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Articles & Updates


From time to time I write articles on topical events or updates to the state of the law or a prior article. Be aware that some of these may have been written a while ago and relate to possibly outdated law but were correct at the time. These are intended to be educational and informational and are not intended to be legal advice.

IN CASE OF DEATH LIST—January 2014

Revoking the Irrevocable Trust—December 2013

Elder Abuse—October 2013

For Animal Care—September 2013

Estate Planning for Same Sex Couples—July 1, 2013

D.O.M.A. IS DEAD—June 27, 2013

Prepaid Funeral Plans—June 25, 2013

Estate Tax Exemption "Portability": Is it right for you? —June 15, 2013

The Estate Tax Exclusion Amount: It is "Permanent" only as long as they say it is!—June 1, 2013

The Clock is Ticking!—August 28, 2012

Same Sex Estate Planning—March 2012

Why Do I Need To Plan My Estate When The Estate Tax Exclusion Is Up To $5,000,000!?—Jun 23, 2011

Tax Considerations of Joint Ownership—Jun 08, 2011

FAQs about the New Tax Rules for Executors for 2010 Estate, Gift and Generation-Skipping Transfer Tax Questions—October 26, 2010

Estate Tax Update: It is 2010: NOW WHAT??—Oct 2010

 

In Case of Death List

The following agencies need to be notified of your loved one's passing.  Not all may apply to your situation:

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Revoking the Irrevocable Trust

It is more than wishful thinking! When is an irrevocable trust revocable? It seems like something you could never do based on the word ‘irrevocable’ but there are ways to get around this. Borrowing from wine terminology, it is called “decanting a trust” and here is the who, what, where, why and when of it all:

Who can decant?
Decanting is done only by the Trustee of the Trust.

What is decanting?
Decanting is the process of transferring property from one trust to another. Specifically, the term applies when a trustee transfers property from one irrevocable trust to a new trust that has terms different than the original. Typically, the beneficiaries are the same though some may have changed.

Where to decant?
The Probate code allows for decanting with or without court intervention in California.  If all beneficiaries agree, no court intervention is needed. If there is dissension, you will need to file a Petition in Probate Court.

Why decant a Trust?
The terms of an irrevocable trust are typically not subject to change. With decanting, a trustee has the ability to effectively change the terms even though he or she is doing so by transferring the property to a new trust that has new terms. In states that allow for decanting, this is one method a trustee can use to more effectively manage the trust without having to go before court to seek judicial permission to take certain actions. In states that don’t have decanting provisions, like California, you may not even need to go to Court to do this.

When is decanting used?
There are wide range of situations in which a trustee can use decanting. Some common situations include: taking advantage of new laws; eliminating an old bypass trust, to put all assets in the survivor’s trust, and get the additional step up in basis; improve outdated trust provisions; address the new needs of the beneficiaries; remove a beneficiary or add new ones; or transfer the jurisdiction of the trust to a new state that has more favorable laws and tax provisions. In general, the trustee can only use decanting for the benefit of the trust beneficiaries.

Decanting can be a useful estate planning technique in updating existing sophisticated estate plans.  However, this is not a do it yourself project.  Consult with an experienced and qualified estate planning attorney.

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Elder Abuse

What is Elder Abuse?
It is the neglect, exploitation or "painful or harmful" mistreatment of anyone who is 65 or older (or any disabled dependent adult age 18 to 64). It can involve physical intimidation, violence, psychological abuse, isolation, abandonment, abduction, false imprisonment or a care giver's neglect. It could also involve unlawful taking of a senior's money or property.  In short, it can involve various crimes, such as theft, assault or identity theft. But when the victim is 65 years old or older (or a disabled dependent adult), the criminal faces stiffer penalties under various protective statutes.

If a relative is refusing to visit unless you give money or do something for them, or if you are being compelled to “lend money” or change your estate plan to favor a care giver or family member, or if you are being threatened with harm if you don’t do what you are asked, it is all a form of something called “elder abuse”.  Elder abuse can be physical abuse or financial abuse or neglect.  You need to reach out for help right away.  It is not OK for anyone to treat you this way.

While the elderly are already extremely vulnerable to abuse, issues of mental impairment and dementia are additional significant factors that make seniors even more susceptible to elder abuse and/or neglect. Elder abuse happens everywhere - in poor, middle class, and upper-income households and in far too many long-term care facilities. It is a problem that has no demographic or ethnic boundaries. Because family members, close friends, and even professional care givers are often the culprits of abuse and neglect, it is often difficult to discover and even more difficult to accept.

Neglect is a form of elder abuse in which a care giver fails to provide the senior with basic needs and in California, such neglect in considered elder abuse and there are special laws that were enacted to protect elders from such harms. This includes water, food, shelter, medical assistance, personal hygiene products, heat or air conditioning. It includes excessively medicating an elder or not positioning and/or moving an elder resulting in bedsores. Remember, seemingly non-serious forms of neglect (such as dehydration, bedsores, etc.) can be life-threatening to the elderly because they often do not have the ability to withstand physical neglect. Children and the elderly are particularly susceptible to neglect. As with any form of elder abuse, neglect should be promptly reported to the appropriate authorities.

Financial elder abuse is the mismanagement of money, property or other assets belonging to an elder. Anyone who has access to an elder's personal information, such as bank accounts, credit cards, checkbooks, etc. can potentially steal from them. Once again, the elderly are particularly vulnerable to every form of abuse so be careful about whom you trust.  It just as often is a “helpful” neighbor who is suddenly running the details of an Elder’s life, particularly where the family is distant or unwilling to provide the care.  The helper then starts to feel entitled to payment for the work.  Elders, or their loved ones, should take steps to protect the elder from financial abuse.  You are not powerless!

How To Protect Yourself From Financial Abuse

Symptoms that you, or someone you, know may be a victim of financial abuse:

Where Can I Find Someone to Help Me?

Helpful links:
Elder Abuse in Nursing Homes: Click Here

California Commission on Aging:

County Adult Protective Services (APS) helps adults who cannot care for themselves, or may have been abused or neglected. They handle reports of abuse in private homes, hotels, hospitals, health clinics, and daycare centers.
For more information Click Here

If you believe you or someone you know is suffering from Elder Abuse, there is help.
CALL: 925.362.1010
E-MAIL: elizabeth@johnsonestateplanning.com

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For Animal Care

Providing For Your Pets In The Event of Your Death or Hospitalization  For many people, a pet is an important and comforting part of life, often filling the void of an empty nest or loss of a family member.  The love and companionship given by pets is immeasurable and many people feel they would do anything for their pets, but then, they never get to it.  The care and well-being of the pet is a primary concern. This is particularly so in the event of a pet owner’s death or hospitalization. Below is a summary of how to plan for the care of a pet in the event of a pet owner’s death or hospitalization.

I will start with hospitalization or “non-death” reasons for being unable to care for your pet. Upon the incapacity or hospitalization of the pet owner, advance arrange-ments should be made to ensure care of the pet while the pet owner is hospitalized or incapacitated.  Some people have other people they live with who will care for the pet but many do not.  Too often, a pet is ignored when something happens to those who live alone.

  1. Arranging For Friends/Relatives To Provide Short-Term Care. It is easy if you know you are going to need care but often this is out of your control. A pet owner should try to find a friend or relative who is willing to take care of his/her pet during these periods. The owner should leave word, preferably in writing, at home and with a neighbor, or with the building management and/or superintendent, for the friend or relative to be notified. The pet owner should arrange for access to his/her home to permit the care and feeding of the pet during such short-term periods. If an apartment is involved, the owner should consider leaving a key with the superintendent or a neighbor. If there is a relative or friend in the area, the owner should consider providing that individual with a key and with written permission to the building management to enter the apartment in the event of the death or hospitalization of the pet owner.
     
  2.  
  3. Arranging for a Shelter or Charitable Organization to Provide Short-Term Care.  There may be an animal shelter or charitable organization with which arrangements can be made to care for a pet in the event of the death or hospitalization of the pet owner. Should the owner make such arrangements, shelter personnel would need the same access listed above if the pet is not being boarded at the shelter’s facility.
     
  4. Designate who will provide care in a valid Power of Attorney form.  All of my Powers of Attorney address pets and authorize the continued care. This is a formal method of providing care during your life for your pet[s].
     
  5. Emergency Instructions.  Once the pet owner has decided upon such arrangements for the short-term care and feeding of the pet in the event of the pet owner's hospitalization or death, the owner should carry a copy of the instructions as part of his/her identification papers in the event of sudden hospitalization or death due to an accident or illness.  A sample is:
    In any situation in which I am unable to return home to feed my pets, such as my hospitalization or death, please immediately contact [Mary Smith] at [address and phone] or [John Doe] at [address and phone], to arrange for the feeding of my [cats] located in my home at [address]. The superintendent of my apartment building [name, address and phone], my Executor [name, address and phone], and my neighbor [name, address and phone] each have a copy of this document.
    How can you protect your pet after you die? On the death of the pet owner, provisions are necessary in the pet owner's Will or Trust, to provide effectively for comfort and care for the pet. A Pet Trust is often a subpart of most Trusts that I do. Would you consider sending your pet to the pound, into that traumatic and fearful environment just because you did not plan for their care?  What can you do to protect the little ones who have given you so much love?
     
    • Designating Interim and Final Caretakers  A pet owner should find a friend or relative willing to take his/her animal and give the animal a good home on the death of the pet owner. The matter should be discussed in advance with the potential caretaker to make sure the animal will be cared for appropriately. The person who will receive an animal as the result of a bequest in a Will should understand that he or she becomes the animal's owner and, as such, has all the rights and responsibilities of ownership.
       
    • Establishing a Pet Trust. Under the law of most states, including California, an animal can be the beneficiary of a trust created to care for the animal. The statute enables persons to create trusts for their animals, and such trusts can be enforced in the courts. The trust can be (i) a testamentary trust, created under a Will, to take effect upon the death of the pet owner, or (ii) an inter vivos trust, created and effective while the pet owner is alive. The pet owner should then ask a qualified attorney to draft his/her Will or Trust, leaving the animal[s] to the caretaker the pet owner has selected. It is best to name alternate caretakers in the Will in case the first-named person is unable or unwilling to take the animal when the time comes.  Another alternative is to give the Executor the discretion to select from among several caretakers prearranged and named by the pet owner in his/her Will or Trust.
       
    • Providing Funds for Pet Care Under the laws of all 50 states, a pet owner cannot leave any part of his or her estate outright to an animal. However, the owner may leave a sum of money to the person designated to care for the pet, along with a request (not a direction) that the money be used for the pet's care. It is important for the pet owner to select a caretaker he/she trusts and who will be devoted to the pet, because the caretaker has no legal obligation under the above provision to use the money for the purpose specified.  The owner should leave only a reasonable amount of money for the care of any pet. A large sum of money may prompt relatives to challenge the Will and the court may invalidate the bequest for pet care.  Think Leona Helmsley who set aside $12 million dollars for the purpose.
       
    • Designating a Shelter or Charitable Organization to Care for Pets   If no friend or relative can be found to take the pet, the pet owner should look for a charitable organization whose function is to care for or place companion animals. A humane society or shelter might agree to accept the animal along with a cash bequest to cover expenses.  San Francisco has the Fido Program born of just this need.  The charity should agree to take care of the animal for his or her life or find an adoptive home for the animal. Before selecting a shelter, find out what kind of care animals receive at the shelter (for example, an animal should not have to stay for more than a short period in a cage) and the reputation of the shelter. If the organization is directed to find an adoptive home for the companion animal in its care, the pet owner should obtain detailed information about the adoption procedure.
    •  

Your pet[s] has always been there for you.  Now it is your turn to be there for your pet.  Make a plan today.  See your estate planning attorney today.

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Estate Planning for Same Sex Couples

The first question asked by many same sex couples in the wake of Windsor is “Should We Get Married?”  Putting aside the emotional reasons for marriage, what are the estate planning benefits?  While you can acheive a lot of the same things through estate planning, there are benefits to marriage of estate planning.  Being married has two key federal and one state tax advantage, all of which you’d realize with or without a living trust.

  1. Married couples get a step up in basis when one spouse dies on all community property assets. That means that the surviving spouse won’t have to pay capital gains on any appreciated assets that she sells after the first death, other than any gain that happened after the death of the first spouse.  For example, if one partner’s house has appreciated a lot since s/he bought it, and you marry and make that house community property, when one of you dies, that house would be valued at its date of death value, not the original purchase price.  This means that there would be no capital gain tax if the house were to be sold then.  And, on the death of the second spouse, there is a second step up in basis!  This is all a benefit of marriage.
     
  2. Married couples get an unlimited marital deduction from federal estate and gift tax.  That means that you and your spouse can give an unlimited amount of assets to each other, at death or during life, and no federal estate or gift tax will be due for those gifts.  The failure to get this benefit was the underlying reason for the Windsor case.  Had the marriage been recognized, the surviving spouse would not have paid any tax. For modest estates, this isn’t as big a concern now that the federal estate and gift tax exemption is $5.34 million, but that number may be reduced by Congress in the future, and it is a benefit that only spouses receive.   Indeed, not two weeks after the new rate was made “permanent”, the government started looking at how to undo that permanent feature!  It is only permanent until they say it isn’t.
     
  3. Married couples can pass real property to each other in California without a change in property tax rates.  A transfer between spouses is an exception to Proposition 13's reassessment requirement.  This can be a huge ticket item in some cases.  Being married means there is no reassessment.  Being unmarried, this may not be available.

So, from a non-emotional and non-romantic perspective, these are the reasons why marriage is a good idea.  As one same sex client said to me when asked how married life was working out, she replied “well, you know, a lot like before but now it will be harder to get out of”.  These factors listed are part of the estate planning aspects and your individual facts may affect the outcome.  You need to see an estate planning attorney to see how this would apply to you.

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D.O.M.A. IS DEAD

By a 5-4 vote, the Supreme Court ruled yesterday that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional insofar as it purports to limit the terms "marriage" and "spouse" to opposite-sex couples for all purposes of federal law. This means that couples who are married in states that recognize same-sex marriage will generally be considered married for purposes of federal law. United States v. Windsor, No. 12-307 (June 26, 2013). For example, such individuals will be treated as married for purposes of federal tax laws and for employment laws such as the Family and Medical Leave Act. The decision does not mean that state laws limiting marriage to opposite sex couples are unlawful, however. A full understanding of the implications of the Windsor decision will require further analysis. It would appear that the issue is now dead in the water, however there are factions vowing to appeal so we will see.

Legal Background
In 1996, a ruling by the Hawaii Supreme Court suggested that there might be a constitutional right to same-sex marriage, prompting Congress to pass the federal Defense of Marriage Act (DOMA) to define "marriage" and "spouse" as limited to a union between one man and one woman and excluding same-sex partners. This was during Bill Clinton's presidency. Many plaintiffs have challenged DOMA as violating the rights of same-sex couples. The Obama administration initially defended the law against challenges in federal court. But in February 2011, Attorney General Eric Holder announced that the president regarded the law as unconstitutional and had instructed the Department of Justice not to defend the statute. Several House Republican leaders, in their role as part of the House's Bipartisan Legal Advisory Group (BLAG), stepped in to defend DOMA in court.

Even though the Obama administration refused to defend DOMA against challenges in court, however, it stated its intention to continue to enforce DOMA — for example, by refusing to grant same-sex couples who are treated as married in their state of residence the tax exemptions generally available to married couples. In 2012, two federal courts of appeals struck down DOMA as unconstitutional, setting up the challenge in the Supreme Court.

The Windsor Case
Supreme Court rulings on estate tax matters are far between and few at best, so the Windsor decision is worthy of immediate discussion. Edith Windsor and Dr. Thea Speyer had been same-sex partners in New York for nearly 40 years. The two married in Canada in 2007. Two years later, Dr. Speyer died, leaving Ms. Windsor her entire estate—along with a federal estate tax bill of $363,000, which Ms. Windsor would not have had to pay if she had been married to a man. Typically, assets passing from the estate of one spouse to the surviving spouse pass free of estate tax—this is known as the marital deduction, which is one of the fundamental concepts of estate planning. However, the Defense of Marriage Act precluded application of the federal marital deduction to the passing of assets between same-sex spouses. As such, a substantial federal estate tax was assessed against Ms. Spyer's estate. Ms. Windsor first sought a tax refund, which the IRS refused. Ms. Windsor sued, and both a federal district court and the U.S. Court of Appeals for the Second Circuit ruled that DOMA is unconstitutional and Ms. Windsor is entitled to an income tax refund.

This left the case in a curious position. Federal courts only decide genuine disputes; they don't do advisory opinions. But here, the Obama administration agreed with Ms. Windsor that DOMA was unconstitutional, so it was not clear that a true dispute remained. Also, generally speaking, the losing party in the court of appeals asked the Supreme Court to hear the case because it seeks a different outcome. The United States asked the Supreme Court to hear the case even though it agreed both with Ms. Windsor's legal position and with the decision of the Second Circuit.

In agreeing to hear Windsor, the Supreme Court asked the parties to address not only whether the DOMA is constitutional, but also whether the Supreme Court even had the authority to hear the case. The Court wanted the parties to address whether the Obama administration's failure to defend DOMA robbed it of jurisdiction to hear Windsor, and whether the defense of DOMA by BLAG solved that problem. Because neither party challenged the Court's jurisdiction, the Court appointed an amicus curiae to argue that position.

The Supreme Court's Decision
The Court first ruled that it had jurisdiction to consider the merits, saying the case clearly presented a concrete disagreement between opposing parties that was suitable for judicial resolution as initially filed. The federal government's decision not to defend the constitutionality of DOMA did not eliminate the dispute because the tax refund the federal government was ordered to pay Ms. Windsor is "a real and immediate economic injury," even if the Executive Branch disagrees with the constitutionality of DOMA. Windsor's ongoing claim for a tax refund that the United States refuses to pay establishes a controversy sufficient for Article III jurisdiction, the majority ruled.

Furthermore, the Court concluded that BLAG's participation in the case ensured the adversarial presentation of issues necessary for the court to exercise jurisdiction as a prudential matter. The Court cautioned that this conclusion does not mean that it is appropriate for the Executive Branch to routinely challenge statutes in court instead of making the case to Congress for amendment or repeal. But it found that the immediate importance of the issue presented to the federal government and to hundreds of thousands of persons, coupled with BLAG's able defense of the statute, supported the decision to hear the case.

DOMA Violates Equal Protection
The Court then ruled that DOMA is unconstitutional because it deprives individuals of the equal protection of the laws guaranteed by the Fifth Amendment. Specifically, it determined that states traditionally have defined who is married within a state, and New York validly exercised that power in deciding that same-sex couples could be married under New York law. In extending marriage to same-sex couples, New York and other states have conferred upon those individuals a "dignity and status of immense import," the Court said.

DOMA ignores and interferes with the state's decision to recognize same-sex marriages without a sufficient federal justification, the majority stated. First, by refusing to recognize same-sex marriages in all circumstances, DOMA essentially stigmatizes some marriages recognized by the state, and the individuals in those marriages, as second-class. Second, DOMA creates two contradictory marriage regimes within the same state, and forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the state has found it proper to acknowledge and protect. Four dissenting justices believed that the Obama administration's failure to defend the statute meant that the court lacked jurisdiction to hear the case. They also would have found that DOMA is constitutional. It should be noted that the Windsor decision does not address whether state laws limiting marriage to heterosexuals are unconstitutional.

Proposition 8
Proposition 8 was a California ballot proposition and a state constitutional amendment passed in the November 2008 state elections. The measure added a new provision, Section 7.5 of the Declaration of Rights, to the California Constitution, which provides that "only marriage between a man and a woman is valid or recognized in California."

On January 11, 2010, Federal District Court Judge Vaughn Walker began hearing arguments in Perry v. Brown. The case was a federal-constitutional challenge to California Proposition 8, a voter initiative constitutional amendment that eliminated the right of same sex couples to marry, a right which had previously been granted after the California Supreme Court found that Proposition 22 was unconstitutional. On August 4, 2010, Walker ruled that Proposition 8 was unconstitutional "under both the Due Process and Equal Protection Clauses" and prohibited its enforcement.

In the California case, Hollingsworth v. Perry, the 9th U.S. Circuit Court of Appeals had last February voided the same-sex marriage ban but ruled narrowly, saying, among other things, the state could not take away a right to same-sex marriage after previously allowing it. As a result, same-sex couples in California are once again free to marry. That case was brought by two lawyers, Theodore Olson and David Boies, who were actually opponents in the 2000 case Bush v. Gore, which decided the 2000 U.S. presidential election.

On June 26, 2013, the United States Supreme Court ruled in Hollingsworth v. Perry that the proponents of Proposition 8 did not have legal standing to appeal a U.S. District Courts' ruling that the proposition is unconstitutional. The state government had refused to defend the law. Same sex marriage in California does not resume until the district court removes a stay of effect it issued, pending appeals, that prevents its ruling from reversing the amendment to the state constitution.

Chief Justice John Roberts said the court would not intervene in a controversy over California's Proposition 8, which lower courts earlier invalidated. Challengers of that ban on same-sex marriage had hoped the justices would use the case to declare a constitutional right to marriage for gay men and lesbians. By a 5-4 vote, the majority sidestepped the constitutional question and tossed out the case on procedural grounds. The issue on the table was whether the supporters of the Proposition 8 ballot initiative had legal "standing" to defend it in court once the ban was invalidated and state officials declined to appeal. Roberts said no. He was joined by Scalia and three of the liberal justices who had just voted to extend federal benefits to gay married couples: Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan.

Kennedy, meanwhile, countered that Proposition 8 supporters should have legal standing, but did not address whether they should prevail. Underscoring the unusual ideological alliances forged, Kennedy was joined in his opinion by conservatives Samuel Alito and Clarence Thomas and liberal Sonia Sotomayor.

What It Means
The Windsor decision means that the federal law that defines marriage as limited to opposite sex couples for federal law purposes is invalid. Now, couples who are married in states that recognize same-sex marriage will generally be considered married for purposes of more than 1,000 federal laws. As a result, married same-sex couples will be entitled to the same federal tax treatment as married couples generally. The decision will also impact many practical questions, such as whether such same-sex couples will be entitled to social security benefits based on the earnings and status of a same-sex spouse. As to Proposition 8, we are left, for the time being with the Federal opinion of Vaughn Walker which ruled Proposition 8 was unconstitutional. Two senators have already introduced legislation to repeal DOMA and the Attorney General is rushing to allow same-sex marriages to start in California ASAP.

The following are a few of the key benefits many same-sex couples stand to receive now that the Supreme Court has dispensed with DOMA:

This will also affect estate planning for many reasons. If this applies to you, we should check your current estate plan and see how you can benefit.

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Prepaid Funeral Plans

Funerals are expensive. According to the National Funeral Directors Association, average funeral costs in 2012 were nearly $8,000, excluding cemetery costs. To relieve their families of the bur-den of planning a funeral, many people plan their own and pay for them in advance.

Unfortunately, prepaid funeral plans are or may be fraught with potential traps. Some plans end up costing more than the benefits they pay out. And there may be a risk that you'll lose your investment if the funeral provider goes out of business or you want to change your plans. Some states offer protection—such as requiring a funeral home or cemetery to place funds in a trust or to purchase a life insurance policy to fund funeral costs—but many do not.

If you're considering a prepaid plan, find out exactly what you're paying for:

  1. Does the plan cover merchandise only (casket, vault, etc.) or are services included?
  2. Is the price locked in or is there a possibility that your family will have to pay additional amounts?
  3. What happens to the money you've prepaid?
  4. What happens to the interest income on prepayments placed in a trust account?
  5. Are you protected if the funeral provider goes out of business?
  6. Can you cancel the contract and get a full refund if you change your mind?
  7. What happens if you move or die while away from home? Can the plan be transferred? Is there an additional cost?

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who will handle your funeral arrangements as beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate.

Not all prepaid plans are bad and to the extent you can prepay for services, it is a good thing, whether you put it in a POD account or have a guaranteed policy. It keeps your family from scrambling to come up with money later, when costs may have increased substantially. It is smart BUT proceed with caution.

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Estate Tax Exemption "Portability": Is it right for you?

One of the significant changes under the American Taxpayer Relief Act of 2012 (ATRA) enacted in January, was to make estate tax exemption "portability" permanent. What is "portability"? When one spouse dies, portability allows the surviving spouse to use the deceased spouse's unused exemption amount. This means that if you didn't get around to doing estate planning, there may be a safety net with portability. This may mean that married couples can now maximize the benefits of their combined exemptions without the need for sophisticated estate planning involving multiple trusts. Portability does simplify estate planning, but should you rely on it? Doing so may be appropriate under certain circumstances. But for many people, particularly the affluent, more-sophisticated strategies continue to offer significant benefits.

Life and Planning Before Portability
Before portability, the traditional approach for maximizing a couple's exemption amounts was to employ an "A-B trust". Generally, the "A" trust is a marital trust and the "B" trust is a credit shelter, or "bypass," trust. For this strategy to be most effective, spouses should "equalize" their estates by, to the extent necessary, transferring assets from one to the other.

When one spouse dies, his or her assets are used to fund the credit shelter trust up to the exemption amount (currently $5.25 million) less any gift tax exemption used during life. This trust benefits the surviving spouse for life and then distributes the remaining assets to the couple's children or other beneficiaries. The excess, if any, goes into the marital trust, which benefits the surviving spouse and qualifies for the unlimited marital deduction. The assets in this trust are included in the surviving spouse's estate.

This strategy avoids estate taxes on the first spouse's death and minimizes estate taxes on the second spouse's death. The credit shelter trust fully uses the first spouse's exemption and, by limiting the second spouse's access to the trust, keeps the assets out of his or her taxable estate. If the first spouse's estate exceeds the exemption amount, the excess goes into the marital trust, where it's shielded from estate tax by the marital deduction. There may, however, be an estate tax liability on the second spouse's death, depending on the size of his or her estate.

Life and Planning AFTER Portability
Now, after January 1, 2013, we now have a substantially larger exemption, currently $5.25 million. It is termed "permanent" which is the subject of another article in this website. How does this affect planning now?  

If you and your spouse have estates that total less than your combined exemption (currently$10.5 million) and are unlikely to climb above that amount, portability should shield you against estate taxes without the need for trust planning. However, if your estates exceed that threshold or may do so at some point in the future, an A-B trust arrangement remains the most effective strategy for minimizing estate taxes. When assets are placed in a credit shelter trust, their value is frozen for estate tax purposes. This means that any future appreciation on those assets bypasses your surviving spouse's estate. But if you rely on portability, future appreciation will be included in your spouse's estate. This could trigger significant estate tax liability.

Why the Affluent Still Need Credit Shelter Trusts

Romeo and Juliet each have $10 million in assets. Romeo dies in 2013, leaving all of his assets to Juliet, for a total of $20 million in her estate now.  Romeo hasn't used any of his $5.25 million gift and estate tax exemption and his estate timely files a portability election. When Juliet dies 10 years later, the value of her assets has doubled, leaving her with a $40 million estate.

For purposes of this example and simplicity, assume that the exemption amount remains at $5.25 million and the tax rate is 40%.  Juliet's estate is subject to tax on $29.5 million ($40 million less her exemption and Romeo's exemption), for a tax liability of $11.8 million. Had Romeo's estate plan placed $5.25 million in a credit shelter trust, Juliet's estate would have avoided tax on its appreciation in value—$5.25 million—for an estate tax savings of $2.1 million.


Even if your and your spouse's combined estate is unlikely to ever exceed your combined exemption, however, trust planning offers several important benefits:

Asset protection
Portability allows you to leave your wealth to your spouse outright without wasting your estate tax exemption. But it does nothing to protect those assets from your spouse's creditors, pressure from would be beneficiaries or financial mismanagement. Well-designed and managed trusts remain the most effective way to protect your assets and preserve them for future generations.

Generation-skipping transfer (GST) tax planning. The GST tax exemption (also $5.25 million this year) is not portable
So if you and your spouse wish to maximize your GST exemptions for bequests to your grandchildren, you'll want to consider trusts. Also keep in mind state estate tax planning. Unless your state's law recognizes portability for estate tax purposes, you may need to use trust planning to preserve your state exemption amounts.

Remarriage protection
Trust planning ensures that your children are provided for, even if your spouse remarries. A credit shelter trust prevents your spouse from spending your children's inheritance on his or her new spouse or on children from the subsequent marriage. It also avoids potential loss of portability benefits in the event your spouse's new spouse dies. Portability is available only for a person's most recently deceased spouse. If your spouse remarries and his or her new spouse dies, portability will be limited to the new spouse's unused exemption—which could be little or nothing.

Plan carefully
Portability has the benefit of simplicity, but before you rely on it, review your situation and consider whether you'd be better off with more-sophisticated estate planning strategies. If you decide to rely on portability, keep in mind that it's not automatic. A surviving spouse can take advantage of portability only if the deceased spouse's executor makes an election on a timely filed estate tax return. Then, there may be issues of remarriage and the loss of the portability so while it is an option that MAY help, it does not guarantee a certain outcome.

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The Estate Tax Exclusion Amount: It is "Permanent" only as long as they say it is!

We were told at the end of December last year that there is a "permanent" fix to the estate tax issue. Of course, for federal tax law purposes, something is "permanent" only so long as Congress and the President say it is. I am talking about the "basic exclusion amount" for federal gift and estate tax purposes. This is the amount that a taxpayer can give away either during life or at death [or both] before any federal gift or estate tax ("transfer tax") will have to be paid on the transfer. The American Taxpayer Relief Act of 2012 (the "2012 Act"), signed into law by the President on January 2, 2013, made "permanent" the $5 million inflation-adjusted basic exclusion amount, currently $5.25M. The 2012 Actalso made "permanent" a top marginal transfer tax rate of 40%.

But what is this?? Less than 100 days after the President signed the 2012 Act into law, his Administration released the "General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals" (http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf). It appears that the Administration already wants something less "permanent" with respect to the basic exclusion amount and the highest marginal transfer tax rate.

The Administration proposes returning to the federal transfer tax law in effect for 2009 for estates of decedents dying, and gifts made after, December 31, 2017. Thus, in just under five years, beginning in 2018, the highest marginal transfer tax rate would increase to 45%, the lifetime gift tax exclusion amount (i.e., the amount a taxpayer can give away during life) would fall to $1 million, and the estate tax exclusion amount (and generation-skipping transfer ("GST") tax exemption amount) would revert to $3.5 million, with no indexing for inflation. The Administration's proposal states that portability would continue and asserts that "no estate or gift tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer" (so there will be no so-called "claw back" for lifetime transfers made in excess of $1 million). The "permanence" of the current exclusion amount and tax rates may depend heavily on the outcomes of the 2014 mid-term Congressional elections.

Beginning in 2018, the proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5million for estate and GST taxes, and $1 million for gift taxes. There would be no indexing for inflation.

The proposal would confirm that, in computing gift and estate tax liabilities, no estate or gift tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer. Finally, portability of unused estate and gift tax exclusions between spouses would be allowed.The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2017.

Stay tuned for more!

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The Clock is Ticking: The tax law is set to change in a radical way and opportunities may cease to existat midnight on December 31, 2012.

History

To understand the impending deadline, a little history is in order. Former President George W. Bush signed a number of tax cuts into law in 2001 and 2003. The "Bush Tax Cuts" would have expired on January 1, 2011, but Congress and President Barack Obama, after a contentious debate at the end of2010, extended the Bush Tax Cuts until January 1, 2013. The extensions included a new element, an unexpected increase in the estate tax, gift tax, and generation-skipping transfer tax exemptions to $5 million in 2011 and $5,120,000 in 2012.

Effect of Increase

Because of this increase, an estate having a net value of $5,120,000 or less is completely exempt from the estate tax (this tax-free result applies to the estate of a decedent who dies in 2012 and who did not make significant lifetime gifts). In addition, the increase in exemption allows individuals (regardless of the size of their estate) to make gifts during their lifetime of up to $5,120,000 before December 31, 2012, without incurring a gift tax. This tax exemption for lifetime gifts is in addition to, and does not include, smaller annual gifts of up to $13,000 or certain direct payments to schools or healthcare providers, excluded under a separate exclusion. Finally, the increased generation-skipping transfer tax exemption permits these gifts to benefit grandchildren and more remote descendants.

The increased exemptions apply only until December 31, 2012. Unless Congress and the President take action, the extensions expire and, as of Januaury 1, 2013, the new exemptions and rates are as follows:

  • The estate and gift tax gift tax exemptions fall to $1 million;
  • The generation-skipping transfer tax exemption falls to $1 million, plus an inflation adjustment from 2001 to approximately $1,340,000;
  • The tax rate on transfers above the exemptions increases from 35 percent to 55 percent;

In the simplest terms, an individual can make a large gift in 2012 without owing any gift tax, while the same gift in 2013 would result in a large gift tax liability;

There are two consequences and benefits to the current situation:

  • First, a gift in 2012 represents what could be a one-time opportunity to transfer wealth to children or other beneficiaries without paying a gift tax and to accomplish multi-generational planning without paying generation-skipping transfer tax.
  • Second, these gifts can save estate taxes by removing the post-gift appreciation on and income from the gifted asset from an estate.

No One Knows What Will Happen

Governmental gridlock in 2010 permitted an unexpected one year repeal of the estate tax, and the government lost billions of dollars in revenue. No one predicted what happened in 2010, and no one can predict what will happen this year. If no legislative changes occur relating to estate, gift, and generation-skipping transfer taxes, the scheduled changes will take effect on January 1, 2013, and the opportunity to make large tax-free gifts may not occur again.

Be Aware

Appreciated property transferred by gift does not receive an income tax basis increase to fair market value, as does property that is included in a decedent's estate at death. Part of the estate tax savings will eventually be "paid back" through higher income taxes when the donee sells the property that was the subject of the gift or through forgone depreciation deductions. The capital gains tax rate, however, has almost always been lower than the estate tax rate, so a significant savings is still likely. Also, gifts of cash do not present this basis issue.

A second concern is the possibility of "clawback" (i.e., an added estate tax that takes back some of the tax-free benefits of 2012 gifts). The gift tax and estate tax work on a unified basis. On a decedent's estate tax return, the taxable gifts he made during his lifetime are added at their date-of-gift value to the other assets of his estate. The estate tax is computed on this combined amount. The estate is then allowed a credit against the estate tax for gift tax that the decedent paid and the credit equivalent amount of his lifetime exemption.

If a person makes a gift in 2012 to use his $5,120,000 lifetime exemption, but in the later year of his death the exemption is only $1 million, some uncertainty exists about what credit equivalent amount will be subtracted to determine his estate's tax liability. In order for the current $5,120,000 exemption to work properly, the estate would have to be allowed a credit in the amount of the tax payable on $5,120,000 in the year of the decedent's death. Some concern exists, however, that the credit may be limited to the estate tax payable on $1 million or other lifetime exemption amount in effect in the year of the decedent's death. As a result, a significant part of the 2012 gift ultimately would be subjected to estate tax. This issue has never arisen before because, until now, the amount of the lifetime exemption has never been reduced from its previous amount.

Nobody knows today how this computation will work and the current law clearly was passed without any consideration of a possible clawback of the tax benefit of gifts using the current gift tax exemption.Congress is aware of this issue. H.R. 3467, the Sensible Estate Tax Act of 2011, introduced last November, contains language to prevent a clawback. Even if a clawback were to occur, however, any income earned on and any appreciation in the value of the gifted property between the date of the gift and date of the donor's death would still escape estate taxes.

Conclusion

It would be nice to see into the minds of those handling this issue to know what is coming. On second thought, that might be just plain scary! Without a crystal ball, all we can know is that those who can afford to do so should consider 2012 gifts. As with all estate planning transactions, you should discuss these matters with your professional advisors, and determine that these gifts are appropriate in your financial and family circumstances. Because planning and implementing large gifts take time, however, you should start now to avoid hasty, last-minute decisions that may prove to be counter productive.

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Same Sex Estate Planning

A marriage bestows certain legal and tax benefits to both husband and wife. However, Federal laws generally do not recognize the same rights and privileges for same-sex couples. Since gay or lesbian couples lack the same certain tax, inheritance and employment benefits that marriage bestows, these benefits must be created through other means, like the use of estate planning documents and contracts.

The question most people ask is "What if I do nothing?" What happens is if you do not make your choices, the State of California will do so in a process called intestate succession which leaves your estate to your biological family, so brothers, sisters, parents and so on. It does not leave anything to a Partner, a Registered Domestic Partner [RDP] or long-time lover.

There are two problems with intestacy. The first and most important problem is that most state intestacy laws discriminate against same-sex couples in that gay and lesbian relationships are generally considered invalid for purposes of distributing the estate of a deceased partner who dies without a will. Generally, under intestacy laws, a surviving partner will be left with nothing upon the death of a partner. This is true regardless of the length and intensity of the relationship between the deceased partner and the surviving partner. 

California, however, has made substantial progress in reversing this discrimination ("AB 205"). As of
January 1, 2005, the law is now: if a domestic partner dies without a will, trust or other estate plan, the surviving registered domestic partner will inherit a portion of the deceased partner's estate provided that both parties are registered with the California Secretary of State as domestic partners. The fraction of the estate the surviving domestic partner will be entitled to will depend on when the assets were acquired (prior to registration or after registration) and whether the deceased domestic partner has surviving children or other relatives. The fraction is determined as follows:

The surviving registered domestic partner will inherit all of the deceased partner's community property (assets earned after registration of the domestic partnership).

If the deceased partner was not survived by any children, grandchildren, parents, siblings, nieces or nephews, the registered surviving domestic partner will inherit all of deceased partner's separate property (assets earned or acquired prior to registration of the domestic partnership or received by gift or inheritance after registration of the domestic partnership).

If the deceased partner was survived by one child (or descendants of a deceased child), or was survived by parents, siblings nieces or nephews, the surviving partner will receive one-half (1/2) of the deceased partner's separate property.

If the deceased partner was survived by more than one child, or one child and the descendants of one or more deceased children, or the descendants of two or more deceased children, the surviving partner will receive one-third (1/3) of the deceased partner's separate property. Keep in mind that this law is only applicable to California residents who have registered as domestic partners with the California Secretary of State and only with respect to property located in California.

In spite of the progress made in California, it is inadvisable to rely on intestacy laws in place of estate planning.
If your partner is survived by any family whatsoever (parent, sibling, niece or nephew), and had separate
property, you run the risk of inheriting no more than one-half (1/2) of the deceased partner's separate property. Furthermore, to the extent that you or your partner own assets outside of California or if you should move to another state, this California law will be inapplicable. Also, irrespective of your registration status, all property that is distributed to your partner, family, friends or other beneficiary according to California intestacy laws will be subject to "probate."

What Is the Big Deal about Avoiding Probate?
Simply stated, probate is a legal process in which your property is identified, inventoried, and distributed to your heirs after your death through the Courts.  There are three important reasons you may wish to avoid probate:

FIRST, it is expensive. The fee for probate is set by statute in California. For ordinary services, the executor and attorney are entitled to compensation based on the total appraised value of the estate (before subtracting debts) as follows:

Eight percent (8%) on the first $100,000
Six percent (6%) on the next $100,000
Four percent (4%) on the next $800,000
Two percent (2%) on the next $9,000,000

 

It is important to realize that the fees for probate are calculated based on the gross value of the estate, REGARDLESS OF MORTGAGES OR OTHER DEBTS OWED.  So even a new house worth $500,000 that you may owe that much on will still cost $32,000, which is $16,000 to the attorney and $16,000 to the executor.  Even if your Executor waives her or his fee, it is still going to cost $16,000 in this example.

SECOND,  probate often ties up your assets for a long time. While the estate is going through the probate process, a lack of liquidity (cash flow) can create problems for your heirs. They may have to pay your mortgage or other debts, or they may be trying to keep your business running. They will need ready cash, but it can be very difficult to sell assets before the probate is  complete. An average probate can take 12 to 18 months, resulting in severe financial problems for your partner, friends, family or business.

THIRD, the probate process can involve a lot of time spent between the attorney and the executor, and can place a physical and emotional burden on the survivors. The grieving process is difficult enough without the bother, invasiveness, delay and disturbance that is often involved in probating an estate.

How to Provide for Loved Ones
In order to ensure that certain property will actually be received by your partner or your friends, you must use a will, joint tenancy or a living trust. As explained before, because of intestacy laws, it is unwise to assume that because you are registered domestic partners, that will be enough proof of your intent, and that therefore your partner will be able to inherit your assets (particularly your separate property). You must have an estate plan other than intestacy.

What a Will Can and Cannot Do
A will is a document in which you identify to whom your property shall be given after you die. Through a will, you can leave your property to anyone you choose, in whatever proportions you choose, including leaving everything to your partner. If you have minor children, you can name a guardian for them in the will.

For individuals who believe that a simple statutory will form is adequate for their needs, the estate planning process has recently been simplified. AB 25 revised the statutory will form to include registered domestic partners in the class of beneficiaries to whom a testator may leave assets and property.

There are several major drawbacks to using a simple will as your primary estate planning device. First, all assets in the will go through Probate. Second, a will can be, and frequently is, contested by the family of the decedent, especially if they have not come to terms with the decedent's choices during life. Third, a will is public, which means that anyone can go to the courthouse and see your will after you die.  You can go on-line and get a copy of Michael Jackson's or Marilyn Monroe's will for goodness sake!

Drawbacks of Joint Tenancy
Owning assets in joint tenancy can also be a useful way to transfer property to your partner. When one joint tenant dies, the remaining joint tenants automatically own the entire asset without probate. For example, if you own a house in joint tenancy with your partner, when you die your partner will own the entire house.  The property will have to go through Probate on the death of the second to die.

There are many drawbacks to doing this.

  • By putting an asset owned by you into joint tenancy with your partner, you are making a gift to him or her right now. If you want or need that asset back later, you may not be able to get it back. If there is a break up, you cannot 'take it back'.
  • Gifts between unmarried individuals are also subject to gift tax.
  • Property owned with someone else as joint tenants is completely subject to the creditors and liabilities of each joint tenant. Thus, even though you contributed the funds to purchase the property, and you are a 50% owner of the property as a joint tenant, you may lose the property altogether if your partner is the losing party in a lawsuit or has outstanding liabilities.
  • Final disposition depends on who dies last!  There is a lack of control over the property's ultimate disposition after the death of your partner - the surviving joint tenant. Because the property is entirely owned by the remaining joint tenant, you have no say or control over what happens with the property after the death of the surviving joint tenant. The surviving joint tenant may dispose of the property, gift it or bequeath it to whomever he or she chooses. Although most clients wish that their property be available for their partner after they die, they would prefer that after the death of the partner whatever, is left of the property should go to their family or other heirs.  A Trust can help you do that.

 

What You Should Do
For anyone in an unmarried partnership, it is important to have some form of estate planning in order to avoid disinheriting your partner. If you do not have an appropriate plan in place, state law will take over, your assets will be tied up in the lengthy and expensive probate process and ultimately distributed according to a "one-size-fits-all" system which may not reflect your intent.

By following the suggestions listed below, you can avoid many of the woes discussed herein and others.

  1. If You Own Real Property, Avoid Probate with a Revocable Living Trust.
    A living trust is a good way to avoid the expense and delay of probate while still ensure the transfer of your assets to your partner and/or friends after death. In the living trust document, you name the persons who shall receive your assets ("beneficiaries") and you appoint someone who will apportion the trust assets after you die ("trustee"). After signing the living trust document, you continue to own and fully control all of your assets. A living trust permits the smooth, inexpensive transfer of assets after death, without the court- supervised probate process. It makes it easier for your partner and for your family. In addition, a living trust is much less open to challenge than a will. Courts are less likely to overturn it since you put the living trust into place and lived with it during your lifetime. In addition, a living trust is private so that, after you die, no one except the beneficiaries have the right to know how you allocated your assets. In addition, in creating a living trust, you will have the option of keeping the assets in trust for your beneficiary rather than distribute the outright to the beneficiary. This way, your beneficiary can have full use and access to the assets during his or her lifetime, and if there is anything left upon the beneficiary's death, that will be distributed to other beneficiaries you have predetermined.

  2. Plan for Incapacity with a Durable Power of Attorney and an Advance Health Care Directive.
    1. Durable Power of Attorney for Asset Management [DPAAM}:
      Through a document called a DPAAM, you can appoint your partner and/or friend to act as your agent, with authority to make certain decisions for you. The DPAAM goes into effect only if you become legally incapacitated, which must be certified in writing by your doctor. Then, your agent will step in and perform the actions which you have outlined in the DPAAM. Examples of actions you may authorize your agent to perform are: making your mortgage payments, collecting money due to you and depositing it in your bank account, paying bills, and even keeping your business running. The DPAAM can be drafted to include as many or as few different transactions as you wish.
      If you do not prepare and sign a DPAAM someone will have to petition in court to be appointed as your agent. This can be expensive, time-consuming, and distressing to all involved, especially if there is a conflict between your partner and a family member.

    2. Advance Health Care Directive
      There is another instrument similar to the Durable Power of Attorney, called the Advance Health Care Directive (AHCD), in which you appoint an agent to make health care deci-sions for you if you become incapacitated. The need for an AHCD has been lessened due to California's improved domestic partnership laws which grant the right of REGISTER-ED DOMESTIC PARTNERS to visit their partners in the hospital. No AHCD is required for visitation. If any other family member of a hospitalized domestic partner objects to the other partner's visiting privileges, the hospital or health facility is nevertheless legally obligated to provide the domestic partner access to the hospitalized partner. Only if visitation is generally curtailed for a bona fide purpose, such as the hospitalized partner's health, may a facility deny visitation.

Nevertheless, it is prudent to execute an AHCD to complement and clarify your rights. Hospitals are often unfamiliar to the rights of domestic partners but routinely encounter and honor AHCDs. If you are NOT Registered Domestic Partners you may have real problems. For partners who are not registered with the California Secretary of State as domestic partners, it is essential to execute an AHCD. In addition, the AHCD affords you an opportunity to make important decisions regarding your health care and your body. For example, in the AHCD you can express whether you would like to be placed on life support if doctors have determined that there is no chance of recovery. Even if you are Registered Domestic Partners, you should have an AHCD. If you travel or move to another state, it is unlikely that domestic partners will be afforded the same rights as provided under California law.

Conclusion
An estate planning attorney can help you put the documents into place, including the Revocable Living Trust, DPAAM and AHCD, which will protect you during life, enable your partner to have meaningful participation in case of an emergency and provide for your partner and loved ones upon your death in the fastest and most cost effective method available.  Unfortunately, until same sex couples are given equal rights to traditional married couples, estate planning is more critical.  Get to it. Let me help you move this off your "To Do" list today.

Useful Links
2010 IRS Private Letter Ruling Regarding Income Taxation of California Domestic Partners
California Secretary of State - Domestic Partners Registry

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Why Do I Need To Plan My Estate When The Estate Tax Exclusion Is Up To $5,000,000!?

I talk to a lot of people who stopped worrying about planning their estates when the 2011 threat of the $1,000,000 limit of assets that could transfer to their heirs without estate tax jumped to an unbelievable $5,000,000 per person! The legislature extended a tax bill already on the books for two more years and increased the exclusion amount from $3,500,000 to $5,000,000. At a $1,000,000 limit, in California, it is fairly easy to see exceeding that amount when one considers the value of your house and retirement assets and planning became critical. Now, it seems people have relaxed and figure, I suppose, that unless they are any where near five million dollars in their estates, they have nothing to worry about. Think again.

First, that $5,000,000 amount is only through December 31, 2012, which is next year. Second, it has nothing to do what happens to your body, only your money. Third, the new exclusion amount does nothing for your children should a Guardian be needed. There is much more to planning your life and estate than just how much money you have. Let’s start with a very basic background on the Estate Tax in the United States.

The estate tax is one part of the Unified Gift and Estate Tax system in the United States. It is a tax on the transfer of the "taxable estate" at death of any assets by any means, whether via a will, according to the state laws of intestacy, a transfer of property from a trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. Transfers during life are taxed under the gift tax system and it imposes a tax to prevent avoidance of the estate tax by those who would give away his/her estate prior to death. There are some transfers to which there is a 100% deduction for anything going to a spouse or to a qualifying charitable institution but that is beyond the scope of this article.

That being said, let’s get back to the list of three significant reasons estate planning is still critical and look at the first one. The $5,000,000 exclusion amount is only through the end of next year. After that, unless the legislature can agree to something else, because it was merely an extension of the prior law, it will “sunset” or expire and we will be back to an exclusion amount of $1,000,000. So this seemingly bottomless glass of tax benefits is a temporary one indeed. If you can be sure that you will die before the end of next year, you may indeed arguably not have any need for tax planning if your estate is less than $5,000,000. This covers your money concerns but does not cover what happens to you, to your body and health. Let’s move to the second reason estate planning is still so important.

Assume a car accident or stroke and then think about what would happen to your assets and family while you are recovering. Typically, your income would be cut off or taper off once sick leave and vacation are used but the bills are still due and you are still recovering. Who can pay your bills, collect your mail, deposit checks and do your banking? If you are in the hospital, who is going to pay the insurance to be sure you still have coverage? What happens if you are unable to make your own decisions about your health care? There are two roads to travel here, the financial one and the physical one. Let’s take them one at a time.

Assume you are unable to pay your bills and take care of your finances. You need to have a Power of Attorney for Asset Management to appoint an “Agent” to act for you. These can be live or springing. “Live” means currently effective and it can be used from the moment you finish signing it. “Springing” means the POA is only effective ONLY IF you become unable to manage your affairs by an ascertainable process you list in the document. So whichever one you have, it allows a spouse, friend, family member or whomever to start acting on your behalf. It may be “durable” if it is specifically stated to remain effective even on your incapacity. From personal experience as an Agent for a friend, I can tell you that had he NOT had an Agent, when he was hospitalized for months, his insurance policy would have been cut off for nonpayment. Because I was the Agent and aware of what needed doing because we had done the right planning, I was able to pay his insurance, mortgage, Daughter’s living expenses at college and the rest of his bills until he could do it again.

Now, let us look at the physical side of a power of attorney. We all need to have an Advance Directive without any question. This is a Durable Power of Attorney for Health Care but they shortened the name. This allows you to appoint an Agent to make decisions for you in the event you are not able to do so. This does not become effective for your flu or broken bone. This is if you cannot make your own choices and when the doctor determines this, the Agent comes into play. The Agent then signs authorizations for treatment or whatever and makes decisions based on what you told him or her and what is in the document. These are temporary instructions [think short term or induced coma] and end of life instructions. This allows you to say “I want heroic measures” or “do not resuscitate” or whatever your choices are. The document also allows you to appoint a Conservator should one be needed for you. It is durable and is designed to last for years. It is critical for each and every one of us and has nothing to do with how much money we have. It is so we don’t end up like Terri Schiavo in Florida with everyone fighting over what they thought she really wanted.

The third reason you need estate planning, irrespective of the size or amount of your estate, is if you have children or pets you want to provide for when you die. Start with children and assume you have done nothing. If you are a single parent or your spouse has predeceased you or perhaps died in the same accident, who do you want to raise your kids? Your parents may be unavailable, uninterested or dead too. The Sister who lives close might be a dream with the kids but a money disaster, unable to keep her own checking account balanced. The Aunt who might step in may be someone you dislike or don’t respect or don’t want anywhere near your children. An estate plan would set out your preferences for whomever it is you want to raise your children if you are gone. Without compelling reasons not to do so, the Court will appoint this person Guardian of your children. You can choose who that will be OR you can leave it to the wisdom of the State of California.

We, who have them and can’t imagine life without them, all love our pets. If you die, have you made a plan for the care of your pets? Do you really want to think of them taken to the pound for lack of a plan. Choosing [and discussing with the person first] a pet guardian is very important too. You can set up a fund from your estate to help pay the cost of the pets’ care in a Pet Trust or, at a minimum, just make instructions.

In looking at all of this, you can see why you still really need to do your estate planning. The amount of money you can leave and what you do with it is certainly important but more important than that are setting up a system where you have:

  1. an Agent to take care of your assets;
  2. an Agent to make health care decisions if you cannot and be a Conservator if needed; and
  3. a Guardian for your children and/or pets.

Consider all of this and then give me a call!

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Tax Considerations of Joint Ownership

Every transfer of an asset has a potential tax consideration that must be considered. Many people approach estate planning with a simple solution. They place the name of a trusted adult child on their bank accounts or on the title to their homes. They do this to avoid probate or so if they become disabled, this child will be able to pay their bills and otherwise conduct their personal business. In the event of their death, it is supposed that this child can be relied on to distribute cash and other assets to the other siblings fairly. Well, maybe! I can tell you it is not without it landmines.

California recognizes a number of different forms of property co-ownership, but the most common ways titled property is held are as tenants in common or as joint tenants. Both types of co-ownership have significant differences, both in the way they are created and the effect the death of one tenant has on the property as well as to the remaining tenants. Considerations of co-ownership typically revolve around planning for property distribution on death. For this reason, always seek the advice of an attorney before making a final decision. This does not address community property because that is held by a married couple and transfers between spouses are not subject to tax.

Tenants in Common: A tenancy in common is a form of property ownership that does not provide any survivorship rights among the co-owners, unlike with a joint tenancy. When one tenant in common dies, that tenant's interest in the property does not automatically pass to the surviving tenants in common. Each tenant in common has the right to posses the entire property. In California, a tenancy in common is presumed, absent language to the contrary.

Joint Tenants: Like tenants in common, joint tenants have the right to possess the entire property. To hold title as joint tenants, the deed to the property must include the language "as joint tenants" or "as joint tenants with right of survivorship." To create a joint tenancy, the joint tenants must have taken title to the property at the same time, they must have the right to possess the whole property, and they must have the same property interest. The key feature of the joint tenancy is the right to survivorship. Unlike a tenancy in common, when one joint tenant dies, that joint tenant's interest automatically passes to the surviving joint tenants. This is true even if the decedent tenant's will or trust provides otherwise. Often an heir who expects to get the property because it says so in the Will is stunned to find that it went to the Joint Tenant after all.

Potential tax problems:

There are two potential tax problems that can be created when one tries to plan their estate with joint ownership. These involve gift taxes and capital gains taxes.

Gift tax issues: Gift taxes are payable for transfers of assets during life. The current amount you can transfer without filing a gift tax return is $13,000 per person and that person does not have to be related to you. Many people attempt to pass their assets on to loved ones through joint ownership. This is usually done by putting one of their adult children's names on the title of all of their assets such as bank accounts, certificates of deposit, and the like. There may be an understanding with this child that he or she is to distribute an equal share of the account to their siblings upon the death of the parent.

Unfortunately, upon the parent's death this property becomes the full property of the surviving joint tenant. While they may have the moral obligation to make distributions to their brothers and sisters they are under no legal obligation to do so. Any distributions to brothers and sisters will be fully voluntary and, therefore, a gift. Gifts in excess of $13,000 a year are subject to gift taxes.

Here's where things get even more complicated. Currently, the Federal Unified Credit allows the first $5 million of an estate can pass to heirs tax-free during one's lifetime as gifts or as part of one's estate at death. Distribution from the person that was the joint property owner to his or her brothers and sisters will either be subject to a tax of up to 45% for amounts over $5 million or will have to be deducted from that person's estate and gift tax exemption. In some instances the amounts in question are safely under these limits but, in other cases, this arrangement can provide significant adverse tax consequences to the child who was placed on the accounts as a joint owner. This may be more relevant in 2013 where the gift tax rate may be reduced to $1,000,000.

Capital gains tax issues: A potentially more serious consequence is the adverse impact on "long term capital gains". Capital gains are taxes imposed on the appreciation of certain property that has been held for more than one year. When one buys an asset, their purchase price is that asset's "basis." If the asset is held for a year or more and then sold for a price higher than the basis, the difference between the two is the "gain." Capital gains are currently taxed at a rate of 15%.

The estate tax law provides a significant exemption in calculating capital gains on appreciated property which is part of an estate whether by will or trust. When one dies, one's heirs receive a "step-up" in the basis of that property to the value of the property on the date of death -- not on the date the property was acquired. How does this work? Mom buys a house for $50K and it is worth $500K when she dies leaving it to her children. The step up in basis would mean that the children get a new basis of $500,000 and, were they to sell it the next day, they would have zero capital gains.

When Mom adds the name of someone else to the title of her property, creating joint property ownership, that person also receives the tax basis of that property. When the surviving joint owner sells the property the tax treatment would be the same as if the property had been sold by Mom, the original owner. The estate would lose its "step-up" in basis and be liable for the capital gains tax. This can this can be very costly. Consider the same house bought by Mom for $50K that is worth $500K on her death. Because there is a joint tenant on the property, the survivor takes the basis of $50K and on selling it the next day for the FMV of $500K has a capital gain of $450K on which they pay 15% or $67,500 in tax.

Now assume a life time transfer of the home to Child: Often, child is so eager to get the gift of the home during life, the tax consequences are not considered until after. We are looking at the same $50K house that Mom gives Child. The Child takes the basis of $50K in the property. This is a gift so there is tax due on the transfer if the credit has not been used. Bigger than that unlikely tax, is the capital gains issue again. Child wants to sell the home and selling it the next day for the FMV of $500K has a capital gain of $450K on which they pay 15% or $67,500 in tax. Mom can die the next day and the step up in basis that would have been $450K is lost in the haste of a life time transfer.

One last aside here about adding a Child to your bank accounts: I just had a case where Dad added Child to his joint account. On Dad's death, the account went, of course, to Child. Second Son was livid about this and litigated the matter and lost but ended up costing both of them more money than was in the account in the first place. If you add a Child to your accounts, understand and choose that it will go to that Child on your death OR write out your intentions, either in your Will, Trust or another writing. You might say, "I added Child to my account for convenience only and I intend that account to be used to pay for my expenses and then be divided by my children". Whatever your intent, make it clear.

While planning for the distribution of assets to joint tenancy seems simple, doing so needs to be considered very carefully.

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FAQs about the New Tax Rules for Executors for 2010Estate, Gift and Generation-Skipping Transfer Tax Questions

Is the estate tax repealed for decedents dying in 2010?

Yes. We never thought we would be here but the indecision and inability of the legislature to reach anagreement is a win for decedents dying in 2010. Title V of the Economic Growth and Tax ReliefReconciliation Act of 2001 ("EGTRRA") repeals the estate tax for decedents dying after December 31,2009 and before January 1, 2011. The estate tax is not repealed for the estates of decedents who diedbefore January 1, 2010; therefore, an estate tax return will still need to be filed for those estates.

Is the gift tax repealed for gifts made during 2010?

No. Title V of EGTRRA does not repeal the gift tax for 2010. However, the maximum gift tax rate fortaxable gifts is reduced from 45% to 35% for gifts made in 2010. Furthermore, EGTRRA broadened theapplication of the gift tax by treating certain transfers in trust as transfers of property by gift. For moreinformation, you should consult your tax adviser or go to the IRS Web site. Key words: Notice 2010-19.

Is the generation-skipping transfer (GST) tax repealed in 2010?

Yes. Another win. Title V of EGTRRA repeals the generation-skipping transfer ("GST") tax on directskips, taxable terminations, or taxable distributions occurring after December 31, 2009 and beforeJanuary 1, 2011.

Should I file a Form 706 for a decedent who died in 2010?

No. Because the estate tax is repealed for decedents dying in 2010, no estate tax is due and there is noneed to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. IRC§6018 no longer requires the filing of an estate tax return. In addition, the most recent revision of Form706, dated 09-2009, is applicable only to decedents dying after December 31, 2008 and before January 1,2010. There is no Form 706 for decedents dying after December 31, 2009.

Should I file a Form 709 for gifts I made in 2010?

Yes, if you made gifts that are subject to the gift tax, that is anything over $13,000. Because the gift taxwas not repealed, donors should continue to file a Form 709, United States Gift (and Generation-Skip-ping Transfer) Tax Return, to report gifts made in 2010. For more information, please contact your taxadviser.

Will Congress retroactively reinstate the estate tax for decedents dying in 2010?

We do not know. If legislation is enacted regarding the estate tax, the IRS will act swiftly to assess theimpact of such legislation and provide guidance to taxpayers regarding their tax obligations and filingrequirements.

Will the estate tax return in 2011?

Yes. Under current legislation, the estate tax repeal will "sunset", effective January 1, 2011. Therefore,the estate tax is applicable to decedents dying after December 31, 2010.

What are the exemption amounts and tax rates for 2011?

Under current legislation, the exemption amount for estates and gifts is $1 million. For GST transfers, the exemption amount is $1 million with an inflation adjustment. Under current legislation, themaximum rate for estate, gift, and GST tax is 55%, with a surtax for estate and gift transfers between$10 million and $17,184,000. It is my guess that they will stick with the $3.5 million limit but we willhave to wait and see.

Will Congress change the exemption amount and rates for 2011?

We do not know. If legislation is enacted regarding the estate, gift or GST tax, the IRS will act swiftly toassess the impact of such legislation and provide guidance to taxpayers regarding their tax obligationsand filing requirements.

Dropping back down to a $1,000,000 exemption amount would affect a larger number of people and soit is something we need to watch. If, as I guess, it remains at $3,500,000, very few people in the countrywill end up having it be an issue. We will have to wait and see. Again.

Stay tuned.

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Estate Tax Update: It is 2010: NOW WHAT??

I. BRIEF HISTORICAL REVIEW OF HOW WE GOT INTO THIS MESS

The 2001 Economic Growth and Taxpayer Relief Reconciliation Act(EGTRRA), was adopted as a ten-year tax relief bill. The duration of the effectiveness of the bill was limited because proponents of the changes did not have enough Congressional votes to make those changes as permanent additions to the tax code. Instead of reducing the scope of those changes to try to get more Congressional votes for a permanent amendment to the law, proponents of the changes chose to make the more sweeping changes they preferred but only for a limited time.

As EGTRRA applied to estate taxes, the estate tax exemption amount increased dramatically over those years from $1,000,000 in 2002 up to $3,500,000 in 2009 (or a combined $7,000,000 amount for a married couple), and the estate tax rate was conversely reduced over that same time period. Then, in 2010, the estate tax was "repealed" (or more accurately, according to the statute, it "does not apply" to decedents dying after December 31, 2009).

We practitioners thought it was unimaginable that Congress would not deal with the pending repeal in 2009. There were several attempts to do over the 10 year period. Most recently, in Fall of 2009, the House of Representatives passed a bill that would have continued the estate tax with a $3.5 million applicable exclusion amount. But the Senate, paralyzed by partisan bickering, could not act. The unpredictable environment and the uncertainty of whether Congress will enact new law, causes profound uncertainties for estate planning in 2010 and beyond; most existing estate plans should be reviewed because of this.

The ten year tax relief bill "sunsets" on December 31, 2010, which means it ends and that door is closed. Therefore, the "repeal"of the estate tax law is currently scheduled to last only one year. After just one year of "repeal" in 2010, unless the legislature acts, the estate tax law is scheduled to be restored on January 1, 2011, but, of course, not with the $3,500,000 exemption. Instead, the estate tax exemption amount would be reduced to $1,000,000 (as would have been the case without the intervening ten-year tax relief bill from the EGTRRA ). We are going backwards in time and progress!

Stop and think about it; This can produce ridiculous results. A person dying on December 31, 2009, could be subject to an estate tax that wouldn't apply to a similarly situated individual whose death occurred just the next day on January 1, 2010. And the reverse would be true for an individual whose death occurred on January 1, 2011, after the restoration of the estate tax, compared to a death the day before on December 31 2010. It also raises that specter of facilitating death for tax purposes in situations where that is possible.

That one-year repeal has made estate planning more difficult. With the "does not apply" repeal in 2010, to be followed by reinstatement in 2011, it has been really very difficult to advise clients about estate tax projections without knowing what the law would be when they will die. For the majority of people, the likely date of death is a mystery and for those who are likely to die in 2010, there is also, as I mentioned, the concern of facilitating the death during this tax year to take advantage of the lack of estate tax, pulling the plug earlier perhaps.

Since 2001, there have been numerous legislative proposals concerning the estate tax, including freezing the estate tax law as of 2009 for subsequent years (and thus avoiding the repeal), or conversely making the repeal permanent after 2010, or reforming the estate tax by significantly increasing the exemption amount and significantly decreasing the tax rate, or avoiding repeal but increasing the tax rate on extremely large estates (i.e., a "billionaire's surtax"). Nothing happened though. On January 1, 2010, the "unthinkable" happened. The estate tax now "does not apply" to decedents dying during 2010, there is a modified carry-over basis system instead of adjusted basis for inherited capital assets, and those laws are scheduled to last for only one year.

II. SO WHAT DO WE HAVE FOR 2010?

Let's break this out into what we have in 2010 and look at the three main areas of concern for estate planning:

  1. Estate Tax
  2. Whether repealed or just "does not apply," the primary effect is the same for the estate of a decedent dying in 2010; there is no federal estate tax due, and no federal estate tax return need be filed. A big difference though is where the government is going to get its tax from you. It used to be through an estate tax. To offset that, they allowed a "step-up in basis" for assets held by a decedent now in the hands of an heir. That allowed for current fair market value as of the date of death to be used. Now, it is on what is called a "Modified Carry-over Basis" with which the assets have capital gains tax treatment when inherited appreciated assets are sold. The heir now takes the basis the asset had in the hands of the decedent, hence a 'carry-over basis' and there is no step up to fair market value. On the sale of the inherited asset, the government now essentially has the capital gains tax in place of the estate tax to recoup that money. In some circumstances, you might pay more in capital gains than you would have in estate tax!

    During 2010 only, the basis of the decedent's property after death will be the lesser of the decedent's basis and the fair market value of the property. There is some minor relief to the carry over basis: The new law for 2010 provides that a limited amount of additional basis can be added to a decedent's capital gains assets which kind of makes up for the loss of the estate tax exemption. Up to $3 million of additional basis can be added to assets passing to a surviving spouse or in trust for a surviving spouse (if certain technical requirements are satisfied) and another $1.3 million of additional basis can be added to other assets regardless of to whom the property passes.

  3. Gift Tax
  4. The gift tax is not "repealed" nor suspended, even in 2010. The gift tax law continues ineffect during 2010 with the same $1,000,000 cumulative applicable exclusion amount. There is also a bit more liberal finding of "a completed gift".

  5. Generation-skipping Transfer Tax
  6. The generation-skipping transfer ("GST") tax is suspended in 2010 but not fully "repealed." Like the estate tax, the GST tax simply "shall not apply" in certain circumstances. The purpose of this tax seems clear. What was happening was grandparents were giving to grandchildren, skipping over the parent generation. This meant that the opportunity to potentially tax the transfer at the parent level was lost so instead of getting to potentially tax a transfer twice [once at each level], the government was only able to tax once. Hence, the establishment of the very, very complicated generation-skipping tax laws.

    "Generation-skipping transfer" is a technical term defined in Internal Revenue Code section 2611(a) and means one of three types of transfers (either a "direct skip," a "taxable distribution" or a "taxable termination") to a generation-skipping beneficiary (a "skip person," whether an individual or a trust that qualifies as a "skip person"). The GST tax law "shall not apply" in 2010 to any such transfer to a "skip person." Therefore, no completed transfer in 2010 will generate any generation-skipping transfer tax liability this year. This allows for excellent planning for 2010!

    It is going to get very confusing later on what was free from GST and what will still be into the future. For example, consider a fully funded trust so a completed transfer, to a trust that includes both "skip" people and "non-skip" people. By the time the assets belong to the "skip" people, the GST will likely be back into play, or rather still remain in play. There may be exemptions that apply. Or not!. This issue certainly needs further clarification from the IRS or by judicial interpretation.

III. THE LAW SCHEDULED FOR 2011

As I wrote earlier, the ten-year tax relief bill (EGTRRA) is schedule to sunset on December 31, 2010. If there has not been any legislative action before then, this is someof what will happen:

  1. The estate tax law will again apply to decedents dying after December 31, 2010.
  2. The restored estate tax will have a $1,000,000 applicable exclusion amount, the maximum estate tax rate will be increased back up to 55%, and the 5% surtax on taxable estate value between $10,000,000 and $17,184,000 will be restored.
  3. The state death tax credit will come back, and so also will the requirement to file California state estate tax returns and pay that "pick-up" tax.
  4. The Qualified Family Owned Business Interest [QFOBI] deduction will be back (valued at the $300,000 maximum)
  5. The gift tax will continue with the $1,000,000 gift exemption amount reunified with the estate tax applicable exclusion amount.
  6. The GST tax will apply to generation-skipping transfers occurring after December 31, 2010. The GST exemption amount will be $1,340,000 (the amount that would have been indexed for inflation in 2010).
  7. Some useful GST tax provisions will go away, since they were part of the EGTRRA ten-year tax relief provisions.
  8. The familiar adjusted basis rules of IRC section 1014 will return.

The way that the EGTRRA sunset provision was drafted presents its own problems: it tells us the Internal Revenue Code will apply again after December 31, 2010, "as if the provisions and amendments [of EGTRRA] had never been enacted." OK, this is stupid wording. What happens to proper lawful transactions that were put in place during the EGTRRA time. If it is 'as if it had never been enacted', then the propriety or legality of the transaction comes into question, doesn't it. This too will require legislative input or judicial interpretation.

IV. TOTAL GUESSES AS TO POTENTIAL LEGISLATIVE ACTION

 

  1. Retroactive reinstatement of the estate tax in 2010? This is a talked about a lot. Might not the Congress say here is how we are treating 2010 and may make those laws retroactive. This, of course, raises a lot of constitutional and other issues so, were this to happen, wisdom seems to suggest they will also offer the option to opt in/opt out for 2010?
  2. "Patches" for the gap year have been provided by the legislature in many states but just not California! These provide guidance for wills and trusts interpretation.
  3. Estate tax reform for 2011? Maybe they will come up with a whole new plan and get us back on track to the 2009 rates. Each time we have been close though, lately, some disaster has distracted them. There was health care reform in 2009 and prior to that, Hurricane Katrina. Wouldn't it be nice if they just dealt with it!

 

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