We’ve written about the importance of updating your beneficiaries, but when you’re going through a divorce, should you update your estate plan while navigating separation or after the divorce is finalized? If you do not have an estate plan, an excellent time to create one is when your marital status changes.
The North Carolina Senate had announced plans to reveal the new NC tax reform bill in early May. However, the press conference instead produced the outline of a measure that the Senate hopes to turn into a bill later in 2013. Citing pending reports of tax collections from April as part of the bill’s delay, the legislators provided the proposed tax changes that will combine to about $1 billion in tax cuts.
Foreign trusts, or offshore trusts, are popular asset protection tools as they are notorious for providing superior protection from creditors. However, foreign trusts are not creditor-proof.
Steve Oshin’s 2013 Annual Domestic Asset Protection Trust State Rankings were released and show the highest scoring state for DAPTs is Nevada.
Designating a spouse as a beneficiary of an IRA not only ensures they will have access to retirement accounts in the event their partner passes away, but it offers them unique advantages to which non-spouse beneficiaries are not entitled.
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A recent North Carolina Senate proposal for the ballots in November of 2014 is an amendment to remove the right to vote in North Carolina for individuals who have been determined incompetent by a court of any state. If passed into law, Senate Bill 668 will take the right to vote away from many senior citizens and individuals with disabilities who have been adjudicated incompetent by a court. (An individual’s constitutional right to vote may be granted back if a court restores their competency.)
Why would an individual renounce or disclaim an inheritance in North Carolina? An inheritance may not always be expected and it may not be desirable for the beneficiary. Certain assets, like real estate or personal items, may require complicated or expensive maintenance that the beneficiary does not want to manage. An inheritance may also come with a heavy tax burden. For senior citizens, an inheritance could affect their eligibility for Medicaid benefits. Instead, a beneficiary may want another family member to receive their inheritance.
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Bequeathing assets involves more than naming beneficiaries. Creating a proper estate plan offers individuals and families the ability to protect their assets for loved ones after they’re gone. Unexpected claims could drain accounts and threaten properties that were intended to be passed on to beneficiaries. There are asset protection tools that help avoid these situations and minimize exposure to creditors.
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2013 seems to be the year of digital afterlife planning. Last month the North Carolina Senate approved Bill 279, a bill for the state’s first-ever laws addressing digital assets. This month Google took their first step forward in post-death account management of their applications. Launching a feature called Inactive Account Manager, Google now offers its users the ability to designate how they wish the data stored on their various Google applications, like Picasa Web Albums, YouTube, Gmail, Blogger, and more, managed after they are gone. Items that do not have inherent financial value, but those that the user chooses to preserve for next of kin.
Neglecting to update beneficiaries, or failing to name them, may leave life insurance and retirement accounts to unintended recipients, create probate expenses, and cause tax problems. Having a Will does not avoid these issues. The best prevention is having updated beneficiary designations.
Although Obama’s American Taxpayer Relief Act was said to make permanent changes, lawmakers had also advised that it was just the first step in a series of changes. Now Obama’s 2013 budget proposal has several amendments, of which are changes to tax laws that were recently made permanent by the American Taxpayer Relief Act.
A common misconception is that elder law attorneys are used primarily by senior citizens. Although elder law attorneys can assist with crisis Medicaid planning and present eligibility for Veterans’ Benefits, they can also help younger individuals make a plan in advance.
Every year many innocent people fall victim to tax scams. Taxpayers may be taken advantage of by scammers, dishonest tax preparers, or may have their identity stolen by other means. There are more opportunities for criminals to find sensitive information about people now in the Digital Age. Read below to learn about common tax scams that are expected to affect taxpayers this year and share the information with your friends and family to help spread awareness:
April is Autism Awareness Month, Parkinson’s Awareness Month, and it is also Financial Literacy Month. These three campaigns may at first appear unrelated to each other, but they are interconnected.
North Carolina estate planning discussions usually put an individual’s assets under the microscope. What trusts would avoid taxes best? How much should be designated for charitable contributions? Are my advance directives up-to-date? Most people are concerned about preserving inheritances for beneficiaries instead of understanding how inherited debt may affect their loved ones.
Everyone wants to save money, but choosing to cut corners on estate planning in North Carolina may end up costing individuals more than they ever expected. The cost of do-it-yourself estate planning may seem attractive at first, however Consumer Reports released a study that shows most of the DIY will programs have unintended consequences.
Recently we reviewed the challenges of digital estate planning—the ways surviving family members’ access to a decedent’s online accounts are affected—and how accessibility is determined by individual account policies. With no North Carolina laws governing digital afterlife yet, many families have struggled to gain access to online banking, investments, frequent flyer miles, and more.
When a baby is on the way, it is a perfect time for expectant parents to complete or update their estate plan to ensure their child’s future care. Some families do not consider the peace of mind a comprehensive estate plan offers until their baby is born. However, during the nine months parents-to-be are decorating a nursery or scheduling routine prenatal visits with their physicians, they can also add meetings with a North Carolina estate planning attorney. There are short-term and long-term events that parents can plan for to prevent court costs, legal fees and wasting of assets, plan for college costs, and secure their baby’s care in the event both parents die or become incapacitated.
Parents of special needs children need to carefully plan for their children’s future. Many families turn to special needs trusts to ensure their child will have access to finances after their deaths, without hindering the child’s ability to qualify for public benefits, such as Social Security and Medicaid.
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A new study reveals more employers will offer Roth 401(k)s to their employees in 2013. About a third of all employers surveyed by Aon, a human resource services provider, have plans to add a Roth contribution option. Since there are no income restrictions for Roth 401(k)s, the rising trend will catch the eye of many employees.
The “Sandwich Generation”—today’s 10 million baby boomers who care for both their own children or grandchildren and elderly parents or relatives—may need to take a different approach to estate planning. New research shows approximately 15% of baby boomers contribute financially to care and living expenses for their elderly family members. The average life expectancy is only going up and many seniors will outlive their savings. When caring for aging parents, particularly when it includes financial contributions, estate planning should include consideration of the parents’ eligibility for Medicaid long-term care coverage, Veterans benefits, the caregivers’ access to medical records, the caregivers’ authority to make medical and financial decisions for the parents, and possibly guardianship.
Recently we wrote about North Carolina potentially joining several other states that are repealing state estate tax (or “death tax”). Last week, the North Carolina House Finance Committee approved repeal of the state’s death tax. If the repeal is enacted into law, soon there will no longer be any states in the Southeast that impose a death tax. (Tennessee’s death tax will expire in 2016.)
Memory loss comes in many forms. From mild cognitive impairment and dementia, to the severe effects of advancing Alzheimer’s, the number of senior citizens affected by memory impairments is only going up. 1 in 5 Americans over the age of 70 are afflicted by some type of memory loss. Families often recognize the importance of advanced estate planning when thinking of retirement for aging Americans with a growing rate of memory impairment. However, seniors may avoid discussions about retirement planning because they are concerned about losing their independence – both financial and otherwise. By meeting with an estate planning attorney in advance, individuals can take the steps needed to help preserve the independence that most fear will be lost as they age.
Continue Reading...Estate planning has always involved a great deal of paperwork. Today, individuals have personal access to online banking, social media accounts, and email that has pushed the industry into a new realm: Digital estate planning.
Most of the country’s attention has been on federal estate tax changes made by the American Taxpayer Relief Act of 2012. Little focus centered on state estate taxes. North Carolina is among 21 states where state-level estate or inheritance taxes are imposed on assets passed on to heirs.
As North Carolina business owners and other taxpayers adjust to the effects of the 2012 American Tax Payer Relief Act, they are starting to focus on asset protection strategies at the same time as minimizing taxes to the fullest extent possible.
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North Carolina health care directives and powers of attorney are required in order for another person to make decisions about an individual’s medical or financial matters. As with most North Carolina estate planning and elder law tools, there is not just one way to prepare the necessary documents. Out of the options for advance directives and health care powers of attorney, which is better? Statutory forms or the Five Wishes documents?
The fiscal cliff deal has not only affected income and estate taxes, but it has also changed how retirement rollovers are handled.
Taking every last minute available in 2012 and then some, yesterday Congress approved a bill that will reduce the nation’s deficit by raising taxes for high income earners. Discussions in Washington continued well past midnight, changing income and estate taxes for Americans.
The holiday season hits Americans just as the tax year is coming to an end. While most people are distracted with buying gifts for their friends and families, they could be enjoying tax deductions by making smart year-end gifts:
Congress has failed to avert the fiscal cliff. We have only nine days until the estate tax exemption drops to $1 million (and the rate goes up to 55%). Not to mention the income tax increases.
To make matters worse, the IRS's online site for applying for tax identification numbers (EINs) will be unavailable from 4:00 pm. on December 27th through the rest of the year. This will hamper last minute planning efforts that require EINs, such as trusts and LLCs, and bank and brokerage accounts for same.
If you still want to take advantage of the $5.12 gift and estate tax exemption - now there's even more reason to act before it's too late.
Merry Christmas to all!
Although this is the North Carolina Estate Planning Blog, much of what I blog about applies to folks all over the country. Since I am licensed in Tennessee and have clients there, I thought it was appropriate to report on these important changes in Tennessee transfer tax.
Continue Reading...Dynasty trusts, which help families legally avoid estate taxes and preserve assets for heirs of future generations, are the target of new legislation that could significantly limit their value. A proposal in the Obama Administration’s 2012 budget is slated to limit dynasty trust terms to 90 years. (North Carolina law allows dynasty trusts to be perpetual.) The Wall Street Journal reports, “the change would apply to new trusts or additions of money to existing ones, but not those already funded.”
Continue Reading...Estate Planning attorneys all across the country are frantically working to help their clients utilize the $5.12 million gift and estate tax exemption before it disappears at year end. Most people are making gifts to irrevocable trusts that will save taxes and provide creditor protection for generations of descendants.
We have only two weeks left, with Christmas intervening, but all is not lost. For those who want to provide a meaningful legacy this holiday season, we can still help. As my colleague Steve Oshins in Las Vegas suggested, here is the way last minute planning can be accomplished:
1. Set up a simple one-page gift trust with just the essential terms so you have a valid trust under state law.
2. Give the settlor’s best friend (or attorney/CPA) as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in the Trust Protector’s sole and absolute discretion.
3. Get the trust fully executed and funded with the $5MM gift before year-end.
4. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions. The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038 (estate tax inclusion).
So, if you are one of the tardy ones, don't despair. Email me early next week and let's get this done.
Greg Herman-Giddens - ghgiddens@trustcounselpa.com
Last week the United States Treasury proposed new regulations for Charitable Remainder Trusts (CRTs), which affects the tax liability of distributions in 2013. CRTs are a common type of trust that allows assets to be donated to a charity while the donor receives income for the specified trust period. Trust grantors take advantage of income and estate tax deductions.
Continue Reading...Estate plans and trusts preserve assets accumulated over a lifetime and distribute them to beneficiaries, but what happens to a business when the owner or key executive departs to another company, becomes ill, or passes away? Succession plans create the selection process for the future architecture of an organization by appointing certain individuals to take over positions in the event an executive leaves their role. Succession plans are to businesses as prenuptial agreements are to marriages.
Continue Reading...Now, weeks past the election with nothing positive coming out of Congress, people of means are finally starting to realize that it makes sense to use some or all of the $5.12 million federal gift and estate tax exemption before it falls to $1million next year. Doing so can save millions of dollars for one's heirs.
This week I've already spoken to three people about such gifting, which can be leveraged with the use of limited liability companies and trusts. Married couples can even make gifts to trusts but keep the assets in the family for future use.
It's still not too late for implementing gifting plans, but the clock is ticking. Estate planning attorneys, myself included, are running out of time to help clients. As it stands, I will be working weekends though the remainder of 2012.
Ben Franklin said that nothing is certain but death and taxes. True, but tax exemptions and rates are certain to change. Act now before they change for the worse.
A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?
Continue Reading...Powers of attorney, which should be part of every estate plan, allow an individual to appoint someone of their choosing to manage their assets and affairs, make medical decisions and handle other matters the individual would have controlled when they were competent. Many powers of attorney (POAs) are effective at the time they are signed, so that no physician certification is required. However, some POAs are designed to be “springing,” meaning that they are effective only when the person who signed the POA is certified by a physician to lack capacity to make decisions.
Continue Reading...Divorce at any age involves the sensitive matter of splitting assets and debt. For couples who divorce in their senior years (coined a “gray divorce”), not only are a lifetime’s investments subject to division, but the costs of long-term care (LTC) also become an even more important consideration. If an individual’s retirement account was compromised or investments drained by their spouse, separating and divorcing as a senior citizen may become emotionally and financially devastating.
Continue Reading...North Carolina recently expanded its law regarding trust "power holders," persons named in a trust, other than trustee, who are given certain powers over the trust and/or trustee. Traditionally, such power holders have been called "trust protectors." What follows is a brief discussion of the use of trust protectors, particularly with regard to North Carolina trusts.
I. Introduction to the use of Trust Protectors. A Trust Protector (hereinafter, “TP”), sometimes referred to as a Trust Advisor, is a person appointed in the trust instrument to direct or limit the trustee with regard to the administration of the trust, and granted certain powers to add flexibility and control over an irrevocable trust.
a. Offshore. The concept of TP came about in the use of (primarily asset protection) trusts on offshore jurisdictions, where grantors may have been uncomfortable about entrusting large amounts of wealth to a trust company on a distant island. TPs were typically given the power to remove and replace trustees and change the situs of trusts.
b. Domestic. Over the last decade or so, the use of TPs has become common in U.S. trusts, and the powers typically granted to TPs have expanded, so that many practitioners view the use of TPs as indispensable in most trusts. This is particularly true for generation-skipping or dynasty trusts, where the trust is expected to last for quite a long period of time.
Continue Reading...Estate Planning Awareness Week comes during the final quarter of the year, just before the New Year shift known as the “fiscal cliff.” What is the fiscal cliff? This buzz word encompasses the impending year-end financial perfect storm. As the calendar flips over to 2013, multiple economic changes will take place at the same time. Automatic spending cuts, expiring tax cuts, and new taxes are slated to happen simultaneously, leaving Americans hanging on a fiscal cliff.
October 15-21, 2012 is National Estate Planning Awareness Week. The country-wide campaign focuses on educating individuals about the importance of planning their estates, and the risks they face if they have not yet created an estate plan. This is a time to carefully review your situation and start basic planning, or to review your existing estate plan and make sure it reflects your current assets and wishes for yourself, aging parents and dependents.
Estate planning is important for everyone at all levels of income and net worth. In the spirit of the annual National Estate Planning Awareness Week, the estate planning attorneys at TrustCounsel have prepared a list of three key benefits of protecting your assets.
Nevada attorney Steve Oshins, who produces an annual ranking of Domestic Asset Protection Trusts, has now done the same for Dynasty Trusts. Dynasty Trusts can theoretically last forever, and are often used by wealthy families to avoid estate taxes and protect assets for future generations. Dynasty trusts are now permissible in the many states that have statutorily repealed the old common law rule against perpetuities, which limited trust terms to little more than the life of one generation.
North Carolina repealed the rules against perpetuities a few years ago, so dynasty trusts are allowed as long as the trustee has the power to alienate (sell) trust assets. However, NC law is otherwise not as desirable as that of the states listed in the chart.
In Rush University v. Sessions, et al, the Illinois Supreme Court ruled that a transfer to a Cook Islands trust was per se fraudulent. Despite the holding, since the grantor was deceased and therefore could not be held in contempt of court, the trust would probably have worked to protect the assets had the assets not been located in the U.S. In this case, however, the trust owned millions of dollars of Illinois real estate, over which the court has jurisdiction, of course.
As explained in this Forbes article by attorney Jay Adkisson, this ruling could spell bad news for the effectiveness of domestic asset protection trusts more so than offshore trusts. Adkisson's view:
"(1) With some exceptions, Foreign Asset Protection Trusts can be effective if the Settlor/Beneficiary and all assets are beyond the reach of the U.S. courts. So long as those two conditions prevail, contrary U.S. law probably will not be of practical benefit to the creditor. But Foreign Asset Protection Trusts might not be effective as to trust assets found in the U.S. (as here), or if the Settlor/Beneficiary remains within the contempt power of the Court.
(2) With some exceptions, Domestic Asset Protection Trusts can be effective if all of the trust assets are held in a DAPT state. But Domestic Asset Protection Trusts might not be effective as to assets held in a non-DAPT state.
(3) While not considered in this Opinion, Bankruptcy Code section 548(e) casts a dark shadow over all “self-settled trusts and similar devices” to the extent that the Bankruptcy Petition is filed within 10 years of the date of transfer.
To summarize as to Domestic Asset Protection Trusts: They “work” so long as your assets are kept in a DAPT state and you can stay out of bankruptcy for 10 years. There is an open question as to whether the courts of a non-DAPT state can compel the return of asset from the DAPT state to the non-DAPT state so that those assets are available to creditors, i.e., the application of “Anderson relief” to DAPTs."
For North Carolina residents, this means that assets held in North Carolina, especially real estate, are unlikely to be afforded much protection by either foreign or domestic asset protection trusts. Even assets located elsewhere may at risk. My advice for those seeking protection - plan carefully, with multiple strategies, and do so now!
The use of revocable living trusts to avoid probate is common in North Carolina. However, one type of property that is rarely transferred to a living trust is automobiles, since doing so involves a trip to the local DMV office and paying to change the title. The title fee is $40, and a highway use tax of 3% of the value of the vehicle must also be paid. What the title agents often don't know, however, is that the use tax is capped at $40 for transfers to a living trust. See N.C.G.S. Section 105-187.6(b)(2). There is no use tax at all for transfers to a living trust in which the owner is the sole beneficiary, but this situation is not as common. N.C.G.S. Section 105-187.6(a)(11).
Here's link to the page on DMV's website that references transfers to a trust.
Given North Carolina's low threshold for requiring full probate - $20,000 for single decedents, and $30,000 for married decedents, it often makes sense to take the time and pay the $80 to transfer vehicles to your living trust. This is especially true if the vehicle is particularly valuable or you plan or keeping it a long time. It could save time, trouble and expense for your loved ones.
Wake Forest University's Law School is well known for its Elder Law Clinic, whose website contains a wealth of resources on elder law issues, including Basic North Carolina Information. It's helpful to do some preliminary research before talking to a lawyer about elder law issues, but there's no substitute for the advice and guidance of experienced counsel. TrustCounsel's Elder Law Attorney Kristen Burrows attended Wake Forest and was a student at the Clinic. She has dedicated her professional life to working with older adults and their families.
The last couple of weeks I have been so busy I have neglected my blogging. However, I have taken some time to watch the Olympics at night, seeing athletes from all over the world compete to win a gold medal. A few were successful, others won silver and bronze medals, and the rest, while great athletes, received little recognition. What all Olympians have in common, however, is the drive to do their absolute best.
While most of us can't compete in anything on a world-class level, we can still strive for excellence in our everyday lives. We can care for ourselves, love and protect our families, help others, and do great work on the job. Part of caring for ourselves and protecting our families involves implementing a comprehensive estate plan appropriate for our situation. You may not need a gold, or even a silver or bronze estate plan, but it should an excellent plan. Also-ran on a world-class level is fine; couch potato is not.
Get your estate plan in shape today. It doesn't even require everyday training!
The Raleigh News & Observer recently commented on the surging insurance rates for long-term care insurance (LTCI) policies in North Carolina, the article for which can be read here. Yet it seems that an increased prevalence of premium hikes isn’t the biggest concern that LTCI policyholders in North Carolina might face.
LTCI partnership policies provide asset protection for policyholders who use up their plan benefits, increasing the amount of non-countable resources that the insured can retain and still receive Medicaid by the amount of LTCI benefits he or she uses. Thus, if the insured requires care beyond the benefits period provided by the LTCI plan, the state will disregard the insured’s assets dollar for dollar by the amount the LTCI policy spent during the benefits period. This feature makes partnership policies seem like an attractive option for many people as it allows them to become eligible to receive Medicaid benefits without first having to spend down their assets to the minimum amount permitted by North Carolina’s Medicaid program.
However, while many might be tempted to seek out an LTCI plan to take advantage of this treatment of assets for Medicaid, potential policyholders should be aware of North Carolina’s distinct treatment of LTCI plans for Medicaid estate recovery purposes. North Carolina statute defines “estate” for decedents who have LTCI partnership policies as “including assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement” (N.C.G.S. § 108A-70.4). Thus, unlike Medicaid recipients who did not hold LTCI partnership policies during life, the estate subject to recovery includes interests transferred to third parties during the decedent’s life as well as real and personal property passing to heirs through state probate law, either under a will or through intestacy. North Carolina residents contemplating purchasing an LTCI policy might want to consider the risk to lifetime property transfers that the policy could pose before committing to an LTCI plan.
Now that the health care law has been declared constitutional, the remaining provisions will be going into effect. One little known provision is a new 3.8% investment income surtax, also called the health care surtax or the Medicare tax; it will go into effect on January 1, 2013.
This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.” For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket ($11,650 in 2012).
Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount. Here are some examples of the application of the surtax.
Note that the surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20% in 2013, so the total tax on capital gains (with the surtax) could be 23.8% in 2013 and beyond.
The good news is that there are some steps you can take this year to help you avoid or reduce the amount of surtax beginning in 2013. Also, 2012 is an exceptional year for estate planning in general. The federal estate tax exemption is $5.12 million, which allows a married couple to transfer as much as $10.24 million from their estate with no estate tax. Under current law, this exemption is scheduled to shrink to $1 million in 2013. Other Bush tax cuts, including income and capital gain taxes, are set to expire at the end of 2012. With the new 3.8% surtax becoming effective in January, 2013 is on track to have the highest tax rates we have seen in years.
Now, more than ever, you need the assistance of experienced tax professionals to advise you and help you implement the best plan for you and your family.
Note: The above content is adapted in part from information provided by the nationally recognized tax professionals at Keebler & Associates. The full text of the Health Care Act is available online, with the relevant provisions beginning at Section 1411 at page 946.
The Supreme Court's recent affirmation of the Affordable Car Act and the associated new taxes, including the 3.8% investment income surtax has many affluent taxpayers and their advisors concerned. However, individual investors aren't the only ones who will be affected by this new law, as the surtax applies to trusts and estates as well.
The surtax goes into effect on January 1, 2013 and will apply to trust and estate net investment income in excess of about $12,000 that isn't paid out to heirs or beneficiaries. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income, but not distributions from IRA's and other qualified retirement plans. Trusts or estates that pay out 100% of income distributions will not owe a surtax, but the heirs or beneficiaries receiving the distribution will have to report the income, which will be used in their own individual surtax determinations.
For eligible estates and electing trusts, selecting the correct year end could considerably reduce the months in which surtax is owed on the estate. It may make sense to choose a December 31, 2012 year end where possible.
It's not too early for trustees, executors and their tax advisors to start considering implication of this new tax.
The IRS has released the 2013 inflation-adjusted amounts for Health Savings Accounts (HSAs). The tables below show the values for 2012 and 2013.
High-deductible health plan: A health plan that meets certain requirements regarding deductibles and out-of-pocket expenses:
*Annual deductible contribution limit: For 2012 and 2013 the maximum deductible contribution to an HSA is as follows:
Source: 2013 data from IRS Revenue Procedure 2012-26
Here's a press release I received today from the American Institute for Economic Research (AIER):
For the months of June and July AIER is offering 10,000 free hard copies and unlimited free digital copies of its popular, all-in-one planning guide, If Something Should Happen: How to Organize Your Financial and Legal Affairs.
The short, 44-page book takes the guesswork out of everyday estate planning and uniquely helps readers pull together everything that’s necessary into one single place – thereby creating a ‘master plan’ in the event something should happen.
AIER, an independent research organization that focuses on providing practical, personal finance tools, is giving away complimentary copies of the book because “not nearly enough people plan for an unexpected illness, or even their death. They delay planning because the process appears overwhelming, or they simply expect to get to it ‘one day’. With the right tools in hand, however, planning doesn’t have to be stressful,” says AIER Research and Education Director Steven Cunningham.
AIER’s book – which discusses creating a will and where to keep financial documents, as well as provides worksheets for recording financial, personal, medical and insurance information – is the perfect tool for readers who want to avoid sending their loved ones scrambling, trying to pull together the pieces of an uncertain financial puzzle under the most stressful conditions.
If Something Should Happen breaks the planning process into three easy steps:
The booklet also includes a page of resources, if readers want more detailed information on any particular aspect of the process, such as pre-paid funeral arrangements, wills and trusts, or powers of attorney.
Complimentary copies of If Something Should Happen are available throughout June and July while supplies last. To receive a free digital copy, visit www.aier.org.
To receive a free hard copy, call 1-888-528-1216 and press 0.
The book, originally published in 2008, normally sells for $10 per copy. A complete list of book endorsements are available here.
Note: I have reviewed the book, and think it will be helpful for most persons. I'm not sure how current the latest version is, however, so be aware that tax figures often change yearly.
I recently met with a loving grandson, who needed some advice regarding his grandmother. His grandmother currently lives in another state. She was recently diagnosed and treated for cancer, but in the process was also diagnosed with dementia. She moved into an assisted living facility after her cancer surgery, and is not likely to move back home. Her only child lives here in North Carolina, and so a move to a North Carolina assisted living facility is likely the next step.
The grandmother does not have much income or assets, so paying for her care is a top concern. Before we could truly discuss options and develop a plan, though, I would need a more accurate picture of her finances. While I would need to meet with the grandmother personally to determine her legal capacity to make decisions and sign documents, I suggested that she have Powers of Attorney in which she designates who can make financial and medical decisions for her. The grandson mentioned his grandmother is hesitant to give up control, and that she’s been expressing fear and distrust lately where there was none before, possibly resulting from the dementia. He asked what happens if she doesn’t sign one, then declines to the point she can’t sign one, and the facility decides she needs someone to make decisions for her. I explained that guardianship – the court process of determining someone incompetent and appointing a decision-maker – might become necessary.
Then the grandson said, “Okay, well, do you have any tips on how to talk to her about this? How to start the conversation?”
Continue Reading...AARP has come out with a Long Term Scorecard, which ranks each of the 50 states and the District of Columbia on "Long-Term Services and Supports for Older Adults, People with Physical Disabilities, and Family Caregivers."
Unfortunately, North Carolina ranks in bottom 50%, at number 24 for 2011. However, NC does have a higher rating than all other southern states except for Virginia. Hopefully in coming years North Carolinians and their elected officials will work to improve our offerings to those in long-term care and their families. If you can't wait - move to Minnesota - it's ranked number one!
I came across a recent article in the Yahoo Finance Blog, Half of Americans With Kids Set to Die Without a Will. If you are a North Carolina resident, what happens to your estate if you don't have a will (you die intestate, in legal terms)? Here's a link to the NC law on Intestate Succession: N.C.G.S. Section 29-13 et. seq.
If you have a spouse and children, you might be surprised to learn that your spouse will not necessarily get your entire estate. This can can be especially problematic if you die owning real estate in your sole name and have minor children. Guardianships would have to be established and authority granted from the court before the property would be able to be sold. There are also a whole host of other potential problems that can be avoiding by having a will or living trust.
Bad things happen to the families of good people who die without a will. Don't let this happen to you.
Today is election day in North Carolina, and I'm sure every North Carolinian, and many others across the country, know that the controversial Amendment One is on the ballot. Amendment One states that "Marriage between one man and one woman is the only domestic legal union that shall be valid or recognized in this State. This section does not prohibit a private party from entering into contracts with another party; nor does this section prohibit courts from adjudicating the rights of private parties pursuant to such contracts."
There has been a lot of discussion about the potential impact of the Amendment should it pass, and I think it's safe to say that much of it is not entirely true. This morning a client called to ask what would happen to the estate planning she and her partner had done in the event the Amendment passes.
Here's my take: First of all, I think the Amendment is poorly worded and unnecessary. The sentence about contracts between private parties was added in the second version of the bill, and makes the Amendment somewhat less restrictive of the rights of the citizens of this state. In terms of estate planning, however, this sentence means nothing. Black's Law Dictionary defines a contract as "an agreement between two parties which creates an obligation to do or not do a particular thing. Its essentials are competent parties, subject matter, a legal consideration, and mutuality of obligation." Clearly the standard estate planning documents - wills and powers of attorney - do not qualify as contracts. Perhaps a trust might under certain circumstances.
Nevertheless, it is my opinion that the Amendment itself would not invalidate existing estate planning documents or bar future documents naming a unmarried partner as a fiduciary or beneficiary. What I am concerned about however, is that such documents may be more subject to contest by disgruntled relatives, who would have another reason to argue why an estate planning document naming an unmarried partner should not be respected by the court. It would also make it easier for a conservative judge who disapproves of gay and lesbian (or even unmarried heterosexual) couples to side with the relatives of incapacitated or deceased partner, to the detriment of the surviving partner.
If the Amendment passes, only time will tell how these and other issues possibly affected by the Amendment will play out the courts. If I were to bring litigation to try to invalidate estate planning documents of unmarried partners, I would certainly use the Amendment as one of my arguments - "Your honor, the constitution of this state provides that this relationship was not valid, and should not be recognized in this state - if the relationship is not valid, how could any documents recognizing that relationship be valid?"
If such arguments were to be successful, that would be a travesty of justice. I believe in equal rights for all North Carolinians, and the freedom to plan with and for the benefit of whomever they choose. Let's hope the Amendment fails.
This recent Forbes article 7 Major Errors In Estate Planning is a must read for everyone, and most errors discussed apply to those with estates below $1 million. Items 1 through 3 apply to virtually everyone, while those with large insurance policies, particularly couples with young children, need to consider item 4. Number 7 is something most do without thinking about the potential consequences down the road. I have even asked my parents not to leave their estates outright to me. I would rather have their legacies protected in a carefully drafted trust that I control.
If you have made any of these big mistakes, it's time to visit an estate planning attorney for advice and possibly a new estate plan:
1. "Not having a plan.”
2. “Online or DIY rather than professionals.”
3. “Failure to Review Beneficiary Designations and Titling of Assets.”
4. “Failure to Consider the Estate and Gift Tax Consequences of Life Insurance.”
5. Not “Maximizing annual gifts.”
6. “Failure to Take Advantage of the Estate Tax Exemption in 2012.”
7. “Leaving assets outright to Adult Children.”
While this list is a great start, it certainly doesn't cover all of the issues that should be considered in crafting a comprehensive estate plan.
A recent North Carolina Court of Appeals decision affirmed the Superior Court verdict that an agent under a power of attorney did not breach his fiduciary duty to his aunt, Doris King or unjustly enrich himself at her expense. Albert v. Cowart, et al.
Even though the defendants prevailed in this case, proper advance planning by Mr. and Mrs. King would most likely have avoided the lawsuit. The use of powers of attorneys and perhaps trusts executed well in advance of incapacity, with a lawyer's counsel, does not completely avoid the possibility of litigation, but certainly reduces it considerably.
It appears that the lawyer that prepared a power of attorney for Mrs. King did so without first consulting with her. This goes against North Carolina State Bar rules, which require that an attorney must first communicate with a person before preparing legal documents for that person to sign. This helps ensure that the person signing the documents has capacity to sign the documents and is doing so willingly.
The national estate planning attorney group WealthCounsel, LLC has introduced the new EstatePlanning.Com, which, no pun intended, contains a wealth of estate planning information for the general public.
Current featured resources are Understanding the Significance of Trusts, Planning for Pets, and Will Your Kids Be Unintentionally Disinherited?
Check it out - more content will be added regularly.
I'm a member of WealthCounsel, LLC, a national organization of estate planning attorneys. Lately there has been a lot of discussion on the list serve about how the internet is affecting estate planning and what the future holds for the profession and the public.
It occurred to me this morning that one could draw a parallel between the evolution of the fast food industry starting several decades ago and what has been happening in estate planning over the last 10 years or so.
Before the 1950's, there was little in the way of fast food joints and instant and frozen foods. Food then was "slow," prepared in the home, from scratch, and local foods were most commonly used. Then came McDonald's, advances in food processing technology, transportation and the like, and the pace of life sped up. The U.S. started shipping in food from all over the world Fast, "distant" food was born.
Now, many years later, there is a backlash against fast food because it is making us sick, overweight, and harms the environment. There's a movement to "slow", local food. Many restaurants here in Chapel Hill now prominently feature such items on their menus. Local, fresh food helps support the local economy, tastes better, is often more healthful, and has less environmental impact. I think it's great - so what if it's old-fashioned?
Turning to estate planning, long ago anyone who wanted something other than a handwritten will had to sit down with a lawyer, discuss the terms, and then return a couple of weeks later to sign the will. Slow and local. This process worked fine, but the world is not static. Along came the internet and LegalZoom. Someone could prepare their will in their underwear in front of their computer at home on Sunday night. A completely different type of "legal" services - fast and distant. This is great for some people, because just like with fast food, there will always be those who value convenience and price over what's actually best for themselves and their families in the long run.
There's no question that the internet will forever change the delivery of legal services. But, just like with the current slow food movement, that doesn't mean that going to the lawyer's office and sitting down for a talk will become a thing of the past. I think there will always be some who prefer the benefits of slow and local over fast and distant.
First, my ideal estate planning clients do not use LegalZoom for their estate planning. The people who use LegalZoom would never go to a lawyer who is not dirt cheap. Unfortunately, experienced estate planners are not dirt cheap. Therefore, LegalZoom certainly is not costing me any business.
Second, people who do their own estate planning, even with the help of some entity like LegalZoom, often don’t get their estate planning and funding right. These people typically never realize their own estate plan is defective, incomplete or unfunded.
Third, once someone dies with a defective or unfunded estate plan in place, the survivors soon realize they need expert help to clear up the problems a defective or unfunded estate plan creates. There is now a legal barrier between these people and their inheritance.
Fourth, at that point, the survivors become my ideal administration clients. My services have now gone from optional (as my services are sometimes seen in the planning stage) to required because the problem is now severe and there is urgency in solving the problem (the urgency is that people cannot get to “their” money!) Luckily for them, I have the skills to solve their problem. And because now I am fixing someone else’s mistakes, my fees are much higher than they would be if I had done the estate planning in the first place.
Yes, I love LegalZoom, I will just not let my friends and family use it, regardless of how much money I make from LegalZoom.
Source (and with thanks to): Kevin L. Von Tungeln's Trusts and Estate Blog.
Las Vegas asset protection guru Steve Oshins has updated his Domestic Asset Protection Trust (DAPT) State Ranking Chart. Steve obviously believes Nevada has the most protective laws, and I agree. I always use Nevada DAPTs - the only situation in which I would use another state's DAPT is for a resident of that particular state. This would prevent the argument that the DAPT laws of Nevada were against the public policy of the client's state of residence or were otherwise not enforceable.
Many folks have the misconception that legacy planning is only for the wealthy, or for the elderly. Young families often overlook the importance of planning in the event of a parent's incapacitation or death. Although tragedy cannot be prevented, careful planning can ensure peace of mind with regard to the care of their children.
In this very touching video, fellow WealthCounsel member Art Swerdloff shares a story of a young family who did place value on implementing a solid plan. At the passing of a young mother, her husband was able to pick up the pieces and provide the care his daughters needed at their tender age.
As Art says in the video, "the inevitable does happen, and when devastation hits, there is nothing like having the perfect plan in place." This story is a heart-wrenching illustration of the importance of estate planning, especially for young families.
Senator Baucus' proposal to do away with stretching for most inherited IRA has not gone away as was anticipated earlier this month. A recently introduced Senate bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would disallow lifetime tax deferred stretching of IRAs for beneficiaries other than a spouse, minor children or the disabled. Other beneficiaries would be required to withdraw and pay taxes on the entire account within five years. The new law would be effective January 1, 2013.
Wealthy folks looking to transfer assets to younger generations in tax-advantaged ways should act now, as the Obama administration is seeking to limit several favorite techniques of estate planning attorneys. On the chopping block are the most commons uses of IDGTs (Intentionally Defective Grantor Trusts), GRATs (Grantor Retained Annuity Trusts), and discounts for gifts of interests in FLPs (Family Limited Partnerships) and FLLCs (Family Limited Liability Companies). Tax-free Dynasty Trusts would also be a thing of the past. This Forbes article from Deborah Jacobs provides a good overview of the proposals.
Some may argue that the passage of some or all of the proposed revenue boosting laws is unlikely, but I'm advising my clients to act now before it's too late.
I have previously blogged about IRA Trusts, which are one of my favorite estate planning tools. This afternoon I presented a 90 minute national continuing legal education teleconference and webinar on the topic. It was my fourth presentation this week! I'm thinking about becoming a professional speaker and giving up actually practicing law. (That's not really true, but I have really come to enjoy helping to educate others).
For those who want an analysis of why and when IRA trusts make sense, an overview of the IRA Required Minimum Distribution rules, and an explanation of the tax issues involved, I offer the manuscript here for the benefit of my readers.
It's Friday the 13th, and I've been at the University of Miami School of Law's Heckerling Institute on Estate Planning all week. This morning there was some discussion on the future for estate planning attorneys. While online documents may have some limited utility, some feel that online software can take care of all their estate planning related legal needs. I beg to differ. Here are 13 reasons why a flesh and blood lawyer beats a computer program any day - a lawyer can:
Attorneys interested in learning more about IRA Trusts may wish to sign up for my 90 minute teleconference, How to Draft IRA Trusts, to be held on January 27, 2011 at 2:00 p.m. Eastern. The program may also be of interest to CPAs, financial planners and trust officers.
IRA Trusts are great tool for protecting large IRAs for the benefit of younger generations. Anyone with an IRA or retirement account over $250,000 or so should consider implementing one.
Local Financial Planner Janet Ramsey, MBA, CFP will be offering a course entitled To the Health of Your Wealth as part of Duke University's OLLI program. The course will run from January 11 to March 28, 2012. Greg Herman-Giddens will speak on non-tax reasons to do estate planning.
For more information click here.
North Carolina legal assistants working with estate lawyers may be interested in a day-long seminar, Estate Planning and Probate Practice for Paralegals, to be held in Chapel Hill on January 25, 2012. I will be presenting the portion on Assisting with Guardianships.
The American Institute of Certified Public Accountants (AICPA) recently published an informative article entitled Four Estate Planning Mistakes (and How to Avoid Them). Although the article is geared toward CPAs for counseling their clients, I recommend it as reading for all, as I see these problems everyday. The four mistakes featured are:
The conclusion provides a good summary of the article: “For most of us, the crystal ball of planning does not go more than five years. Families change, health changes, tax law changes and the law changes. The goal is to get the client on the path and to keep him or her there through all of the phases of life. Helping the client through each phase and encouraging the planning as part of the ongoing relationship between the CPA and the client is a very valuable service to the client and their family.”
Thanks to Jonathan Mintz of WealthCounsel, LLC for sharing the article and his comments.
It's Halloween, and tonight kids of all ages will be dressed in an assortment of costumes, many designed to frighten. What frightens an estate planner? Here are a dozen examples of scary planning (or lack thereof) with regard to life insurance and retirement plan beneficiaries:
Talk to your estate planning attorney to make sure that your beneficiary designations are properly coordinated with your estate plan/ This will best protect your family, preserve your assets and save taxes.
Written by Lord Neaves centuries ago, but true to this day:
Ye lawyers who live upon litigants' fees,
And who need a good many to live at your ease,
Grave or gay, wise or witty, whate'er your degree,
Plain stuff or Queen's Counsel, take counsel of me:
When a festive occasion your spirit unbends,
You should never forget the profession's best friends;
So we'll send round the wine, and a light bumper fill
To the jolly testator who makes his own will.
He premises his wish and his purpose to save
All dispute among friends when he's laid in the grave;
Then he straightway proceeds more disputes to create
Than a long summer's day would give time to relate.
He writes and erases, he blunders and blots,
He produces such puzzles and Gordian knots,
That a lawyer, intending to frame the thing ill,
Couldn't match the testator who makes his own will.
Testators are good, but a feeling more tender
Springs up when I think of the feminine gender!
The testatrix for me, who, like Telemaque's mother,
Unweaves at one time what she wove at another;
She bequeaths, she repeats, she recalls a donation,
And ends by revoking her own revocation;
Still scribbling or scratching some new codicil,
Oh! success to the woman who makes her own will.
'Tisn't easy to say, 'mid her varying vapors,
What scraps should be deemed testamentary papers.
'Tisn't easy from these her intention to find,
When perhaps she herself never knew her own mind.
Every step that we take, there arises fresh trouble:
Is the legacy lapsed? Is it single or double?
No customer brings so much grist to the mill
As the wealthy old woman who makes her own will.
The law decides questions of meum and tuum,
By kindly consenting to make the thing suum;
The Aesopian fable instructively tells
What becomes of the oysters, and who gets the shells;
The legatees starve, but the lawyers are fed;
The Seniors have riches, the Juniors have bread;
The available surplus of course will be nil,
From the worthy testators who make their own will.
You had better pay toll when you take to the road,
Than attempt by a by-way to reach your abode;
You had better employ a conveyancer's hand
Than encounter the risk that your will shouldn't stand.
From the broad beaten track when the traveler strays,
He may land in a bog or be lost in a maze;
And the law, when defied, will avenge itself still
On the man and the woman who make their own will.
Thanks to attorney Knox Proctor for bringing this to my attention.
The North Carolina State Employees Credit Union has a relatively new program called Estate Planning Essentials. Members of SECU are offered "estate plans" for $250, or $350 for married couples. The program description states that "[A] slate of experienced estate planning attorneys has been identified who have agreed to prepare these documents at a set price for Credit Union members." I don't know who the "experienced" estate planning attorneys are, but I have yet to talk to an attorney who specializes or concentrates their practice in estate planning who would be willing to provide simple estate planning documents and a trip to the local SECU for these prices, much less offer any related advice. I certainly declined to participate in the program. Law firms, even small ones, have tremendous overhead, and it is not possible to provide good counsel and personalized services at such low prices.
Obviously SECU thinks this program is a great benefit for its members. I think it’s a tremendous disservice, as members will have no idea that their bargain basement “estate plans” will fail to cover or properly deal with many important issues both in the documents and otherwise (income and estate taxes, special needs planning, asset protection planning, incapacity planning, governmental benefits planning, form of asset ownership, beneficiary designations, etc.).
SECU says one of its "Trust Representatives" will be able to identify "these and other complex issues" and discuss these complex situations and address any additional planning that may be needed." Query what training, credentials and experience the Trust Representatives have as compared to attorney specialists in estate planning. In my experience, bankers often provide inappropriate or erroneous information in legal-related matters.
SECU members: Caveat emptor. This is a classic case of "you get what you pay for."
In the May 26, 2011 Alaska Bankruptcy Court decision of In re Mortensen, the court avoided a transfer of real property of the debtor to an Alaska Domestic Asset Protection Trust (DAPT). The judge held that under Section 548(3) of the Bankruptcy Code, any transfer to a DAPT for less than full and adequate consideration is, by definition, with the intent to "hinder, delay, or defraud" creditors despite state law providing otherwise, and that such DAPT asset are part of the bankruptcy estate if made within the 10 year look back period in Section 548(e)(1). 548(e)(1)(D) states that the intent to defraud relates to future potential creditors as well as any present creditors: "the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted." [emphasis added]
Although this case was decided in Bankruptcy Court in Alaska, there is no reason to doubt that the decision would be any different in North Carolina or any other state as it hinged on federal, not state, law.
Bottom line is do whatever you can to avoid filing bankruptcy within 10 years of funding a DAPT. Also make clear that any other applicable reasons for the DAPT, such as estate tax planning, are well-documented. Finally, don't try to do the legal work yourself!
Continue Reading...October 17-23 is National Estate Planning Awareness Week. Most people are woefully unaware of the importance and benefits of estate planning. Even if you have implemented a comprehensive, up-to-date plan, chances are your family members and friends have not. Encourage them to talk to an estate planning attorney about how to protect their loved ones, preserve assets and save taxes. Here's our Press Release on the topic.
In How Low Rates Can Cut Your Tax Bill, WSJ columnist Laura Saunders reports out that current low interest rates create several advantageous tax planning opportunities:
Nevada’s new Domestic Asset Protection Trust (DAPT) laws became effective October 1, 2011. One new feature is the ability to move a DAPT that was established in another state to Nevada without having to start the statute of limitations period over.
For example, say you set up a DAPT in a state where there’s a four-year waiting period for protection, where the law expressly allows a divorcing spouse to pierce through the trust, and/or permits a pre-existing tort creditor to pierce through the trust. You can now transfer that trust to Nevada to take advantage of Nevada's more protective laws without having to re-start the waiting period for protection to begin.
At two years, Nevada's waiting period is the shortest, and it is the only state with no "exception" creditors. Check out Steve Oshin's Domestic Asset Protection Chart for an up-to-date comparison of DAPT jurisdictions.
DAPTs do require use of a trustee in the jurisdiction in which the trust is established, but they can be used by residents of any state. Protection against court challenges for non-residents may be somewhat uncertain, but DAPTs are increasingly popular with real estate developers, physicians, and others concerned about future creditors. They are normally used in conjunction with Limited Liability Companies to provide another level of protection and more control to the trust grantor.
To help increase awareness of the importance of having up to date health care legal documents (Health Care Power of Attorney, Living Will and HIPAA Authorization), TrustCounsel is offering all three documents for $50 today and tomorrow (September 29 and 30) to North Carolina residents through OurLocalDeal.
Parents - if something were to happen to you, have you done all that you can to ensure that your children are legally protected? Most parents of young children have not done anything at all, or if they have, the planning is often incomplete or outdated.
Every parent of a minor child should have:
Planning for the protection of your children in the event you are longer around is too important to ignore, and is not a "do-it-yourself" project. See an estate planning attorney, who can assist you in preparing a secure future for your children, no matter what their age.
In the 2011-2012 Session, the North Carolina General Assembly passed several laws affecting estate planning, trusts and probate:
Here's a test every adult should take - it's not hard, but the consequences of failing can be serious:
1. I have a current Health Care Power of Attorney
to permit my spouse, children and/or family to
make emergency health care decisions for me
in the event I am unable to do so. Yes No Don’t Know
2. I have a current Durable Power of Attorney to
permit my spouse or children to handle my
financial affairs in the event I become disabled. Yes No Don’t Know
3. My Revocable Trust and Powers of Attorney
specify an understandable test to determine
my disability. Yes No Don’t Know
4. If I have a Revocable Living Trust in place
as part of my estate plan, it gives instructions
for my care and the care of my loved ones if I
become mentally disabled. Yes No Don’t Know
5. I am certain that my current estate plan will
minimize possible federal and state estate taxes at
my death, including taxes on my house, life
insurance and IRAs. Yes No Don’t Know
6. If I have a Revocable Living Trust in place
as part of my estate plan, I’m sure that my trust
is fully funded so that my family can avoid the
delays and expenses of probate. Yes No Don’t Know
7. I have taken steps to avoid possible will
contests and disputes at my death. Yes No Don’t Know
8. I have taken steps to protect my children’s
inheritance in the event my surviving spouse
chooses to remarry. Yes No Don’t Know
9. I have recently checked the beneficiary
designations of my retirement plans and life
insurance policies, and I am confident that I have
not listed my estate or any minor children as
either primary or secondary beneficiaries. Yes No Don’t Know
10. I have a plan to provide creditor and lawsuit
protection for assets passed to my surviving spouse. Yes No Don’t Know
11. My current plan provides creditor and
lawsuit protection for my children's inheritance. Yes No Don’t Know
12. My current plan addresses income tax
planning. Yes No Don’t Know
13. I have a plan to protect my childrens’
inheritance from a divorcing spouse. Yes No Don’t Know
14. I am satisfied with the persons I named as
guardians of my minor children in my current plan. Yes No Don’t Know
15. I am satisfied with the persons I named as
executor or trustee in my current plan. Yes No Don’t Know
16. I am satisfied that my current plan sets up a
contingent trust for my minor children. Yes No Don’t Know
17. I am aware of all future estate planning
fees and expenses, including an understanding
of those involved at the time of my death. Yes No Don’t Know
18. My children have met with my attorney
and fully understand their roles and
responsibilities upon my incapacity or death. Yes No Don’t Know
If you answered "no" or "don't know" to even one of these questions, you are probably due for an estate planning checkup. Make sure you use a qualified attorney to assist you.
Thanks to Ohio attorney Ted Gudorf for this checklist.
A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning. However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect. Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.
A couple of days ago I blogged about the dangers of bad estate planning, and presented a hierarchy of worst to best ways to plan. Today I'm providing a list of 10 of the most overlooked issues in estate planning (things that frequently aren't dealt with in lesser methods of planning). Many plans will address some of these items, but it's a rare plan that has adequately covered everything. The most important thing is that the person doing the planning is informed of all of the issues. That way they can make an educated decision that certain things need or need not be provided for in their particular plan. Here's the list, in no particular order:
I have seen plenty of bad estate planning planning in my 23 years of practice. The pitfalls are many - I will list them in my next post. Here's my list of the hierarchy of estate planning, from worst to best (and I have seen them all!):
Of course, the cost goes up with the quality, but it's that true for everything in life. Shopping estate planning based just on cost is like trying to compare a used Ford Pinto to a brand new Lexus. If someone calls my office to simply ask "how much do you charge for a will" I know right away they they do not understand all that goes into estate planning and probably do not see the value in the high level of service and expertise I can provide.
My blog has a function that allows readers to comment on a post. In the vast majority of cases, however, the comments are actually questions by those trying to avoid having to pay a lawyer to assist or advise them. While I sometimes answer simple questions, my standard response is to tell the reader that he or she should consult with an attorney. Of course, you could say I'm biased, given that I'm a practicing attorney, but I normally don't even suggest that the reader chose my firm.
Here's a recent example of a question and my reply:
My dad just died at the age of 89. His will named my mom, age 91, as Executrix. I am handling all of that for her with her assistance. My question: Her will names my dad as Executor of her estate upon her death. Due to his death, that needs to be changed to name me, the only child, as Executor. Is there a way to do that in NC without having to involve a lawyer (and pay) a lawyer?
RESPONSE: Anyone can legally prepare their own estate planning documents, including a will or codicil. However, why take the risk making an expensive mistake? It's well worth paying a lawyer to make sure your assets and family are properly protected, and in many cases, it will save money in the long run.
North Carolina residents who want to own certain weapons regulated by the National Firearms Act should consider the advantages of an NFA Gun Trust specifically designed for use in North Carolina.
From NorthCarolinaGunTrustLawyer.com:
NFA firearms (also called NFA weapons) are certain guns and accessories regulated by the National Firearms Act. They are sometimes called "Class 3 weapons." NFA firearms include all fully automatic and select fire weapons, short barreled rifles and shotguns and sound suppressors (silencers). NFA firearms include things that you might not expect.
Example: Remember the Hi-Standard .22 Derringer? It's an ordinary garden variety pistol. Pair it with a wallet holster and it becomes an NFA weapon. Many collectibles, including pistols with detachable shoulder stocks, such as the Artillery Luger and the "Broomhandle" Mauser are also regulated by the National Firearms Act.
Suppose that your father brought home a "deactivated" machine gun from World War II? Even though these "Deactivated War Trophies" are welded up and are incapable of firing, they are still NFA weapons.
See NorthCarolinaGunTrustLawyer.com for more information.
Many people come in to see me with the notion that all that they need and want is a "simple" estate plan. Generally that means no living trust, and a will with no trust provisions for surviving family members. I think the main motivator for this is lower cost, but probably also the desire to avoid taking the time and energy to comprehend the workings of a more complex plan.
Simple plans are less expensive and easier to understand, but at what cost? If you have children, grandchildren, or others that you care about and wish to see benefit from your estate, a simple plan offers absolutely no assurance that that will happen.
Here's a couple of brief examples:
These types of circumstances occur everyday and impact many, many families. Children and grandchildren are unintentionally disinherited, and in-laws and creditors end up with the family legacy.
How do you prevent these types of things from happening? Talk to your estate planning attorney about using a trust or trusts as part of your estate plan. It will cost a bit more, and take some more time to implement, but the savings and peace of mind can be priceless.
Today is National Health Care Decisions Day. Take charge of your future - talk to family, your doctor and your estate planning attorney about your wishes. Everyone age 18 or over should have a Health Care Power of Attorney, Living Will, and Authorization for Use and Disclosure of Protected Health Care Information (HIPAA Authorization). When my kids turned 18, I made sure they each had a complete estate plan, including these documents.
The IRS has issued interim guidance on the treatment under Code Section 67 of investment advisory costs and other expenses subject to the 2-percent floor under Section 67(a). Notice 2011-37.
In particular, the notice provides that, for taxable years beginning before the date that final regulations under § 1.67-4 of the Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.
One estate planning tool that can protect your family and partners is a buy-sell agreement. This legal document gives owners the first chance to buy an interest in the company if another owner pulls out or dies. Ideally, these contracts are drawn up when a business is launched, but they can be entered into later.
But don't wait too long. If you die without an agreement, it may be difficult for your heirs to know how to handle important matters that could have a significant effect on the value, continuation or disposition of your business. Even if you stay with the company for decades, the time to prevent disputes is before they occur. Minimize legal fees, as well as sleepless nights, by solving "what if" issues now.
Continue Reading...
Health care reform doesn’t come cheap. How do we pay for it? More and increased taxes, of course, both this year and in future years, along with certain credits for health insurance premium costs. This is an outline of the many tax law changes as a result of the new health care laws, organized by affected parties and implementation date:
Individuals:
· Starting in 2011
o Over-the-counter medications are no longer qualified expenses for Flexible Spending Accounts, Health Savings Accounts, or health reimbursement arrangements
o 20% penalty for nonqualified distributions from Health Savings Accounts, up from 10%
Continue Reading...
Yesterday I attended a presentation by attorney Martin Shenkman, whose wife has multiple sclerosis - he regularly speaks on planning for those with chronic illness. He offered the use of his materials to the attendees, and this is one of his memos:
1. Important. 120 million Americans are living with chronic illness. Don’t underestimate or ignore the tremendous impact on a large portion of your client base. Every legal document, plan, etc. has to be tailored to address chronic illness. Standard documents and planning will often not protect the person living with chronic illness.
2. Income Tax Issues.
a. Can the client claim a parent or other loved one confined to a nursing home as a dependent?
b. Are the costs the client is incurring for qualified long-term care, including nursing home care that is deductible as medical expenses? What planning can be done to maximize the deductions?
c. What affirmative steps can a client take to enhance the likelihood that certain expenditures will qualify as deductible medical expenses for tax purposes? How can the client corroborate that an otherwise personal expense is for medical care? What is the taxpayer’s motive or purpose for incurring the expense? Has a physician recommended the item or expense to treat a diagnosed medical condition? Has this been confirmed in writing? Can the taxpayer establish that the item would not have been bought but for the disease or illness? IRC Sec. 213(d); INFO 2009-0209.
d. Payroll taxes for in home aides can be a nuisance. Proposed regulations may permit home care service recipients to designate an agent to report, file, and pay all employment taxes, including FUTA. See Prop. Reg. 31.3504-1; REG-137036-08.
e. Standard deduction for taxpayers who are legally blind may be higher.
f. Gross Income may exclude certain disability-related payments such as Veterans Administration disability benefits, and Supplemental Security income.
g. Impairment related work expenses of an employee who has a physical or mental disability limiting their employment, may be deductible business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.
h. A credit for the elderly or disabled may be available. This credit is generally available to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.
i. Earned income tax credit EITC is available to disabled taxpayers as well as to the parents of a child with a disability.
j. Dependent care credit taxpayers who pay someone to come to their home and care for their dependent or spouse may be entitled to claim this credit. There is no age limit if the taxpayer’s spouse or dependent is unable to care for themselves.
3. Insurance. Evaluate existing life insurance policies. Identify and evaluate all planning opportunities which may include: accelerated death benefit options; borrowing against cash value to fund needed expenditures; viatical settlements; possible sale into the secondary market versus cash surrender value (CSV).
4. Disability. Identify and address all aspects of disability planning which is often more diverse and complex then clients realize. Advise the client as to the tax status of insurance paid for personally versus insurance paid for from a business. For private disability insurance does the client have a residual versus total disability? Have the calculations been made correctly? There are often a myriad of assumptions in the calculations that integrate policy terms, accounting concepts and tax definitions. These will often require an analysis of earnings and business expenses realized by the client over a base period that may not conform with annual tax returns. Check insurance company calculations. The definitions of “disability” and “income”, etc. will often be different under disability income replacement policies, business overhead interruption insurance, disability buyout insurance and employment or shareholder agreements. Review all contractual arrangements that apply to the client and endeavor to develop a consistent, yet accurate set of calculations for each.
5. Expenditures. Clients with chronic illnesses or with loved ones with chronic illnesses may face unique budgeting issues that other clients don’t. Standard rules of thumb, which many investment advisers use, might not be reasonable. Assist the client in preparing reasonable projections that might address their unique situation. Then review with the client and the client’s attorney the revocable living trusts (clients facing significant health issues, especially progressive illnesses should have trusts) and durable powers of attorney to address these expenses to assure that the fiduciaries have both the authority and guidance to address them. This will also require that the fiduciaries have authority to access medical records that may be necessary to evaluate the appropriateness of certain bills. HIPAA is the affectionate acronym for the Health Insurance
Portability and Accountability Act of 1996 (Pub. L. No. 104-191, 110
Stat. 1936 (1966)); 45 C.F.R. Sec. 164 (2002).
Special expenses may include:
a. Shortened work expectancy.
b. Costly improvements to make their home accessible.
c. Costs of having an independent Social Worker periodically meet with the client in his or her home and interview them and issuing a report. This can be invaluable in assuring proper care.
d. Using an institutional trustee and paying the fees involved.
e. Paying for experimental medical treatments which insurance won’t cover.
f. Paying for desired accommodations and living arrangements.
6. Settlement Suit. Income taxation of settlements is important to address pro-actively, preferably prior to settlement. Suits against an employer or partners for
discrimination, damages, back wages, are common and the amounts must be allocated to each tax category as the tax impact can be significant. Legal fees may be deductibility and the AMT trap that would otherwise eliminate a deduction avoided. IRC Sec. 62(a)(20) may permit deduction against adjusted gross income (AGI).
7. Investment Planning. Tailor an investment plan in light of the client’s specific circumstances, not generalizations or assumptions. Each chronic illness differs from other chronic illnesses. Each client’s experience is unique to that client. Client’s can have varying experiences over time. Risk profile and time horizon is not the same as for “other” clients. Risk may be affected by fear, medical costs, or need to retire early. The time horizon can vary – new drug therapies can change the course of the disease.
8. Client References. Refer clients to IRS Publication 3966, Living and Working with Disabilities, and IRS Publication 907, Tax Highlights for Persons with Disabilities.
From a presentation I gave last week for Duke University's OLLI program's course on retirement and wealth management, here are 10 things NOT to do in terms of estate planning:
The reasons for most of these is obvious, others maybe not so much. The best thing you can do to learn more is to consult with an estate planning attorney.
From guest author Raymond Lavine:
Many senior citizens freely admit that they fear growing older more than they fear death. The prospect of becoming increasingly frail and dependent in a society which worships strength and self-reliance, and of losing family and lifetime friends can understandably make the specter of old age a frightening one.
Does senior-care have to be a time of physical failing and emotional loss? Of course aging brings physical deterioration, and time brings the loss of loved ones, but senior-care can still bring growth and new awareness. Those who are emotionally, financially, and socially ready to take on the challenges of aging are the ones for whom senior care will actually bring happiness.
Baby-Boomers, and those who are following us, find that we and our families are in denial about the fact that we are growing older. This denial is counterproductive, and if you are in that situation, you have the right to confront your loved ones with the fact that you need to make plans for your later years.
There are many aspects of home care or senior living which will require input from your family; where you will live; who will manage you finances should you become unable to; and who will be responsible for seeing that you get proper medical care an transportation if you need it. If you are going to live with one of your children, clarify what you expect of the other children so that there is no resentment from the child with whom you live, who may feel overwhelmed.
The quality of your senior living will depend to a very great degree on the communicating you do with your family ahead of time. Making sure in advance that your housing, finances, medical, and social needs will be met will not only relieve you of a tremendous burden; it will bring you and your family closer together so that your years of senior care will be pleasant and enjoyable.
Senior planning also means working with your financial planners; wealth managers; attorneys; and accountants. Owning long-term care plans is helpful to provide money for long-term care needs but this and other insurance need to be coordinated with your over-all estate and financial planning.
You have goals during your working and family career and it is essential to plan your goals for your senior years. There are many talented and knowledgeable people who will assist you with planning so that fear and denial turn into positive and meaningful goals and objectives.
And let us not forget the elder advisors: attorneys; wealth managers; financial planners, accountants, mediation services, and fiduciary services; elder care workers; and transition specialists.
General ("financial") Durable Powers of Attorney (DPOAs) are very useful documents that every competent adult should have. DPOAs can be used to manage one's property and affairs in the event of incompetency, avoiding the need for a court proceeding to determine incompetency and appoint a guardian. This can save thousands of dollars in attorneys and court fees, not to mention much time and trouble.
However, what many people do not realize is that DPOAs are no longer valid after the person who signed it (the principal) dies. Thus a DPOA cannot be used for any purpose after the death of the principal, including signing checks or accessing a safe deposit box. If the bank doesn't know that the principal has died, the agent under the DPOA may not be prevented from taking these actions, but doing so could result in civil or criminal liability.
So, if you are the agent under a DPOA, DO NOT take any action using the DPOA after the principal dies. If you do, you may very well create a mess that you will have to pay a lawyer to clean up for you. My firm is doing that right now for at least one client.
A Durable Power of Attorney (DPOA) is a part of virtually every estate plan. The DPOA allows the person who signed the document, the principal, to designate an agent, or attorney-in-fact, who will act in his or her stead. The idea is to try to avoid the time, trouble and expense involved in an incompetency and guardianship proceeding.
Some estate plans also include living trusts for probate avoidance, which also can be helpful in avoiding the need for guardianship, since the successor trustee can manage the assets in the trust in the event of the incapacity of the trust grantor.
However, what many people don't realize is that the agent under a power of attorney does not have power to control assets in a trust. It's the trustee that exercises that power. Thus, if mom's checking account is in the name of her trust, and she develops dementia, the DPOA will not be effective to allow the agent to sign checks on the account. That authority belongs to the successor trustee, a separate legal role.
For the successor trustee to gain authority, the original trustee (normally the grantor) must resign, or if that is not possible, the provisions in the trust for trustee succession must be followed. Commonly, the signed statements of two physicians attesting to the incapacity of the grantor are required. These statements, along with a copy of the trust, then become the written authority for the successor trustee to exercise authority regarding the trust.
North Carolina law requires that a DPOA be registered/recorded in the Register of Deeds office in the county in which the principal resides if it is used after the principal has become incapacitated. However, most financial institutions require registration even if the principal has full capacity. Only an original document can be registered. Once registration is completed, certified copies may be obtained from the Register of Deeds.
The U.S. News and World Report has issued a report on the best nursing homes in America. From the website: "All of the homes shown received 5 stars, the highest overall rating, from the federal government's Centers for Medicare and Medicaid Services. A facility's overall rating is geared to its performance in health inspections, nurse staffing, and medical care. Homes are ranked in tiers according to their star ratings in the three individual areas. Within each tier, the order is alphabetical."
Here's the list for North Carolina.
Modern day movies and television commercials (including a recent one by DirecTV) sometimes feature a lawyer reading the will of a deceased testator to his family. Occasionally I even get questions about the ceremony. However, it is the product of a bygone era, and as far as I am aware, never happens anymore.
I have been practicing for 23 years and have not once held a "reading of the will." It was a necessity in the days before widespread literacy and the availability of photocopies, but now we can simply mail (or email) a copy of the will to the beneficiaries. These days, for many decedents the will is not even the primary dispositive instrument - it's a living trust. One never hears about a "reading of the trust."
So, while scenes of the stuffy old lawyer reading the will can be dramatic or comedic, they are certainly not an accurate representation of practice over the last few decades.
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Just As the Name Implies Second-to-die life insurance doesn't pay off until the death of the second policyholder. Why is it needed? Let's say you own several million dollars worth of assets. By law, you can leave the entire amount to your surviving spouse with no estate tax consequences. But those assets then become part of your spouse's estate and could be taxed after death at rates of up to 35 percent in 2011 and 2012. |
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Unfavorable Rule for Corporate-Owned Life Insurance For corporate owned life insurance (COLI) issued after the August 17, 2006, enactment of the Pension Protection Act, an unfavorable provision generally requires businesses to include death benefit proceeds (in excess of premiums paid) in taxable income. |
But second-to-die insurance can also be used by the co-owners or partners of a business operation. In this scenario, the insurance proceeds are paid upon the second owner's death.
One IRS ruling gives a little more flexibility to policyholders of second-to-die insurance, which is also called "survivorship insurance" in some circles. Specifically, the ruling may allow you to transfer ownership of your policy and get the proceeds out of your taxable estate.
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Tax Basics |
Generally, life insurance proceeds paid directly to you because of the death of the policyholder are not taxable. However, your taxable estate will include proceeds from a life insurance policy on your life if the money is paid to the estate (or if it's received by someone else for the benefit of the estate). Also, the proceeds are included in your taxable estate if you possess any "incidents of ownership" in the policy, such as the right to change the beneficiaries or borrow against the policy.
If you want life insurance proceeds to avoid federal estate tax, you may want to transfer ownership of your life insurance policy to another person or entity. (See lower right-hand box if the entity is a corporation.)
You can transfer the ownership rights in an existing policy, but the proceeds are still taxable under federal law if you die within three years of the transfer -- and possibly under state law too.
In the IRS private letter ruling, a couple transferred a second-to-die life insurance policy to an irrevocable trust and named their daughter, who is executor of their estate, as the trustee. They also granted their daughter discretion to use the proceeds to pay estate tax, inheritance tax and other taxes due because of death, but she is under no compulsion to do so.
Result: The IRS said that the life insurance proceeds will not be included in the estate of the second spouse to die, even though the funds could be used to pay estate tax. (IRS PLR 200147039)
Check with your estate-planning attorney to learn whether second-to-die insurance is right for you or whether transferring ownership of a policy is a smart move. Keep in mind that transferring ownership may also have gift tax consequences.
I'm at home today, sick with the flu. Last night was rough, fever, chills, cough, and inability to sleep, but I feel a bit better right now. However, during the worst of the night, a thought came to mind that it might actually be a relief if my mortal existence ended. Not that I really wanted it to, but it made it easier to imagine truly feeling that way in the event of a painful terminal illness.
As I often say, estate planning involves sometimes difficult discussions. This post is no exception. This morning I thought to myself, that while I by no means wish to die any time soon, if the time came now, I am ready in many respects:
So, while I hope the rider on the pale horse does not appear on the horizon for me for a few decades, if he comes I will know I have prepared the best I can.
Giving someone your power of attorney (POA) has been likened to giving a trusted person a spare set of keys to your house or car. If a problem arises -- for example, you lose your keys -- your interests are protected. Otherwise, you're still in control. And just as you can take back your spare set of keys, you can also revoke a power of attorney.
Basically, a power of attorney gives someone the legal ability to act on your behalf in ways you specify. Obviously, you should only give this power to a person you have complete confidence in, such as your spouse, adult child, or trusted attorney. A POA can be as simple as giving your child the legal authority to pay your bills and endorse your checks if you are no longer able to do it. Or it can be more detailed, such as enabling your child to pay the bills and sell a parcel of real estate that you own.
Different Types of POAs
If you're considering granting a power of attorney, here are the basic types available:
General power of attorney - This grants a wide range of powers to act on your behalf -- basically, to do whatever you can do. In the event that you became incompetent or incapacitated or pass away, the POA would automatically be revoked. Because of the sweeping nature of this power, it should be used sparingly.
Health care power of attorney - This authorizes another person to make medical decisions on your behalf and remains in effect even if you have become mentally incapacitated. This type of authorization must be signed in front of witnesses and notarized in order to be valid. The agent (sometimes called the attorney-in-fact) that you appoint must be an adult, and cannot be a person who is paid to provide health care to you. As with other forms of POAs, you can specify the decisions you are authorizing your agent to make, or give them the same authority you have to make decisions for yourself.Special power of attorney - As its name implies, a special POA gives your agent power to act only in specific situations. For example, let's say you need to travel for a long period of time when certain matters need to be concluded at home, such as selling your car.
Springing power of attorney - A springing POA is an instrument that can be written so that it takes effect only if you become incapacitated. You need to be very clear when defining what circumstances will trigger a springing POA.
Durable power of attorney - A durable power of attorney can remain in force even if you become incompetent or incapacitated. This POA generally requires that a family member or close relative be appointed as your agent. It differs from a general POA in that it conveys limited powers to the agent and can be put in place for longer periods of time. It can be desirable for some individuals to separate the duties granted by durable POAs into two types --
medical and financial responsibilities. For example:
A Durable Financial POA Can Take a Load Off Your Mind
Here are some of the duties you can authorize your agent to handle with a durable financial POA:
- Pay bills and the bills of your family, using available assets.
- Pay real estate taxes, maintain your home and buy or sell real estate.
- Manage retirement funds.
- Make decisions necessary to operate your business.
- Calculate, file returns and pay your taxes.
- Buy or sell insurance.
- Handle banking and investing money and collecting government benefits, such as Social Security.
1. A durable medical POA (Health Care Power of Attorney) authorizes an agent to make health care decisions. You can give your agent the same authority to make decisions as you have yourself, or you can limit the authority. This POA becomes effective when a doctor states in writing that you're not able to make your own medical decisions. You may want to include an advance directive (living will), which states your wishes concerning life support, if it becomes necessary.2. A durable financial POA names an agent to carry out your financial responsibilities described in the right-hand box. This type of POA can save your family lots of money and avoid many problems if you become incapacitated.
When Does the Power End? A durable POA ends automatically upon your death. So if you wish to have your agent also wind up your affairs after your death, you need to create a will and name that person as your executor. A durable power of attorney can also end if:
You are mentally competent and choose to revoke the POA.
A court concludes that you signed the authorization while you were incompetent, under undue influence, or a victim of fraud, and therefore renders the POA invalid.
The agent you choose is unavailable, unless an alternate is named.
You get a divorce. This applies if your spouse is your agent and you live in one of several states where a divorce automatically terminates the POA.
If You're Married: Your spouse has some authority over property that you own together. He or she can pay bills from a joint account and manage investments in a jointly owned brokerage account. But in most states, including, North Carolina, spouses are limited in their abilities to buy or sell co-owned property without consent of both parties. And if any property is in your name only, your spouse generally has no legal authority to act without a durable power of attorney.
Getting Your Ducks in a Row
Whether young, middle-aged, or approaching the golden years, everyone needs to give some thought to the future. Obviously, the need increases as you get older. An arrangement such as a power of attorney is a simple way to smooth out bumps before they arise. Contact your attorney to learn more.
Source: TrustCounsel's January eNewsletter from BizActions.
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"Nothing is certain but death and taxes," Benjamin Franklin famously said. In the last decade, another occurrence has been certain: The federal estate tax keeps changing. The tax cut legislation passed recently establishes new estate and gift tax rules for this year, next year and last year. Here is a summary of the rules, along with some estate planning considerations for high-net-worth individuals.
The new tax cut extension package, which was signed into law on December 17, 2010, establishes a new (but temporary) estate and gift tax regime for 2011 and 2012. It also clarifies the situation for the estates of individuals who died in 2010 (see right-hand box).
Here is a brief summary of the relevant estate and gift tax provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Note: North Carolina law provides that North Carolina estate tax is due only if federal estate tax is due, so the NC exemption is essentially $5 million as well.
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This is funny, but seriously, all too true in relation to setting up a estate plan. Most people just ignore planning, or keep putting it off for another day. Isn't your family more important than that?
There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.
Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.
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Who Benefits Most The qualified charitable distribution opportunity is beneficial for taxpayers who:
2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts). 3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation. 4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs. 5. Are looking for a quick and easy estate-tax-reduction strategy. |
The Basics
A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.
As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.
Income Tax Advantages
Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.
In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.
Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.
Continue Reading...A dozen states now offer what are called Domestic Asset Protection Trusts (DAPTs), which allow a trust grantor to shelter trust assets from creditors while retaining the right to distributions from the trust. North Carolina statutes do not provide for the formation of DAPTs, but NC residents can avail themselves of the laws of the states that do. One requirement of DAPTs is that there be a trustee in the jurisdiction in which the trust was created.
Here's a chart ranking DAPT states, created by Nevada attorney Steve Oshins.
On December 17, 2010 the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), extending the Bush-era tax cuts. This new law creates a once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.
The new law also presents additional planning opportunities that are less immediate, but no less important.
Background
Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax, an onerous tax that equals the maximum gift or estate tax rate. The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.
A Unique Opportunity
The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax. This is because, under the new law, the tax rate is zero for any generation-skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers will be 35%. In two short years the rate goes back to 55%.
Take Advantage of the Lowest Tax Rates in Decades
I urge you to consider taking advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren. An estate planning attorney can help you structure these gifts so that they meet your goals and objectives, regardless of amount.
You know the importance of having a will. If you die "intestate" (without a will in legal language), your state's laws will determine the disposition of your assets. Your actual wishes will be irrelevant, even though they may be well-known to your friends and relatives.
An Effective Will Here are three basic things you should cover: |
From today's TrustCounsel eNewsletter.
Local Financial Planner Janet Ramsey, MBA, CFP will be offering a course entitled Wealth Planning in the New Normal, Navigating Retirement Decisions in Rough Waters as part of Duke University's OLLI program. The course will run from January 20 to March 31, 2011. Greg Herman-Giddens will speak on non-tax reasons to do estate planning.
For more information and to register, click Continue Reading.
Christmas is in 12 days, so I thought it appropriate to use the "12 Days of Christmas" theme to talk about the fact that estate planning is truly a gift to your family or other beneficiaries. While planning for one's incapacity and demise is not exactly a cheery topic, the holidays are about spending time with and enjoying family, and giving to others. So, here are 12 things you can do for the benefit of your family:
Merry Christmas to all!
For the past ten years, the federal estate tax rules have been changing and they will shift again on January 1, 2011. As of that date, the federal estate tax will return with a $1 million exemption and rate of 37-55%. Thus, virtually everyone with assets in excess of $1 million should have their estate plan reviewed.
Bypass Trust Arrangements Can Save Estate Taxes
Married couples concerned about estate taxes can set up a bypass trust arrangement in their wills or living trust documents. (Bypass trusts are also commonly called credit shelter trusts).
The main purpose of a bypass trust is to allow both spouses to take advantage of their respective federal estate tax exemptions. Typically, assets with value equal to the current exemption amount are automatically put into the bypass trust when the first spouse dies. The trust is created at that time and is irrevocable.
The beneficiaries of the trust are designated by the first spouse to die, and the assets used to fund the trust come out of that person's estate when death occurs. Typically, the trust beneficiaries are that person's children and/or grandchildren.
Since the first spouse to die designates the beneficiaries of the bypass trust, the assets used to fund the trust are included in that person's estate for federal estate tax purposes. However, no federal estate tax is due because that person's estate tax exemption provides sufficient shelter.
The surviving spouse can be given money from the bypass trust to meet his or her reasonable financial needs. When the surviving spouse passes away, the remaining assets in the bypass trust go the beneficiaries of the trust (such as the children and/or grandchildren).
A Potential Problem
Even with properly drafted bypass trust provisions, asset ownership and beneficiary designations must be coordinated with the intent of the estate plan so that assets are available to be sheltered in the bypass trust at the death of the first spouse to die. This asset allocation is a crucial part of any estate plan.
The Bottom Line
Throughout your life, your estate plan will have to be altered at times due to tax changes and other events. Some situations are inherently unpredictable--like winning the lottery or losing a bundle in the stock market. However, it's a fact that the federal estate tax laws are in flux and proper planning is needed. Anyone with assets over $1 million who has not had their plan created or updated after January 1, 2010 with the return of the estate tax (with a $1 million exemption) factored in should schedule an appointment for a review to see what, if any, changes are advisable. This is particularly important for married couples.
P.S. Remember that the proceeds of life insurance policies are taxable for federal estate tax purposes.
Wills Must Keep Up With Life Changes
A will is an essential part of planning for the future. But don't think creating a will is a one-time proposition. Even if you have a valid document, it may need to be updated for a variety of reasons. For example (this also applies to living trusts):
1. Deaths - If individuals named (as beneficiaries or executors) have died or they become incapacitated, a will should be changed.
2. Assets - Revisions may be needed if the value of assets has increased or decreased significantly, or they are no longer owned. For example, if you specifically leave your home to one of your children, and later sell it, you may want to change the distribution of your other assets.
3. Marriage - Wedding bells usually signal the need to review a will. Which assets should pass to your spouse? Are step-children involved? If this is not spelled out in a will, the state will decide. In a community property state, a spouse automatically inherits half of all community property. In most other states, such as North Carolina, a spouse may receive one‑third to one‑half of the estate, absent any other directions.Also, keep in mind that an unmarried couple living together may want to leave assets to each other but in order to make an inheritance happen, it must generally be spelled out in a will.
Before it's too late, people should let someone know where their original will is stored. If one can't be found after a person dies, a court may decide it was destroyed. It's a good idea to keep a copy in a safe deposit box, but don't put the original there without checking state law. Some states require that safe deposit boxes be sealed after the renter dies. In North Carolina it's relatively easy to access the safe deposit box.
Other options include:
- Store an original will in the office of the county Clerk of the Superior Court. (It is retrieved if the person moves.)
- Have your attorney retain the original will. Ask them what will happen to the document if they die, move, or quit practicing.
- Store the will at home. Of course, it could be lost, destroyed or discovered by an interested party who could deliberately destroy, conceal, or alter it.
4. Divorce - In many states, a divorce automatically revokes a will or those provisions concerning an ex‑spouse. As a result, if you get divorced, it's best to have a new will drafted. For instance, you might have your former spouse removed as a primary beneficiary. In addition, you may want to change the beneficiary of your life insurance, pension or any existing IRAs. Consider the use of a trust if children from a previous marriage are involved.
You may also want to change your will if one of your children gets divorced.
5. Births - Once parents have children, their wills should be amended immediately to include the names of guardians to care for the children in the event the parents die prematurely. Also, parents or grandparents might wish to restructure their wills concerning distribution of assets after children are born. Again, the use of a trust may be recommended.
6. Retirement - This event may also trigger the need to make changes to an existing will. For example, many retirees sell their homes and move to other states. But state laws can vary widely. Furthermore, individuals should consider a power of attorney that enables someone else to act on their behalf in the event of incapacity.
7. Tax law revisions - The Internal Revenue Code is regularly changed. In fact, many aspects of estate tax planning are in flux right now. A will should be designed to take advantage of maximum tax benefits that exist today so it may have to be updated as tax laws change.
You don't have to tackle this problem on your own. If you need to update a will or living trust, rely on your estate planning attorney to guide you. And don't delay - the financial and other consequences for failing to act could be significant.
So maybe the prospect of protecting your family, preserving your assets, and saving taxes doesn't motivate you to get your estate planning done. If so, here are some less-mentioned benefits of completing a plan with an estate planning attorney:
Time is running out - we are in the last quarter of 2010, with a host of dramatic changes in the tax laws approaching:
There have also been alarming developments in the law regarding the ability of creditors to reach IRAs:
Heavy stuff on a Friday afternoon, but don't delay - contact your estate planning attorney right away to formulate a plan to protect your assets and save taxes for you and your family.
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If you're asked to serve as the executor of an estate, think carefully about the decision before accepting the position. Acting as an executor or administrator of an estate can involve a great deal of work, depending on assets and the complexity of the estate.
| Q. Who Can Be An Executor? A. It depends on state law, but you generally must be over the age of 18 or 21. In most states, to be an executor a person cannot have been convicted of a felony or be considered "unsuitable" by the court. |
Many people agree to be named as an executor for a relative or friend - and then find they're left with a task that's more difficult and overwhelming than they expected. What's more, executors are bound by law to observe a strict standard of care in fulfilling their duties. You can be held legally liable for negligent handling of the estate.
Use the list of typical executors' responsibilities below to make an informed decision about whether to agree to be named executor. Here are some possible duties that an executor must fulfill:
Inform various people of the death. This includes family members, employers, business partners, the attorney and accountant.
Cancel accounts. This includes the deceased person's credit cards, utilities, banks and other creditors.
Have the will probated. Usually, this means having a lawyer petition the court to probate (or approve) the will. Once the will has been probated, the executor has the power to administer the estate - in other words, to perform the rest of the duties on this list.
"Marshal" the assets. This means finding all of the deceased person's assets, which may not be easy. (Imagine trying to quickly locate every asset you own right now, such as car registrations, stock certificates, account statements, deeds, pension benefits, mortgagepapers, and IRA papers. Now imagine trying to do this for someone else.)
Advice: To ensure that your own assets will be more easily located after death, it's a good idea to prepare a post-mortem letter. This is a document you can prepare yourself to tell executors and heirs where everything is located to carry out your instructions.
Be sure each asset is valued. Assets need to be valued both for estate tax purposes and to provide heirs with a tax basis. (Under the tax law, the tax basis of an asset in an heir's hands is generally the "date of death value.") Some assets, such as business interests, require an appraisal.
File any tax returns. Depending on the size of the estate, tax returns that need to be filed might include federal and state estate tax returns, the decedent's final income tax return, a final gift tax return, and an income tax return for the estate.
Make an accounting of the assets. You'll need a professional for this. In some cases, you may need to sell some of the assets.
Handle the debts. After determining what the estate owes, an executor pays the debts out of an estate bank account.
Distribute the estate's assets in accordance with the deceased person's wishes. If substantial time elapses before the assets are distributed, you have to manage the assets.
These are just some of the duties an executor may have to perform. Although it is an honor to be asked by a friend or relative to serve as an estate executor, don't hesitate to decline if you aren't sure you can handle the task. Perhaps as an alternative, you could serve as a co-executor with a financial professional or institution that has the expertise needed to handle some of the responsibilities.
This post is from an article in my October 5, 2010 eNewsletter.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:
The answer is obvious. Think about it, and then decide what's best for you and your family.
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.
Continue Reading...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!
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.
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.
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.
As you can see, an estate plan is more than just a set of forms. It should be a comprehensive approach to dealing with certain or potential issues of death, disability, long-term care, tax liabilities, probate costs, and family disputes. Not exactly cheery subjects, but certainly important.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.
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?
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.
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.
Effective January 1, 2010 North Carolina law required (1) that a Will prepared by an attorney contain the name of the attorney as the drafter; and (2) that an attorney who drafts the will of relative with a bequest or devise to the attorney must attach an affidavit stating that he or she is in compliance with the law that prohibits drafting such wills unless the testator is a relative.
These laws are repealed as of July 1, 2010.
As worded initially, it was not clear if failure to comply with the statutes invalidated the Will. This has been clarified - the law now provides that failure to include the drafting attorney's name or the required affidavit does not invalidate the Will.
Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.
Continue Reading...I created a few of the these "10 Things" lists myself, and this list provides some basic information on what to think about before entering retirement.
However, in Number 8, the article states that "it is helpful to speak with a qualified attorney or estate planner to determine how best to handle your estate." (Emphasis added.) This statement is misleading in that only an attorney can prepare an estate plan for someone. Furthermore, it's not just helpful to speak with an attorney, but if you want to make sure that you have protected your family, preserved your assets, and maximized any tax savings, it is imperative. Everyone should see any estate planning attorney, and way before one starts thinking about retirement.
A few weeks ago I had my 18 year old son, who just headed off to college, sign a Will, Durable Power of Attorney, Health Care Power of Attorney, Living Will and HIPAA Authorization. At his age, he may not care much about those documents, but I feel better knowing that if, for example, he is hospitalized and can't communicate, I will have the power to communicate with the doctors and make decisions for him.
This post is by elder law attorney Kristin L. Burrows, who recently joined my firm. Look for more entries from her in the future, focusing on elder law.
There are numerous rules governing who is eligible for Medicaid to help pay nursing home costs. Medicaid planning involves advising clients about what those rules are and applying the rules to their financial situation. The goal of Medicaid planning is to protect the client’s rights and maximize the assets that Medicaid allows them to keep or transfer.
In the overwhelming majority of cases, the people who are coming to see me for Medicaid planning are not wealthy, and are not trying to hide money. The people who come to see me are often the spouse or family member of an elderly person who needs to enter a nursing home. The family is overwhelmed by the circumstances. They are worried about how to pay for the huge nursing home bills and how to protect the spouse who is still living at home. They are devastated by the thought that everything their spouse or parent spent their life working for and saving will be depleted by their final health care costs. They are often planning for Medicaid eligibility in order to protect the spouse who will remain at home (the “community spouse”) from becoming impoverished, and to protect some resources to help the person entering the nursing home maintain the best possible quality of life in his or her last years.
The truth is, Medicaid planning is usually the last ditch effort. How many people really think about long-term care planning? Even if they have thought about it, how many people know how to plan for it? Who knows if they’ll need it? Who knows when they’ll need it? Who knows how long they’ll need it? Who knows what level of care they’ll need? Who knows how much it will cost by the time they need it?
Moreover, in situations where someone needs nursing home care, there are often many other issues going on simultaneously. In some cases, the person entering the nursing home has either reached the point or is about to reach the point that he can no longer make his own decisions. An elder law attorney can help you navigate all of these issues to understand your rights and options, and to develop a plan to tackle the hurdles ahead.
When Trusts Meet Retirement Accounts, a recent article on WSJ.com, explains the benefits of using a trust to pass on IRAs and other retirement accounts to children. Properly drafted trusts can provide protection against losing or depleting the funds due to mismanagement, creditors, and divorce. What's more, since the accounts can then be "stretched" over the beneficiaries' lifetimes, the effect of tax-deferred compounding on the account values is simply astounding.
Due to the complexities in this area of the law, working with an attorney experienced in drafting such trusts and well-versed in applicable law is imperative.
I regularly recommend Standalone Retirement Plan Trusts to clients who have $200,000 or more in retirement savings and want to ensure that the funds will be protected after their deaths.
A new online service, Entrustet, provides a free way to safeguard your digital assets, such as domain names, blogs, twitter accounts, online financial accounts, etc. I have tried it out, and it's very user friendly.
In addition to the general public, estate planning lawyers may find it a good value-added service to introduce to clients. Some features that benefit lawyers:
A New Social Security Program Operations Manual System (“POMS”) Section Regarding Early Trust Termination Provisions for "Self-Settled" Special Needs and Pooled Trusts is set forth below. This will not affect SNTs established with the assets of a third party, such as a parent.
Provided by Sharon Kovacs Gruer, CELA and Richard A. Courtney, CELA
SI 01120.199:
A. Introduction to early termination provisions and Trusts
1. Effective date of instructions regarding early termination provisions and trusts. These instructions are effective 10/1/10 and are to be considered informational until that date. Do not apply the policy or procedures in this section prior to 10/1/10.
2. Applicability of early termination provisions and trusts
This section provides the policy for evaluating special needs and pooled trusts established with the assets of an individual on or after 1/01/00 and that contain early termination provisions. If certain criteria are met, such trusts can be excepted from counting as a resource under Section 1613(e)(5) of the Social Security Act (the Act). If those criteria are not met, such trusts should instead be evaluated under Section 1613(e) of the Act. [emphasis added.] For more information about evaluating trusts under Section 1613(e) of the Act, see SI 01120.201 <https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120201> .
Use the instructions in this section to evaluate the following types of trusts:
· Special needs trust established under Section 1917(d)(4)(A) of the Act
For information on special needs trusts established under Section 1917(d)(4)(A) of the Act, see SI 01120.203 <https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120203> .
· Pooled trusts established under Section 1917(d)(4)(C) of the Act
For information on pooled trusts established under Section 1917(d)(4)(C) of the Act, see SI 01120.203 <https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120203> .
3. Case processing alert regarding early termination provisions and trusts
Trusts are often complex legal arrangements involving State law and legal principles that require obtaining legal counsel. Therefore, the following instructions may only be sufficient to recognize that an issue is present that should be referred to the regional office (RO) for possible referral to the Regional Chief Counsel. When in doubt, discuss the issue with the RO staff. Many issues can be resolved by phone.
B. What is an early termination provision?
An early termination provision or clause would allow a trust to terminate before the death of the beneficiary. Commonly, such provisions or clauses provide for termination of the trust when, for example, the beneficiary is no longer disabled or otherwise becomes ineligible for Supplemental Security Income (SSI) and Medicaid, or when the trust fund no longer contains enough assets to justify its continued administration.
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You or someone you love may be ready for a retirement community living arrangement, which typically includes lifetime residential accommodations, meals, and some degree of medical services. These facilities can be quite expensive. The good news: Unexpected tax write-offs may help offset the cost.
The tax-saving idea is that you may be able to deduct part of the retirement community's one-time entrance fee and ongoing monthly fees as medical expenses on your Form 1040, regardless of your current health status. Since the fees we are talking about here can be quite large (see right-hand box), meaningful deductions may be possible despite the limitation on medical write-offs. (You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income.)
Court Decision Shows the Way
For recent proof that substantial deductions are possible, we can point to a 2004 Tax Court decision. Source: Delbert L. Baker v. Commissioner (122 TC 143 (2004). In 1989, Delbert Baker and his wife bought into a resort-style retirement community. It provided four living arrangement categories:
The Bakers paid a one-time entrance fee of about $130,000 plus monthly fees of over $2,000 in exchange for lifetime residential and medical care privileges for both spouses. (This was back in 1989. Today's prices would be much higher in many areas.)
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Most people who execute living wills, health care powers of attorney and other advance directives express their desire to not have their lives prolonged if terminally ill or in a persistent vegetative state.
However, there are some who believe that all or many measures should be taken to prolong their lives. The North Carolina statutory documents are not really designed for this purpose. Thanks to a client, I recently discovered the "Will to Live" Durable Power of Attorney, which is designed for persons who want to be kept alive by artificial nutrition hydration and nutrition, as well as other life-prolonging measures under most circumstances.
This document does meet the NC statutory requirements. Just as with the standard living will, I would encourage those who are interested in using it to discuss it with both their physician and their estate planning attorney.
On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).
New Limitations
The Act would impose the following new limitations on GRATs:
(1) A required minimum 10-year term;
(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and
(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.
The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.
Impact of New Legislation
When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.
By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.
Please click here for a more detailed explanation of how GRATs work.
What action do you need to take?
Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.
Source: Moses & Singer, LLP June 2010 Client Alert
Genworth recently conducted a survey of the Cost of Care in North Carolina (Home Care, Adult Day Care, Assisted Living and Nursing Homes). There are comparisons of the U.S. and NC as a whole, along with the largest metro areas in the state.
With no estate tax in 2010, the prospects of reinstatement diminishing daily, and the ever more probable $1 million exemption in 2011, my staff has been working hard to notify our existing clients that they should come to have their wills or trusts updated.
Many older wills and trusts contain formulas or distribution schemes based on the existence of the federal estate tax, and will not work as intended if the testator/grantor dies this year.
The Revenue Law Study Committee of the NC General Assembly has produced a draft bill that will alleviate this problem by providing that the the will or trust provisions would be interpreted as if the 2009 estate tax was still in effect.
However, even if the bill passes, it should not be viewed as a panacea - any person or couple with assets in excess of $1 million should have their estate plan reviewed as soon as possible. I have already had at least one client die with the outdated language still in place.
The website of the North Carolina Medical Board contains many Position Statements, including one on Advance Directives, a portion of which is quoted below:
"It is the position of the North Carolina Medical Board that it is in the best interest of the patient and of the physician/patient relationship to encourage patients to complete or authorize documents that express their wishes for the kind of care they desire at the end of their lives. Physicians should encourage their patients to appoint a health care agent to act through the execution of a Health Care Power of Attorney and to provide documentation of the appointment to the responsible physician(s)."
and one on Pain Management and End-of-Life Care:
"The Medical Board will assume opioid use in such patients is appropriate if the responsible physician is familiar with and abides by acceptable medical guidelines regarding such use, is knowledgeable about effective and compassionate pain relief, and maintains an appropriate medical record that details a pain management plan." and
"The health care team should give primary importance to the expressed desires of the patient tempered by the judgment and legal responsibilities of each licensed health professional as to what is in the patient’s best interest. "
Those with an interest in these issues would be well-advised to read the Position Statements and discuss them with their physicians.
Thanks to a client for bringing this article to my attention: How To Protect Your Family From Estate Tax Uncertainty. It contains good advice, which I have highlighted in bold in the following text from the article:
Make sure your estate plan accounts for a year with no estate tax, as well as a minimal $1 million exemption next year. Typically, a couple's wills are designed to use each spouse's estate tax exemption, without leaving a surviving spouse short of funds. When the first spouse dies, the exemption amount goes into a "bypass" trust for the children and the rest goes outright to the surviving spouse. The survivor has access to trust income and, if needed, principal, but the amount in the trust bypasses his or her estate.
With no estate tax such formula-driven plans don't work as intended, with too little, too much or even nothing left to certain heirs. So far ten states have passed laws saying that an estate's executor can fund the trust as if the 2009 estate law is in place; Florida has decided to require heirs to go to court to sort it out.
If you have a bypass trust, consult a lawyer now. You may be able to do a cheap fix with a codicil that clarifies how your assets should be allocated if there is no estate tax when you die. Or, if your plan is old and you live in a state with an estate tax, consider a will rewrite that might help your family minimize the combined federal and state tax bite. (Nineteen states and the District of Columbia have their own estate taxes, and these laws are also constantly in flux.)
Note: North Carolina does not have an estate tax this year, but it should return next year along with the federal tax.
I recently gave a presentation on the Legal and Contractual Aspects of Continuing Care Retirement Community (CCRC) Agreements. The talk was very popular - I planned for 40 attendees and over 140 came! I thought others might be interested in the topic - click here for the presentation handouts, which include a comparison of several local CCRCs in which I have clients.
Note: As of June 17, 2010, the handout to which I have linked contains a few corrections to the Carolina Meadows information, courtesy of Liz Rossi of Carolina Meadows.
Forbes.com has been publishing a series on finance and taxes - here's one about an estate tax worst case scenario: Estate Tax Could Come Back with a Sharp Bite. Author Deborah Jacobs discusses the possibility that we could have a $1 million exemption, combined with the elimination of tax reducing strategies such as Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs).
2010 marks the 20th Anniversary of the enactment of the Patient Self-Determination Act, and April 16th, 2010 is the Third Annual National Healthcare Decisions Day.
So, make sure that you, your family and friends all have up-to-date Health Care Powers of Attorney, Advance Directives (Living Wills) and Authorizations for Use and Disclosure of Protected Health Care Information (HIPAA Authorizations) It's also important to talk your doctor and family about your wishes.
My law firm, TrustCounsel, is currently in the process of reviewing all of our clients' estate plans and notifying those that need to update their plans due changes in the law, and possibly changes in the client's situation. A recent New York Times article, Assemble a Paper Trail, and Make Sure Your Heirs Can Follow It, suggests that this is a critically important process, stating: “Once you have [an estate plan], it is crucial to keep it up to date. This should be done every five years or whenever there is a major life event.”
This article goes on to say that “in a year when there is no federal estate tax — though there will almost certainly be one in 2011 — reviewing wills and trust documents should be on everyone’s to-do list. Reviewing both wills and trusts for someone with substantial assets is particularly important this year. Even though there is no estate tax, wills can have clauses that distribute assets to trusts as if the tax still existed. This could end up leaving some heirs too much money and others none at all. And since a federal estate tax will return next year even if Congress does nothing about it, there will be a need to review everything again in 2011.”
While I agree wholeheartedly with the bulk of the article, I do caution readers about using Legal Zoom for their estate planning documents. Software produces legal documents, which may or may not end up being valid and effective, but software cannot produce an estate plan. Documents from Legal Zoom and its ilk result from a simple transaction. An estate plan produced by an expert estate planning attorney is the result of a counseling process, and is much more likely to fully address all of a client's needs and goals. Is Robert Shapiro (the founder of Legal Zoom) writing letters to all of his customers describing all of the federal and state-specific changes in the law over the last five years?
When children are young, the primary concern of parents is to provide for them. After they grow up, parents usually still want to provide for them in their estate plans.
If you have more than one child, and you plan for them to inherit your estate, you may wonder how to divide your assets. To help decide how to allocate your estate, answer these questions:
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Are you comfortable distributing assets to your children outright? If substantial assets are involved, you may want to set up trusts to distribute them gradually. For example, you might want them to be dispensed in thirds when each child reaches age 25, 30, and 35. You can always give the trustee discretion to make early distributions for expenses that you deem appropriate, such as paying for college, starting a business, or purchasing a home.
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In addition to attorney-prepared health care planning documents like Health Care Powers of Attorney, Living Wills and HIPAA Authorizations, I often talk to clients about Do Not Resuscitate (DNR) Orders and the newer Medical Order Scope of Treatment (MOST) Form. These two forms can be obtained only from one's physician, and must be signed by the physician to be valid.
Laypersons often get Living Wills and DNRs confused, and many physicians are unaware of the MOST form. For those who are elderly or seriously ill, a conversation with one's physician about whether or not to use a DNR or MOST is in order. The North Carolina Medical Society's website contains quite a bit of information and sample forms.
The Health Care Reconciliation bill includes a new 3.8% Medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.
Under H.R. 3590, there is also a 1% increase in the employee Medicare tax on all earnings. Taxpayers with income under $100,000 will benefit from partial exemptions.
Congress has promised the two new taxes are temporary (10 years or so)- but don't hold your breath.
The House Ways and Means Committee has approved H.R. 4849. The "Small Business and Infrastructure Jobs Tax Act of 2010," which contains a provision instituting a 10 year minimum for Grantor Retained Annuity Trusts (GRATs). GRATs are commonly used to transfer wealth to younger generations at no or little gift tax costs. The restriction would be effective upon enactment of the law.
If you are considering a GRAT, now is the time to act!
Click "Continue Reading" for the pertinent text from the report by the staff of the Joint Committee on Taxation.
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Most everyone in the country has heard about the Georgia husband and father, Robert Gary Jones, who was killed by an airplane while jogging on the beach on Hilton Head Island, South Carolina. This accidental death will no doubt spur a lawsuit against the pilot of the plane, Edward I. Smith.
As an estate planner, this tragic story prompted several questions in my mind:
This event is an example of the fact that one never quite knows what will happen, including a sudden death. Don't leave yourself and your family exposed - contact an estate planning attorney today. Preparation may not prevent incidents from occurring, but it sure can ease the effects of the aftermath.
For those who have been through a similar experience, this poignant article Letting Go of My Father, which details Jonathan Rauch's struggles in caring for his elderly father, will solicit empathy. For younger readers, it can provide a glimpse of things to come.
While the article does not cover the issue, the legal aspects of caring for an elderly relative can be greatly simplified by making sure a durable general power of attorney, health care power of attorney, living will and HIPAA authorization are in place early on. Once an elder becomes mentally incapacitated, it's too late.
Also, geriatric care managers can provide invaluable assistance, even when an elder is in facility, by monitoring health care, medications, etc.
Thanks to attorney Kathe Joyce for bringing the article to my attention.
Special Needs Trusts (SNTs), also sometimes referred to as Supplemental Needs Trusts, are used to provide supplemental benefits to disabled or elderly persons receiving governmental benefits (such as Medicaid and SSI) while not disqualifying them for the benefits.
There is a distinction between "self-settled" or "first party" trusts, which are funded with the disabled persons own assets, and most often called special needs trusts, and "third party trusts", which are set up by another person and funded with that person's money. The latter are often referred to as supplemental needs trusts. The laws regarding SNTs are very complex, and such trusts should be drafted only by attorneys experienced in that area of the law.
The administration of SNTs is also complex. Only certain types of expenditures are allowed. The wrong type of payments from the trust can disqualify the beneficiary from receiving governmental benefits. I currently serve as trustee for several SNTs - given the many needs of a disabled beneficiary, it can be a demanding job.
For examples of what expenditures from an SNT are allowable, and those that aren't, click "Continue Reading."
Continue Reading...In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.
The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property. The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority. Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.
The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina. The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.
On February 2, 2010, in Ododonnabhain v. Commissioner of Internal Revenue, the U.S. Tax Court held that a transgender woman's expenses for hormone therapy and sex reassignment surgery were medically necessary and therefore deductible for federal income tax purposes. The court found that "gender identity disorder" is a disease, and ruled that gender transition-related healthcare is non-cosmetic, medically necessary healthcare. However, expenses for breast augmentation were found to be cosmetic as the surgery did not treat the disease or improve bodily function, and therefore were non-deductible.
Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax. Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole. No sooner said than done:
Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.
For years, there has only been North Carolina estate tax due if federal estate tax was due. Now, however, that the federal estate tax is gone (for now, anyway), what's the status of the NC estate tax?
N.C.G.S. Section 105-32.2 provides, in pertinent part, as follows:
"The amount of the estate tax imposed by this section is the amount of the state death tax credit that, as of December 31, 2001, would have been allowed under section 2011 of the Code against the federal taxable estate. The tax may not exceed the amount of federal estate tax due under the Code." [Emphasis added.]
Regardless of how the first sentence above is interpreted, since zero federal estate tax is due for individuals dying in 2010, the second sentence clearly mandates a zero NC estate tax as well.
I'm at the University of Miami School of Law's Heckerling Institute on Estate Planning this week. Our first speaker, Lou Mezzullo, stated that he thinks Congress will not act this year on restricting planning with Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs). Too many other things of importance to tackle.
This posting is courtesy of attorney Marc Soss of Florida:
The aging demographics of the United States coupled with the Pension and Recovery Act of 2006 (the "PPA”) and Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create tax efficient vehicles to solve a clients’ long-term care planning needs. Beginning on January 1, 2010, a tax-free planning option will become available for individuals who desire to provide for long-term medical care by utilizing an existing annuity or life insurance contract purchased after 1996. While not a new concept (it dates back to 1997), the 2010 tax-free planning opportunity may be beneficial to an individual with a larger than needed life insurance policy death benefit, unaffordable monthly or annual premiums, an under-performing or matured deferred annuity contract, or the desire to incorporate long-term medical care into his or her estate plan.
Continue Reading...
From The New York Times to my bully pulpit:
This article helps explain why revising old estate plans is more important than ever, given this bizarre (tax-wise) year of 2010.
And for heaven's sake, if you don't have an estate plan, what are you waiting for? Today is the first day of the rest of your life, but tomorrow may be the last day of the life you had. Be a grownup and get a plan!
Carolina Donor Service will answer all your questions about organ donation in North Carolina. Also, don't forget that in a Health Care Power of Attorney you can give your agent the power to donate your organs.
This is from Steve Akers' recent presentation, Estate Planning in Light of One-Year 'Repeal' of Estate and GST Tax in 2010:
"the Administration proposes to dramatically change the rules regarding valuation discounts (emphasis added). If there is an estate and gift tax reform package adopted next year, it could include that provision. If there is no legislation, there are indications that the IRS will issue regulations under §2704 that would place significant restrictions on valuation discounts on entities that are valued on the basis of their liquidation value (such as family limited partnerships holding marketable securities or other assets other than operating businesses.) Therefore, to have a chance to take advantage of the lower 35% rates in 2010 and to avoid the coming restrictions on valuation discounts, clients should consider make desired gifts and sales as early in the year as possible (Emphasis added).
Since the estate tax is sure to return, I am advising clients for whom a family limited liability company makes sense to form it now, and if possible use their $1 million lifetime gift tax exemption now to take advantage of discounting before it is legislated away.
I just put this Estate Planning Alert on my firm's website homepage, but thought it would also be appropriate for this blog:
As of January 1, 2010, there is no more federal estate tax. The estate tax has been replaced with a complex modified carryover basis regime. In 2011, the estate tax is scheduled to return, with a $1,000,000 exemption and 55% rate (plus an additional 16% for North Carolina residents). Due to these changing laws, it is imperative that everyone with an estate of $1 million or more do proper planning to ensure that income and estate taxes will be minimized. Be aware that the face value of life insurance is included in calculating one's estate, so even many young couples have estates in excess of $1 million. Do not let your family pay tax unnecessarily. Consult an estate planning specialist today.
The following is a guest post by Chris Birk of SuretyBonds.com, which also publishes the Surety Bond Insider:
If your list of New Year’s resolutions seems thin, look no further than your estate plan — and make sure you’ve included a waiver of bond for the executor.
Probate bonds can prove a costly headache. Without a will that explicitly waives the need for a probate bond, courts have no choice but to mandate their purchase unless the heirs formally agree that a bond is unnecessary. And even then the court may still deem a probate bond necessary to ensure the estate and its assets are protected and debts are paid.
The absence of a bond waiver ensures that the executor is likely to spend time and money negotiating a financial and legal hurdle in a process that already has its fair share.
Surety companies will also examine the financial and credit history of the executor before issuing a bond. Make no mistake — there’s an underwriting process for these bonds, just like any other risk-management mechanism. There are cases where an executor has failed to qualify for a bond, triggering a new series of legal maneuvers involving the surety company.
The cost of a probate bond depends on the value of the estate and its unsecured debts. For estates valued at more than $1 million, bond premiums could easily run about $2,000 per year depending upon the location.
While the estate can pay for bond costs, think of it more as a reimbursement — you can’t access the estate funds until probate is complete. And sureties won’t issue bonds with an I.O.U. In addition to upfront costs, executors (and administrators) are on the hook for renewals and premiums each year.
These costs and potential aggravations can slow the probate process. They’re also a recipe for confusion and, in many instances, unnecessary expense.
With the new year underway, now is a great time to revisit your estate plan and thoughtfully consider including a bond waiver.
From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post is from today's Advisor's Forum Wealth Counselor and explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.
Continue Reading...It's 2010! As of January 1st, the federal estate tax is no more and it may mean that you should revise your estate plan and related documents. Anyone with total assets over $1 million (including face value of life insurance, retirement, home equity, etc.) should make make sure there estate plan is up to date. Click "Continue Reading" to find out what the change involves, what happens next year, and what steps you might want to take now to ensure your wishes are carried out.
Continue Reading...In looking for estate planning assistance, you should consider the following:
1. Do they concentrate their practice solely in estate planning? It's difficult enough for a specialist to keep up with current law and best practices, let alone an attorney who also handles other areas of the law (such as real estate closings, family law, etc.).
Continue Reading...
From IR-2009-114
Watch Video: Year-End Tax Tips: English | Spanish | ASL
Watch Video: Record Keeping: English | ASL
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
Continue Reading...This from Howard Hinds of the Curbstone Group in Boston:
Master Limited Partnerships (MLPs) are excellent tools for estate planning:
1. MLP distributions (around 8% yield right now) are considered return of capital, meaning that distributions reduce your basis in the MLP, while allocated net income increases your basis.
2. Tax Shield: Because MLPs own large hard assets (like pipelines) with high depreciation (non-cash) expenses, allocated income to an investor is usually less than 20% of cash distributions in a given year for the first several years of ownership. This creates a tax deferral, which is recaptured when you sell the MLP.
3. When you sell an MLP: (a) the gains from your purchase price to selling price are taxed at capital gains rates, and (b) the difference between your purchase price and your basis (which has been reduced over time) is taxed at ordinary income rates.
4. But, if you die while holding an MLP, the tax deferrals you have accumulated over time are washed away along with the capital gains taxes, and whoever receives those MLPs after you die has a new stepped up basis, so those tax deferrals are not passed along. This can be a very big deal for someone who has owned Kinder Morgan Energy Partners since 1995 and they have $0 basis and the share price is $55 per share
So in addition to being great income vehicles for someone with large estate, MLPs can be great tax shields as well.
In a recent Florida case, Bank of America was held liable for refusing to honor a power of attorney:
Copyright 2009 Stuart News Company All Rights Reserved The Stuart News/Port
St. Lucie News (Stuart, Florida) November 15, 2009 Sunday Martin County
Edition SECTION: LOCAL; Pg. B5 LENGTH: 496 words HEADLINE: Stuart man
takeson Bank of America BYLINE: Melissa E. Holsman staff writer BODY:
STUART
-- When Clarence H. Smith Jr. sued Bank of America in 2007 over its
refusal to honor the power of attorney his now-deceased father had enacted years
before, he called it as a case of David against Goliath. And like
David, Smith on Friday walked out of court a winner, armed with a jury award
worth $64,142. "I'm glad we won, but I think it's a victory for more than
just us," said Smith, 67, of Stuart. "It's a victory for anyone who gets a
rough deal from a big bank -- that a little person can prevail against a huge
international bank." After a week-long trial, it took a one-man,
five-women jury 15 minutes to determine Bank of America had not acted
reasonable in September 2007 when it denied Smith Jr.'s request to
transfer $65,000 his father, Clarence H. Smith Sr, then held in a joint account
with a female friend he knew from living at Ocean Palms Retirement Center.
Smith said his ordeal with the bank began when he became suspicious
money may be missing from his father's bank accounts. He presented to
former Stuart branch manager Victoria Carscadden the durable power of attorney
he'd had on behalf of his father with a request to transfer money from the
elder Smith's jointly held accounts into a new account only the father and son
could access. But instead of honoring the request, Carscadden
testified that she consulted bank policies and called the woman on the account
with Clarence Smith Sr., and she accused the son of trying to steal his
father's money. Carscadden said she refused Smith's request because bank
rules governing jointly held accounts require that all signatures on an
account must agree to any transfers or changes. The woman sharing Clarence
Smith Sr.'s account, she said, had refused to allow any money to be moved.
At trial, Smith's Stuart attorney William R. Ponsoldt Jr. showed that
despite Carscadden visiting Clarence Smith Sr. to see he was competent and that
he wanted his son to manage his affairs, she still refused to recognize
Clarence Smith Jr.'s power of attorney. Shortly afterward, Ponsoldt told
jurors, the woman sharing Clarence Smith Sr.'s account moved all the
money into an account only she could access. Clarence Smith Sr. died about
three weeks later, Ponsoldt said. He argued that the bank's refusal to =
honor Smith's power of attorney went against state law. During his closing
argument, Bank of America attorney J. Randolph Liebler of Miami, said
based on bank policies, "it would be absolutely inappropriate to have honored
the power of attorney where there was some allegation of abuse -- rightly or
wrongly." After court, Bank of America spokeswoman Shirley Norton
said they were disappointed in the jury's verdict. "We believe that
neither the facts nor the law support the verdict," she said, "and we plan to
appeal." Smith meanwhile, said he'll use the money to pay bills from
his father's estate. "I feel fortunate we were able to take on Bank of
America," he said. "Think of all the people who can't."
Thanks to Brevard attorney Nicola Melby for bringing this to my attention. North Carolina also has laws to help with enforcement of a valid power of attorney. N.C.GS. Section 32A-40 et sq.
Thanksgiving is less than a week away, but many people currently have turkeys of a different kind - poorly drafted Wills.
If your Will is missing one or more of these features, it's time for an update:
Having these provisions can save a lot of time, money and aggravation in the administration of your estate. And these are just the simplest, most obvious things. Any number of other provisions may be advisable depending on your situation.
Many people are aware that they can give any number of other people up to $13,000 per year under the federal gift tax annual exclusion (IRC Section 2503(b)). Staying under this number means that no gift tax return has to be filed and that there will be no reduction in the amount that can be passed free of estate taxes at the donor's death.
However, writing gift checks to children, grandchildren or others at the end of the year can cause the donee lose the benefit of the annual exclusion unless:
Bottom line: make sure your donee deposits the check no later than the last business day of the year.
Example: Bob gives his $13,000 gift check to his granddaughter Lucy on Christmas Day, 2009. Lucy deposits the check in her bank on December 31, 2009. The check is paid by the drawee bank on January 7, 2010. This would be completed gift for Bob in 2009.
Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.
There are several strategies available to help reduce the impact of these taxes:
Continue Reading...
This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.
The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.
The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.
Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.
Last Thursday's Wall Street Journal's website featured an article on online estate planning programs: Before It's Too Late: A Test of Online Wills. As you might imagine, I'm not a big fan of do-it-yourself estate planning, particularly for those who have substantial assets. Creating a Will and other documents yourself with the help of software may be better than nothing, but it can create a sense of false security, as it did for the author of the article, Jane Hodges.
In the articles, Hodges says: However, in crafting our revocable trust, the program presented a pop-up note indicating that people with more than $1 million in assets might need an attorney due to changing inheritance tax laws that take effect in 2011. (Our joint assets exceed this amount mainly due to hefty life insurance policies and the value of our home, which we don't own outright.) [Emphasis added.]
In this case Hodges did not see an attorney and thus failed to address a huge potential issue - estate taxes. If the federal estate exemption returns to $1 million in 2011 as scheduled, assets over $1 million, including proceeds of life insurance policies, will be taxed at 55% for federal purposes, not to mention any state estate taxes. Saving a couple of thousand dollars on legal fees could cost her beneficiaries hundreds of thousands of dollars in extra taxes. Plus there are a whole host of other issues that can be addressed by an experienced estate planning attorney that websites ignore. Caveat emptor!
Effective October 1, 2009, Trustees of North Carolina trusts can, subject to certain requirements, appoint the trust property to another trust for the same beneficiary. This "decanting" power can be useful in helping to protect trust funds. The law applies to trusts created before and after the effective date.
Click "Continue Reading" for a Comprehensive Living Trust Checklist to determine whether or not your trust needs to be upgraded. Thanks to attorney Thomas J. Bouman for the checklist, which I have modified for North Carolina purposes.
Continue Reading...
One common oversight I see when reviewing new clients’ financial status is failure to consider the estate tax impact of large life insurance policies. Most people know that life insurance proceeds are received free from income tax. What most don’t know, however, is that the proceeds are part of the insured’s estate for estate tax purposes if:
Life insurance proceeds of any amount can be paid to a U.S. citizen spouse free from tax. But – those same proceeds, or the value of items purchased with the proceeds, will be included in the taxable estate of the surviving spouse.
This may not be a problem for most of us at the current $3.5 million estate tax exemption. However, barring a change in the law, in less than 14 months the exemption will revert to $1 million, and the rate will increase from 45% to 55%. North Carolina adds another 16%.
With a $1 million exemption even a $250,000 policy could be subject to estate tax when combined with the value of real estate, retirement accounts, and all the other assets of a decedent. Why take the chance of losing over half the proceeds to Uncle Sam? The solution is to create an irrevocable life insurance trust (ILIT) to own the policy. The proceeds will then escape taxation at the death of the insured, his or her spouse, and can be structured to avoid taxes at the death of the children or other beneficiaries are well. In addition, the proceeds are protected from creditors and mismanagement by the beneficiaries.
If an existing policy is transferred to an ILIT, the proceeds will still be included in the insured’s estate for estate tax purposes if he or she dies within three years of the transfer, so it's best not to delay planning for existing policies.
ILITs must be structured properly to take into account various estate, gift and income tax issues, as well as state law. Make sure you have an estate planning specialist prepare your ILIT and work with your life insurance agent. ILITs are not inexpensive to create, but your beneficiaries could easily save several hundred thousand dollars or more.
Wealth Management Exchange is designed for networking and information exchange. One can sign up to receive email alerts on financial and estate planning topics.
Last week was National Estate Planning Awareness Week - I'm sure most of us didn't know that, but awareness about the necessity of estate planning is pitifully low, so anything that can be done to help folks realize that it's important to plan for the future is good.
Here's an article from USA Today - 5 myths about wills, and what you should do. However, I disagree with one thing in the article - that Do-It-Yourself software and websites are fine for basic wills. The problem is that many people think they need only a basic will, but in reality their situation is not so simple. I don't even recommend using a non-specialist for your estate planning. I have seen many poorly drafted "simple wills" that end up complicating probate and costings thousands of dollars in attorney and court fees more than a properly prepared will would have.
Go see an attorney who specializes in estate planning. Your family and property are too valuable to rely anyone but an expert.
As Halloween approaches, here's another reason to be scared - failure to do proper estate planning. Make sure you have not committed any of these common mistakes that I see all too often:
The really frightening thing is that these mistakes only apply to those who have attempted to do some estate planning; most people have made the ultimate mistake of not planning at all.
Check out this aptly titled article on webcpa.com - The dangers of postponing estate planning until Congress clarifies the law. Don't let the expenditure of a few hours or a couple of thousand dollars keep you from putting a plan into place that could avoid unintended financial problems for your family and/or save them hundreds of thousands of dollars in taxes. Estate plans are not meant to be a "once and done" solution. Regular updates are necessary, just like tuneups for a car. Without regular maintenance, your car will eventually breakdown and be useless. The same could be said for an estate plan.
This article from WSJ online on the effect on changing estate tax exemptions on what's left for the surviving spouse describes just one reason why.
Practically every day, I discuss with clients the pros and cons of revocable living trusts. In my opinion, the positives generally far outweigh the negatives, but living trusts don't make sense for everyone. There have been innumerable articles and blog postings about the advantages of using a living trust for estate planning, but I thought I'd approach the topic from a different angle - why might you not want to use a living trust:
If even one of these statements describes you, then maybe you aren't the right candidate for a living trust. ;-)
In addition to providing ease of management and significant asset protection, FLPs and (FLLCs) are still a excellent planning tool for obtaining gift and estate tax discounts (for minority interests and lack of marketability) - provided that the implementation and valuation are done correctly. See this BVWire article on Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009).
However, anyone considering a FLP or FLLC for the transfer tax advantages should not delay - the Obama administration has recommended legislation prohibiting such discounts in most cases.
The following is a list of some of the events that should trigger a review of your estate plan:
(1) Marriage, divorce, death of spouse.
(2) Birth of a child.
(3) Children become financially independent.
(4) Birth of a grandchild.
(5) New business venture.
(6) Substantial growth in your business.
(7) Job promotion.
(8) Retirement.
(9) Purchase of life insurance.
(10) Move to a different state.
(11) Substantial increase or decrease in wealth.
(12) Decision to make large charitable gifts.
(13) Increase in risk of being subject to a lawsuit.
(14) Substantial amounts of property are in joint names.
(15) Purchase of real property (including a time share) in another state.
(16) Changes in tax or other relevant laws.
Even in the absence of any of these events, an estate plan should be reviewed every three to five years to ensure that the documents are in keeping with current laws.
Contemporary estate planning causes a division of an estate and results in an ultimate dissipation of the resource base over a period of years. Is it possible to keep the resource base together to serve the family for many family generations? The Sam and Helen Walton story tells us how we can do so. The King Ranch story provides another illustration of what can be done.
Sam Walton's autobiography was published shortly before his death in April of 1992. Sam Walton writes about building a business and entrepreneurship. He also talks about the building of an estate plan. Most of the information I provide comes from the book. Other information comes from those who knew Mr. Walton or members of his family.
Continue Reading...Here's the money your family could have saved had you done proper estate planning:
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(with thanks and apologies to Geico)
By FREYA ALLEN SHOFFNER - an attorney in Boston who focuses on estate planning.
Estate Planning is great. It is an empowering tool that can be used in a multitude of ways. Planning your estate means designing the documents that will direct how your assets are handled now and in the future. Making an estate plan that works means avoiding the difficulties of conservatorship, guardianship, and a complicated probate process. A good plan can help you and your family save many thousands of dollars in taxes. It allows you to make your medical decisions in advance.
Unfortunately many people have fallen for the many myths and fantasies about estate planning. Often, their families and loved-ones are left with nothing but huge bills, complicated probate proceedings, and even nasty lawsuits.
Here are ten dangerous estate-planning fantasies. Which ones do you believe?
1) I’m Too Young For An Estate Plan. False. If you have passed your eighteenth birthday, you need an estate plan. Every pot of gold comes with a pot, and your estate plan is the pot that holds your gold. Your estate plan helps you manage your assets during your life, if you are disabled, at death, and after. Don't leave Earth without it.
2) I’m Too Poor For An Estate Plan. Wrong. Estate planning is essential for everyone who is concerned about how their assets are managed now and how they will be distributed after their death. Don’t forget, once you take into account the value of your home, your retirement funds, and insurance policies, you might be wealthier than you thought.
3) A Simple Will Is All I Need. Not Necessarily. Many people have the mistaken belief that their Will controls where all their assets will go. However, many assets like insurance proceeds, retirement plans, IRAs, annuities, and even bank accounts may automatically become the property of someone else. Be sure to review all of your co-owned assets when you begin your estate plan.
4) Once I Write My Will, I’m Done. Absolutely Not. Birth, adoption, divorce, death, and many other factors can change the way you should set up your plan. Review your estate plan periodically, especially when there are major changes in your life.
5) I’ll Just Leave Everything to My Spouse So I Won’t Have To Pay Taxes. Not True. The federal government and many states do offer a tax credit for assets that pass to your spouse. However, if you leave everything to your spouse, you may be throwing away half of the credit.
6) I Can Make Unlimited Gifts to My Children To Avoid Estate Taxes. A Myth. While making gifts to your children can lower your estate tax total, you need to do it properly to make the most of the gift tax laws.
7) My Closest Relative Will Automatically Be My Children’s Guardian. No. Guardianship of minor children is an important aspect of estate planning that requires thought and careful consideration, nothing about it is automatic.
8) Life Insurance Doesn’t Count For Estate Taxes. Another myth. Life insurance proceeds are part of the policy owner’s taxable estate. And, if you forget to name a beneficiary they could be part of your probate estate as well.
9) If I Go Into A Nursing Home the State Will Take All of My Money. False. There are many ways to plan for payment of long term care expenses. Sit down with your attorney to discuss long-term care strategies.
10) An Online Form Is All I Need. Very Wrong. While online estate planning forms might give you an idea about what to do, every state has different requirements for the specifics of a Will. Remember, you estate plan is the container that will hold all of your wealth. Don’t risk your family’s future security on a fill-in form.
Don’t be fooled. With a little thought and the help of a good attorney, your estate plan will work to protect your hard-earned wealth for decades to come.
This morning I came across this article on estate planning advice by the Better Business Bureau. I certainly endorse the idea of urging people to do proper planning, but articles like this can sometimes do more harm than good. I give a grade of C (mediocre).
Here's the text of the majority of the article, with my comments in bold:
An estate plan can be as simple as drafting a will or as complex as setting up a trust and a living will. BBB offers the following guidance on the basic components of an estate plan and advice on choosing what is necessary for different situations.
Wills can be complex also, and can contain trusts that take effect at death (testamentary trusts). Also, the first sentence implies that a will and a living will are mutually exclusive, which of course is not the case. The only source of true estate planning guidance should be a well-qualified estate planning attorney.
Will
At the very least, anyone who has assets that they would like to pass on to specific individuals should create a will. A will can allocate assets as well as establish guardianship of children. Most wills have to go through probate after the individual’s death. In probate, a court oversees the payment of any debts and distributes inheritances—the process can last several months.
This is basically accurate, but it's not really the will that goes through probate, it's the assets (depending on what type and how they were owned), And in many cases, probate can last for a couple years. This is one reason I generally counsel the use of living trusts to avoid probate.
Living Trust
While a trust might sound like something only wealthy people need, it’s actually a tool for anyone who would like to set conditions on how and when their assets are distributed. A trust can also help reduce the amount of taxes paid on the inheritance and does not have to go through probate—unlike a will. Examples for creating a trust include wanting to give a child their inheritance over time, rather than in a lump sum, and restrict how the money can be spent.
This is misleading. A will can also contain provisions that set conditions on how and when assets are distributed (a testamentary trust). In addition, a living trust in and of itself does nothing to reduce inheritance (estate) taxes. Trusts or other provisions that can save estate taxes can also be contained in wills.
Living Will
A living will provides a way for an individual to communicate their desire for life-saving measures in case they are incapacitated. In addition to a living will, individuals can also assign medical power of attorney to someone they trust who can further ensure that their wishes are fulfilled.
Actually, a living will normally states one's desire to not have life-prolonging measures. There's no mention of HIPAA restrictions on sharing health care information, however, and the need for a blanket HIPAA Authorization.
For simple estates, many Web sites offer an inexpensive do-it-yourself approach to creating a will; for more involved estates, it’s best to enlist the help of a lawyer. BBB advises researching any estate planning companies or lawyers first at www.bbb.org before paying for assistance.
Beware of the websites. Using a website to do your estate planning is like diagnosing and treating yourself after reading WebMD. In, the North Carolina State Bar has stated that Legalzoom is violation of the law. Click "Continue Reading" to view the text of a letter sent to Legalzoom in 2008.
Also, to be accredited with the Better Business Bureau, a business must pay a fee. Therefore, lack of accreditation should not be viewed as a negative factor. Finally, don't just use any lawyer - with a board certified estate planning specialist you know that he or she has extensive knowledge and experience in estate planning.
After creating an estate plan, BBB recommends communicating the terms of the plan with the family members and loved ones it impacts. An estate plan needs to be revised every time the individual moves, changes marital status or is affected by major financial changes, such as investments or buying or selling a business. An estate plan will also need to be reviewed if anyone the estate plan affects undergoes major life changes such as marriage or death.
Communication with family members is generally good, unless you think it will start a family feud. Regular review and updating of estate plans is also important because of changes in the law.
Bottom line - it's a good idea to try to educate about estate planning before meeting with a lawyer, but don't rely on the Internet alone for your estate planning. There's no substitute for the services of a knowledgeable and experienced attorney.
Continue Reading...Most people fail to do any estate planning at all, and many more have outdated or inadequate plans. A recent article, A slacker's guide to death, discusses this issue. One word of caution - the article, while generally applicable to North Carolina, has one suggestion that is not always a good idea in North Carolina, and that's for married couples to own assets jointly. I normally recommend that only for real estate, as jointly owned cash and investment accounts are more vulnerable to creditors.
Second-to-die life insurance has long been used by married couples to provide liquidity to pay estate taxes at the death of the second spouse to die. Such insurance is less expensive and easier to obtain than two separate policies on the same individuals.
Now, life insurance that pays out at the first death is available. The Phoenix Companies, Inc., of Hartford, Connecticut, has released its Phoenix Joint Advantage universal life policy. A single policy will insure two lives, covering couples who need cash for support when the first of them dies, and small business owners who need funds to purchase a deceased owner's interest.
The product has several options, such as a survivor purchase rider, which enables the survivor to purchase a new policy without undergoing further underwriting.
Given the usefulness of this type of policy for estate and business planning, I predict other companies will follow suit.
Unlike in the income tax and asset protection arena, single member limited liability companies (LLCs) are not disregarded for gift tax purposes. Pierre v. Commissioner, 133 T.C. No. 2 (Aug. 24, 2009). See Paul Caron's recent TaxProf Blog entry for a brief summary.
This article discusses when it might be appropriate to include your parents or grandparents in your will or living trust - generally when you are providing support for them. In most cases, funds should be held in trust for the elder relatives, to protect the assets and preserve Medicaid eligibility.
Note: The article is written by a Canadian lawyer, so it contains a reference to Canadian governmental benefits. Otherwise it is applicable to U.S. residents.
Check out the Family Care Naivgator from the Family Caregiver Alliance. North Carolina's page is here.
Make Time to Create an Advance Medical Directive - I recently had the opportunity to hear a presentation by Bill Colby, the attorney who represented Nancy Cruzan's family in the right-to-die case that went all the way to the U.S. Supreme Court. Mr. Colby has written a book Unplugged: reclaiming our right to die in America, which I have purchased but have not yet read. If Mr. Colby writes as well as he speaks, it should be an interesting and information book.
A recent WSJ.com article discusses Advance Directives (Living Wills and Health Care Powers of Attorney) and their important role in end of life situations. I learned that Google now has a free online service for registering such documents.
North Carolina residents should be aware that NC has a statutory form for both an Advance Directive (Living Will) and Health Care Power of Attorney. Both forms were revised in October 2007, although the older statutory forms are still valid. Non-statutory forms may possibly be considered invalid if they do not meet NC's strict witnessing and notarization requirements.
Last week I attended a presentation by Ed Slott, CPA, America's foremost IRA expert. A couple of years ago I participated in an extensive two-day training with Slott, and found him to be both informative and entertaining. One word of wisdom from Slott - check with your retirement plan custodian to review your beneficiary designations! Often these are outdated, incorrect, or even missing.
The Required Minimum Distribution (RMD) and other rules for IRAs and qualified plans (such as 401(k)s) are complex and require constant study to stay current. The truth is that very few advisors, whether they are attorneys, CPAs or financial planners, are fully aware of the rules. So, if you have an IRA or other retirement account over $100,000, make sure that you find an advisor who is an IRA expert. Failing to plan properly could cost you or your family thousands of dollars in extra income taxes or even unnecessarily subject the IRA to the claims of creditors.
This is from the latest edition of the GiftLaw eNewsletter:
Note from Greg: Family Limited Partnerships (FLPs) were previously the preferred entity for obtaining discounts on transfers of wealth to younger family members. FLPs have largely been replaced by Family Limited Liability Companies (FLLCs). The writer of the article below often refers to FLPs even though the case involved FLLCs.
Indirect Gifts through FLP Trigger $1 Million Gift Tax
In David E. Heckerman et ux.v.United States; No. 2:08-cv-00211 (27 Jul 2009), the District Court determined that gifts of cash to an FLP together with gifts of FLP interests were indirect gifts valued at fair market value.
On November 28, 2001, David and Susan Heckerman created trusts for each of their two children, then ages five and two. They also created the Heckerman Family LLC and two solely-owned LLCs, Heckerman Investments LLC and Heckerman Real Estate LLC. Heckerman Investments LLC was designed to receive liquid securities and Heckerman Real Estate LLC was designed to hold realty.
On December 28, 2001, David and Susan Heckerman transferred a $2.05 million beach house in Malibu, California to Family LLC, with an immediate quitclaim deed to Real Estate LLC. On January 11, 2002, they transferred $2.85 million in mutual funds to Investments LLC and signed gift documents "effective on January 11, 2002" to transfer the majority of Family LLC units to the children's trusts.
Appraiser Mark Wellington of Private Valuations, Inc. completed an appraisal of the value of Family LLC units gifted to the children's trusts. He determined that the transfers would be subject to a 58% discount for lack of marketability. Therefore, both David and Susan had transferred a gift value of $1,022,000. Using their four annual exclusions (two parents times two children) and two $1 million gift exemptions, there was no gift tax payable.
The IRS audited the return, claimed that the securities transfer was an indirect gift and assessed gift tax of $511,497.56 for each donor. The Heckermans paid the gift tax and filed for a refund.
The IRS contended that under Reg. 25.2511-1(a), "whether the gift is direct or indirect," there is a transfer. Because the transfer to the FLP was completed on the same date as the gift of the units and there was no clear evidence that the transfer of the FLP units was after the funding of the FLP, the IRS claimed that this was an indirect gift. The IRS also claimed a step transaction.
The court supported both positions by the IRS. First, the gifts of FLP interests were apparently not signed until after January 11, 2002, but were "effective as of January 11, 2002." Therefore, the transfer process created an indirect gift on the theory that the children's trusts owned the FLP units when the cash was transferred.
In addition, following the rationale of Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006), there was a "step transaction" that also created the indirect gift. Because the transfer of $2.85 million in cash to Investments LLC and the gifts of the LLC units were an "integrated transaction," the step transaction doctrine applied.
Editor's Note: It is significant that the IRS did not object to the FLP discounts for the transfer of the real estate on December 28, 2001 and gift of FLP units two weeks later on Jan. 11, 2002. With even a period of two weeks between the funding and the FLP unit gifts, the transfer was effective in producing a substantial FLP discount.
There's been a lot of coverage in the news lately about the care and custody of young children of deceased parents. First it was Anna Nicole Smith's baby. She didn't have a will naming a guardian for young Dannielynn. After a battle with Smith's attorney and companion Howard K. Stern, eventually Smith's former boyfriend Larry Birkhead was determined to be the biological father and assumed custody.
Then Michael Jackson died, and even though his Will named his mother Katherine as guardian, there was an attempt by the mother of the oldest children, Deborah Rowe, to obtain custody. Katherine prevailed, no doubt assisted by the fact that Jackson had stated his preference that she care for his children.
In a recent case not involving a celebrity, but certainly more tragic, Massachusetts resident Julie Corey was charged with kidnapping a deceased former neighbor's 4-pound newborn girl. The baby had been cut from Darlene Haye's womb. Apparently Hayes had no Will naming a guardian of the child, and several people are now seeking custody.
Naming a guardian for your minor children in a Will is one of the most responsible things you can do as a parent. While a judge can overrule your choice in certain circumstances, not stating your choice will almost assuredly trigger a fight for custody. Wouldn't you like to be the one to decide who raises your child? Otherwise you will be leaving it up to a judge whom you have never met and will most likely never even see your child.
President Obama is visiting Broughton High School in Raleigh today, and conincidently he recently stated in a discussion of health care reform that he and Mrs. Obama have Living Wills and consider them important. Hopefully they also have Wills, Durable Powers of Attorney, Health Care Powers of Attorney and HIPAA Authorization forms.
These are basic documents that every adult should have, whether age 18 or 88. An estate plan can help you maintain your dignity, protect your family, preserve your assets, and even save taxes!
Beginning January 1, 2010, it will be unlawful for North Carolina attorneys to prepare a Will or Codicil naming the attorney as a beneficiary unless the attorney is within five degrees of kinship of the testator, a present or former spouse of the testator, or a parent, sibling or child of a spouse or former spouse of the testator. If the law is violated the bequest or devise is void. Inclusion in the Will or Codicil as an Executor or Trustee is permissible.
Drafting such a Will is also viewed as unethical by the North Carolina State Bar, which means that an attorney can be disciplined or disbarred for doing so.
If an attorney does draft a Will or Codicil in which he or she is a beneficiary of an allowable family member, he or she must attach an affidavit to the Will stating that he or she is in compliance with the law. N.C.G.S. Section 31-4.1.
Also, on every Will or Codicil prepared after December 31, 2009, an attorney must add a statement with his or her name and business address, stating that he or she prepared the Will. N.C.G.S. Section 31-4.2.
Interestingly, the new law does not mention living trusts, so those desiring to do so could easily skirt the law by preparing a revocable living trust rather than a will. You can tell we don't have any estate planning experts in the North Carolina General Assembly!
Beginning October 1, 2009, when a lawsuit is filed to contest a Will (Caveat), the probate administration will no longer be fully suspended until the caveat is resolved. Only certain actions, such as distributions to beneficiaries and payment of personal represenative's commissions, will be prohibited.
Session Law 2009-131, amending N.C.G.S. Section 31-36.
Governor Bev Perdue recently signed into law Session Law 2009-267, which:
The changes are effective October 1, 2009.
The new laws will be extremely helpful, as Special Needs Trusts under 42 USC Section 1396p(d)(4) must be established by a parent, grandparent, legal guardian or court. If there is no parent or grandparent is is willing and able, and no guardian, the only way to protect Medicaid and SSI benefits by using a Special Needs Trust is by having one created by the court.
I'm down in Amelia Island Florida this weekend for a Florida Bar Tax Section meeting. Today is a day off for many, and will be an afternoon off for me, as I head to the pool and then a movie with the family.
However, it's been a while since I blogged, and I wanted to write a brief note as we approach July 4th. Our nation has been a free state now for well over 200 years, officially starting with a legal document, the Declaration of Independence.
Individuals can help assure their own independence, too, in a manner of speaking, by making sure that they have important legal documents of their own. In the event of incapacity, whether temporary or permanent, Living Trusts, Durable Powers of Attorney, Health Care Powers of Attorney, Living Wills and HIPAA Authorization forms can all help avoid the necessity of being declared incompetent and having a guardian appointed. Choosing the person to handle your affairs and making advance instructions about what you want and do not want will ensure that you maintain a certain level of dignity and independence from the court system. You should be in charge, or the individual you choose as your representative, not the judge.
Choose independence, just as our forefathers did.
The U.S. Tax Court decision in Estate of Erma V. Jorgensen, T.C. Memo 2009-66, provides another example of the wrong way to create and administer a family limited partnership from an estate tax planning perspective. See this article by attorney Kay Ford Bailey of Austin, Texas for a brief analysis.
On June 1, 2009, Governor Perdue signed into law Session Law 2009-48, which, effective October 1, 2009, institutes substantial changes to to statutes dealing with renunciation of interests in property. In general, the effect of a valid renunciation of property is that the person renouncing is treated as having predeceased the transferor. For example, a child that renounces an inheritance from a parent would be treated under the parent's will as having died before the parent.
The revisions include:
That's a question we hear frequently from callers to the office. While we like to be able to answer that question quickly and easily, that's not possible. My favorite lawyer's answer applies: "well, it depends." Depends on what, you ask? Here are some of the factors that impact the fee for a Will:
Then there are other questions to consider:
As you can see, it's virtually impossible to quote a one-size fits all fee for a Will (or complete estate plan, for that matter). Any law firm who does that will most likely be providing a cookie cutter Will that doesn't fully address your particular situation. And online and software do-it-yourself Wills are even worse!
My advice is to make sure you have a lawyer who specializes in estate planning assist you with your estate plan. Isn't it worth the time and cost to ensure that you and your family are fully protected?
In the recent case of Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the U.S. Tax Court allowed a 35% discount for gifts of family limited partnership interests. No discount was permitted for the FLP interest owned by the decedent at her death.
This case shows that a properly planned and executed family limited partnership or limited liability company is still a very effective way to pass on wealth to younger generations. However, Obama's tax proposals would do away with such discounts in most cases.
Click here for a summary and the full text of the case, thanks to NC State's GiftLaw eNewsletter.
Offshore trusts continue to be an effective asset protection tool, including in bankruptcy, tax litigation, and divorce situations, even when the facts are not favorable to the trust grantor. The catch, however, is that you might have to some time in jail for contempt of court before you and your money are reunited.
Here are three cases arising out of Florida:
In re Stephan Jay Lawrence, 238 B.R. 498 (Bankr. S.D. FL 1999). Stephan Lawrence set up and funded an offshore asset protection trust just weeks after an arbitration award against him for over $20,000,000 due to a margin account deficit due to the 1987 stock market crash. Lawrence then filed bankruptcy. The court discredited Lawrence's testimony that he was no longer a beneficiary of the trust and found that he still had control over the trust, including the power to repatriate the trust assets. Lawrence was held in contempt and jailed for not complying with the order to repatriate.
Lawrence remained in jail for about six years, after which time he was released by the court, based on a ruling that there was no realistic possibility that Lawrence would comply with the order for repatriation.
Continue Reading...A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse. Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes. The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009). ILITs are the best (estate) tax shelters around! Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.
The recent Kiplinger.com article How to leave an IRA that's heir-tight contains lots of good information and advice about IRA distribution planning, but there's a glaring omission - no discussion of the use of trusts to protect IRAs for the benefit of one's heirs.
A stand alone IRA trust provides for maximum stretch out of the IRA payments will providing maximum flexibility and protection. Anyone who has an IRA or other retirement plan over $200,000 (all accounts combined) or so who ultimately wants to leave it to children or grandchildren should seriously consider using an IRA Trust.
For many people, unless you have had your plan done or updated in the last few months, that answer would be YES!
This article from CNN Money provides some important factors and ideas to consider.
I previously blogged about NC's repeal of the Rule Against Perpetuities, which limited the amount of time a trust could stay in existence, and some questions that existed regarding the repeal's validity.
In February 2009, an order was entered by Judge Albert Diaz in the Mecklenburg County Superior Court found that:
The Court declared that the Act is constitutional and supersedes the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities.
Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al; Mecklenburg County File No. 08 CVS 13456
As a Superior Court ruling (rather than Court of Appeals or Supreme Court), this holding is not binding on other North Carolina Courts, but it does serve to help answer the questions posed in the my earlier post. I would feel fairly comfortable preparing a North Carolina dynasty trust at this point.
The use of Trust Protectors is becoming increasingly common, particularly in irrevocable trusts that may last for decades, if not generations. A Trust Protector is generally an individual, often an attorney, cpa or family member, who is given certain powers over a trust by the trust grantor. These powers can provide increased flexibility and protection for the benefit of the trust beneficiaries.
Here are the most common specific reasons to use a Trust Protector:
I generally do not recommend choosing a family member as a Trust Protector, because, depending on how close the kinship is, a family member serving in that role could create income and estate tax problems due to attribution rules. Also, family members rarely have the expertise needed to make and carry out the necessary decisions.
Attorneys and CPAs may be wary of serving due to concerns about liability. Corporate fiduciaries may have the same concern, and are not set up to serve in that capacity. One alternative is to use a specialty Trust Protector firm such as TrustProtector, LLC.
There are two primary types of charitable trusts - charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). CRTs are far more common, and are generally funded with a minimum of about $100,000 worth of assets. With federal income and capital gains tax rates to increase the future, these trusts should see renewed popularity, particularly if the stock market begins to move from bear to bull. However, taxpayers in the top federal rates should be aware of Obama's plan to limit the charitable deduction to a maximum of 28%.
Charitable Remainder Trusts
For those of you who have the desire to make a gift to charity but feel that you can't afford to part with a significant portion of your estate and receive nothing in return, a charitable remainder trust may prove to be the answer. The attraction of CRTs is that in addition to the income tax and estate tax deductions available, the donor of the trust receives income from the trust for a specified period. As discussed below, making a charitable gift by way of a CRT is most advantageous when highly appreciated, low-yield assets are used to fund the trust.
Here's a great article from Santa Barbara attorney Mark Cornwall - Beware the Pros at Cons. Occasionally clients ask me about such arrangements, and, of course, and I inform them that's it's a bunch of baloney. Remember - if it sounds to good to be true, it most likely is!
This week is Safe Kids Week in North Carolina. While Safe Kids Week is designed raise awareness about protecting children from unintentional injuries, parents also need to plan to keep their kids safe from a financial standpoint should something happen to the parents. At a minimum, each parent of a minor child should have a Will that names a guardian and establishes a trust for the child.
Without a will, there is no opportunity to designate the individual (guardian of the person) you would like to care for your child in the event of your death, so the court will make that decision. Also no funds can be distributed to your child from your estate until someone (guardian of the estate) is appointed to handle the funds. This is expensive, time consuming, and complicated. In addition, the child will receive all of the remaining funds at age 18, regardless of his or her ability to manage the funds.
Also, you may need life insurance to ensure that there is enough money to raise your kids if you aren't around anymore.
If you want your kids to be safe in as many respects as possible, it is imperative that you have a comprehensive estate plan in place. Don't leave your children's future to chance.
This bill was recently introduced in the U.S. House of Representatives, and is for the expansion of IRA charitable rollovers, which are currently limited to those who have reached 70 1/2, may be no more than $100,000, and must go to a 501(c)(3) organization.
The bill does away with the $100,000 limit, lowers the eligible age to 59 1/2, and expands the permissible recipients for those at least 70 1/2 to split interest entities (e.g. charitable remainder trusts).
Click "Continue Reading" for the full text of the bill.
1. Have reached age 70 1/2.
