Are You Prepared For The Return Of the Estate Tax on January 1st?
November 30, 2010
Q. My wife and I have a Living Trust and a combined estate worth roughly $2 million, including the equity in our home. I understand that the federal estate tax returns on January 1, 2011, and that couples having a combined estate worth more than $1 million may once again be subject to tax. Is this true? Is there anything we can do to about this?
A. Yes and yes. As things now stand, the federal estate tax is scheduled to return with a vengeance on January 1, 2011. For individuals who pass away after that date, the estate tax exemption will drop to only $1 Million per person, and the excess above that amount will be subject to a very hefty estate tax that can be as high as 55%. In your case, if your trust leaves everything outright to your spouse without special “tax savings” provisions, the tax that will be due upon the death of the survivor owning a $2 Million taxable estate would be approximately $435,000.
While Congress could still act to change that result, legislative efforts over the last several years to do so in anticipation of January 1, 2011, have thus far failed.
Background: During the last decade, the exemption from estate tax gradually went up each year from a starting amount of $675,000/person in the year 2000, all the way up to $3.5 Million/person in the year 2009 and, for persons dying in 2010, there is no estate tax whatsoever. For many persons who designed their estate plans during the last decade and whose estates were valued at less than the applicable exemptions, estate taxes became less and less of a concern and many plans were put in place that did not incorporate tax planning. This often made sense when the exemptions were greater than the value of one’s estate, but tax planning now suddenly becomes important once again for many folks. Consider that the value of the equity in your home, a 401K, plus some savings & investments can easily add up to more than $ 1 Million, once again exposing your estate to tax upon death.
With the exemption scheduled to drop once again to $ 1 Million and the federal estate tax scheduled to return at a rate of 45% to 55% for amounts above that, tax planning once again becomes important. This is especially so in your situation. Without proper tax planning, your children would be faced with a hefty tax bill and might need to sell some or all of your estate in order to raise money to pay the tax by the due date, nine (9) months after death of the surviving parent.
The good news: There are strategies that may reduce or even eliminate this burden, with more strategies available to married couples. However, they must be set up during your lifetimes. These may include creating “sub-trusts” within your Living Trust which would be “activated” upon the first death in order to preserve the decedent-spouse’s full exemption. This technique can effectively double the exemption over the span of two lifetimes; using life insurance to fund the anticipated tax liability; and, making intra-family gifts during lifetime to reduce the value of your taxable estate. Other available strategies are sometimes known by their funny sounding acronyms, e.g. QTIP, ILIT, QPRT, GRAT, IT, GSTT. If you also wish to design your plan so as to permit access to available government benefits to help pay the cost of long term care, the strategies might also include creating MIDGTs or VIDGTs to protect the home. Our recommendation: have your plan reviewed by a competent professional. An ounce of prevention may be worth a pound of cure.
The Ins and Outs of Incapacity
November 28, 2010
Most people think that having a trust is about controlling (to an extent) what happens to your assets after you die. This is true, but a trust actually has a much broader scope: a trust can also protect and provide for your loved ones—and more importantly, it can protect and provide for you—if you should ever become incapacitated.
In basic terms, incapacity means that you are no longer able to make decisions for yourself. Sometimes it is easy to determine incapacity: the person is in a coma or unconscious and obviously unable to make decisions. But sometimes it’s more difficult. What about whether or not a person is able to make rational decisions? What if someone is suffering from Alzheimer’s, Dementia, or even a severe mental illness… should that person be making important financial decisions?
It is important to include a definition of incapacity in your trust, because this one word carries a lot of weight. It is when you are incapacitated that your successor trustee will take over, when the agent nominated in your Healthcare Directive will get the authority to make health care decisions for you, and may also be the point in time when your financial Power of Attorney goes into effect. With so much hanging on a single word, it’s important to know exactly what that word means.
Every standard trust should have a definition of incapacity, as determined by a court of law pursuant to statutory definitions of incapacity. This essentially means that you are deemed incapacitated when a court of competent jurisdiction determines that you are unable to legally handle your own affairs. However, an alternative provision is also often included in trusts and companion legal documents, i.e. upon a written determination by your treating physician(s) that you can no longer handle your financial affairs competently. Many trusts require that this determination be made by two (2) phyicians, each providing a separate certification of incapacity. This requirement is fine if you are really concerned about relying upon only one medical opinion. However, in practice, we have found that there are often logistical problems in securing the written opinion of two physicians, especially if you are residing in a facility such as a nursing home. Usually, only one physician makes the rounds there, and securing an evaluation by another phyician is often difficult and impractical. Hence, we tend to prefer the requirement of only one (1) physcian for most plans that we prepare for seniors.
There are many reasons why you would want to have an option in your documents that provides an alternative to the court determination of incapacity. The primary reason is that court proceedings can be lengthy and expensive. While your agent may be spending days or weeks going through the legal process, your estate may be languishing and your trusee or financial agent may be powerless to take action on your behalf. Giving a licensed physician the power to determine your incapacity will likely circumvent the expense and lengthy delays often associated with the court process. Further, when we designate a physician, we generally prefer not to require that the decision be made by a specific individual, as that person may not be readily available or may no longer be your treating physician. Our recommendation: specify that such a decision may be made by your then current, treating physician if available and, if not, by an examing physician.
Preparing Boomers for the Finance Sandwich Squeeze
November 15, 2010
Baby-boomers are called the sandwich generation—and with good reason. They were expecting to pay for their own retirement and their children’s college education; but now recession upon recession has toppled their elderly parents’ savings, and Boomers find that they are faced with the prospect of shouldering the financial burden of their parents’ final years as well. The pressure of providing for so many people at once can quickly become overwhelming, and using one’s own savings or retirement fund can begin to look like an easy solution to immediate financial concerns.
Although it may seem like an easy fix to looming financial debt, don’t give in to the temptation to use your own savings. Before you give in to fear and drain your retirement, get some professional financial advice. This special edition recently released in the New York Times shows that it is possible to prepare for what’s coming—both for your parents and yourself.
Our first recommendation is to discuss your situation with a trusted financial advisor. After that, one of the primary suggestions offered in the Times is to talk to your parents about their situation. It may not be easy; be prepared for your initial advances to be met with resistance. Aging parents often worry that they will lose control of their own finances, or that giving decision-making capacity to one child will lead to anger or hurt feelings among their other children. Instead of gearing up for a fight, the article mentions a few ways to gently lead into the conversation (including talking about family philanthropic projects.)
Another discussion you won’t want to skip is one about Long-Term Care Insurance. This article by Ron Leiber discusses different kinds of insurance, whether or not you’ll need it (you will), and how to pay for it.
The world of “old age” is changing. People are living longer than their predecessers and are experiencing more long-term health issues. In some situations, elders may be able to rely upon Medi-Cal to subsidize the cost of residence in a nursing facility, provided that appropriate planning is in place. However, care outside of the nursing home environment usually requires reliance upon savings and/or long term care insurance if available. For veterans, a tax-free Veterans Pension may be available, even if the disability is not related to military service. Serious discussion and serious planning are essential to surviving the challenges of the “new” old age.
Estate Planning Is Easier Than You Think
November 13, 2010
Have you ever seen the “1001 Must Do” books series? 1001 Movies You Must See Before You Die, 1001 Books You Must Read Before You Die, or maybe 1001 Natural Wonders You Must See Before You Die? Let’s face it, 1001 things is a lot of pressure! This is why we like this article in the San Francisco Gate, which lists only 16 estate planning things to do before you die.
Creating your estate plan can seem complicated and scary, but it’s not as daunting as you think—especially if you have the right person helping you. The article mentioned above lists 16 things to do in order to get your affairs in order, but even those 16 things can be pared down to only 5 essential tasks:
1. Make a list of your assets-include your home and other real property, checking and savings accounts, retirement assets, life insurance, investments, as well as high ticket physical items and heirlooms.
2. Make a list of your debts-including credit card debt, remaining mortgage debt, auto loans.
3. Choose your beneficiaries-consider not only children or grandchildren, but also any charities you would like to support. Think about what you want for your legacy beyond the first generation. Also, although it can be difficult, consider what you would want should your children or grandchildren predecease you.
4. Decide who you trust to be your agents/executors to handle your affairs-getting your affairs in order means choosing people to make decisions when you are unable. Agents with power-of-attorney will make financial decisions if you are unable, health care agents work with your doctors to determine your medical care, and trustees will control any assets you place in trust for the benefit of yourself or your beneficiaries.
5. Meet with an estate planning attorney-creating an estate plan is not as simple as checking a few boxes and signing a will. An estate plan requires an evaluation of your assets and goals, careful research into federal and state laws, and a determination of which of the myriad of documents best meets your needs. Have an experienced attorney help make your plan perfect.
The Quiet Devastation of Alzheimer’s Disease
November 5, 2010
According to a recent report put out by the Alzheimer’s Association, 5.3 million people have Alzheimer’s disease. Chances are that you or someone you know has been touched by this illness. In spite of these overwhelming statistics, Alzheimer’s continues to be a disease that sneaks up on individuals and their families, quietly tearing apart lives with uncertainty and confusion. As elder law attorneys, we sometimes see this heartbreaking confusion in our own offices when elderly clients or their families come to us, concerned that a loved one no longer has the capacity to sign or make decisions about legal documents.
A new article in the New York Times discusses the slow and sometimes invisible development of Alzheimer’s disease, and some of the earliest warning signs that your loved one may be suffering. “New research shows that one of the first signs of impending dementia is an inability to understand money and credit, contracts and agreements.” This comes as particularly bad news to families who put off their estate planning year after year, each time telling themselves “We’ll do this next year for certain.”
By the time families come into our office with their suspicions about their aging loved one it may be too late for us to help. “Lawyers have guidelines, published in 2005, that include warning signs of diminished capacity, like memory loss and problems communicating and doing calculations. The guidelines instruct lawyers to look at the legal requirements for capacity in specific situations, like making a gift. But many questions remain.”
Plans created after the suspicion of Alzheimer’s or dementia has set in can be fraught with doubt, and often cause conflict among family members. We have seen the rifts and heartbreak the illness causes in even the strongest of families. We urge you to take care of important legal and estate planning issues early, before questions of competence can cast the shadow of doubt over your wishes.
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