Dedon on Estate Planning

Taking Care of the Basics

Effective for 2011 and 2012, Congress provided affluent taxpayers an extraordinary opportunity to transfer wealth by eliminating estate and gift tax on assets worth less than $5 million, or $10 million for a married couple. This great news, however, only affects a small percentage of the population.

Regardless of wealth, all of us need fundamental estate planning, which includes a Power of Attorney, Medical Directive, and a Will. The Power of Attorney and Medical Directive name an agent in the event you are incapacitated or unavailable to handle financial and health matters, respectively. The Power of Attorney and Medical Directive apply during life and terminate upon death. Absent a Power of Attorney or Medical Directive, a judge may appoint a guardian to handle those affairs.

In many states the Living Will is incorporated within the Medical Directive or it may be a separate document. The Living Will provides that, in the event your life is over and you have no cognitive ability, it is your desire that you not be artificially prolonged on life support. Without a Living Will, there is a presumption that you want to be kept alive on life support. In a couple of well publicized cases over the last several years, where there was no Living Will, the government was involved in determining whether or not the family was allowed to remove an individual from life support. Thus, it is important to make your wishes known one way or the other.

Your Will disposes of your assets upon death. Absent a Will, state law will determine how your assets are distributed. Not only will state law determine the beneficiaries, but there would be considerably more confusion and expense in determining how the assets are distributed and who is in charge as the fiduciary to oversee the estate. Additional problems can result without a Will. For example, assets may be distributed outright to beneficiaries where a Trust is necessary. Trusts are necessary to protect beneficiaries who are minors, spendthrifts, have special needs, and may get divorced or sued.

Lifetime trusts oftentimes are the fourth important estate planning tool. I have written extensively on using Revocable Living Trusts to avoid probate, so I will not repeat those comments here.

Besides having the necessary documents in place, you need to ensure your family members know where you keep the original documents. It is difficult to prove that copies of documents are the last signed documents if the originals are lost. Further, you should keep an updated list of assets so your family knows your financial structure.

In sum, federal estate and gift savings for 2011 and 2012 affect the wealthy. But there are important reasons why everyone would benefit from a Will, Power of Attorney and Medical Directive, and in many cases, a Revocable Living Trust. These essential documents apply regardless of net worth.

 

Fundamental Estate Planning

This summer may be remembered for the unusually large number of high profile deaths. These deaths cause us to face our own mortality and, for estate planning lawyers, result in more phone calls. It is always surprising how many individuals don't have any planning, such as Wills, Powers of Attorney and Medical Directives. Even fewer people have the appropriate planning, such as Revocable Trusts for probate avoidance or correct beneficiary designations on assets and proper asset titling.

With this in mind, by clicking Download Fundamental Estate Pl Presentation 8-31-09 blog.PPT you can follow a PowerPoint Presentation I will be giving this fall to prospective clients and professionals covering the need for fundamental estate planning, the necessary planning tools to utilize, and the critical importance of examining the ownership of the assets and beneficiary designations. The Case Study in the PowerPoint highlights this latter point.

Estate Planning Presentation for Financial Institution and Their Clients

Attached is a PowerPoint presentation I recently gave to a financial institution pertaining to fundamental estate planning issues for their clients.

Download Financial Inst Presentation

Getting Started

I am often asked, "what should I do before our first appointment and what should I bring?" In order to help you prepare, I recommend you do the following:

• Watch this video I  have createrd to provide an overview of the issues we will discuss when we meet.
  
  
• Print the pre-interview form, complete the first page, and bring it with you.
  
  
• While optional for our first meeting, the second page of the pre-interview form, item two above, is a Financial Statement Summary table. Funding Revocable Trusts for probate avoidance and to balance the assets for estate tax purposes often is an important part of the planning. Although a list of assets is not necessary for our first meeting, ultimately it will be important to review the assets’ value and ownership.
  

Below is an example of how to complete the Financial Statement Summary. Assuming you are married, you may prepare a financial statement listing across the top of the page these three types of ownership:

Mr.                 Mrs.                 Joint

Listed down the page will be the assets by general categories. Almost all clients will have real estate (one or more homes); retirement assets (IRA, 401(k), etc); other liquid assets (stocks, mutual funds, bank accounts) and life insurance. In addition, there may be closely held business interests or investment properties.

Taking Care of Basics: Revocable Trust FAQs

With the end of the year approaching, it is appropriate to revisit a basic but yet important and neglected concept central to estate planning: the need to fund your Revocable Trust to avoid probate and, in the case of a married couple, to balance out the estates for tax purposes. The March 31 Post, reprinted below, discussed this funding in more detail. In addition to the guidance provided in the March 31 Post, set forth are common questions clients ask regarding how to transfer assets into their Trusts.

2009 Annual Exclusion Gift

The IRS has provided an early Christmas present by announcing that the 2009 annual exclusion gift is $13,000. It increases from $12,000, which was the amount in 2008. The annual exclusion gift is the amount that you can give to any recipient of your choice during the calendar year without tax consequence. If the gift is a present interest and qualifies for the annual exclusion, it does not erode the exemption amount available upon death. As has been widely reported, the exemption amount in 2009 increases from $2 million to $3.5 million.

For example, in 2009, if husband and wife have two children, in 2009 they can give $26,000 to each child. Upon their deaths, if they have done the appropriate planning, they could still leave $7 million to their children without any federal estate tax. (State estate tax may differ.) There generally is no reporting regarding the annual exclusion. However, there are exceptions depending on the type of gift and who is making the gift.

Designing Trusts For Children

A critical issue parents wrestle with in designing Trusts for their children upon their deaths is how to balance providing the necessary resources for their children against providing "too much too soon" and thereby undermining each child’s motivation to lead a productive and meaningful life. My July 28th Post, reprinted below for your convenience, describes how "ascertainable standards" are the typical provisions utilized to achieve this balance. The ascertainable standards are "health, maintenance, support and education." These words are well understood in the Trust world and in the eyes of the IRS. They provide guidance to Trustees to accomplish the parents’ objective to protect the child with adequate resources but not sap the child’s incentive.

Some clients go beyond ascertainable standards by providing specific guidance that condition distributions on various targets, such as achieving a level of education or income, or marrying, or pursuing a particular profession. These "Incentive Trusts" strike some as trying to "rule from the grave," while for others they merely provide the necessary structure and guidance to help the child when they no longer are able.

Monitoring Tax Exempts

The November 21, 2008 Daily Tax Report published by BNA, reported on IRS Commissioner Steve Miller’s comments at the annual Western Conference on Tax Exempt Organizations held in Los Angeles on November 20^th.  Miller’s theme was full disclosure and transparency regarding tax exempt organizations’ operations.

According to Commissioner Miller, the revised Form 990, which is the annual tax return filed by tax exempt organizations, and greater information required at the creation of the organization, as required by Form 1023, will facilitate the IRS monitoring these organizations. Miller was quoted as saying "[w]e intend to let the sun shine" on governance issues. Thus, it will become increasingly important to have the board of directors actively review key decisions and document those decisions in Minutes.

The Daily Tax Report quoted Miller as saying the IRS will focus on the following:

• The composition and independence of the board

• Internal financial controls

• Compensation

• Conflict of Interest policies

Planned Giving: The 2008 Charitable Remainder Annuity Trust

The November/December issue of Advancing Philanthropy, the bimonthly magazine dedicated to ideas and strategies pertaining to fundraising which is published by the Association of Fundraising Professionals, contains an article I wrote regarding Charitable Remainder Annuity Trusts combined with life insurance. As charities struggle to maintain gift levels, the article illustrates how CRAT's can help charity and the individual. The article contains case studies applying the concept to particular client situations. It is reproduced here.  (It will take a minute to download.)

Possible Estate Tax Changes

At long last the election is one day away. The barrage of advertising, phone calls and mailings will stop and we will have a new President in 2009. What does that mean for estate planning? I have written in the past that both candidates believe change is necessary. In 2009, the exemption automatically rises to $3.5 million. There is no estate tax for one year, 2010 (although there would be no step up in basis for income tax purposes), and then in 2011 the estate tax exemption reverts to only $1 million.

The candidates realize this law is flawed and needs to be fixed. Obama is on record as saying a $3.5 million exemption amount is appropriate. McCain favors a $5 million exemption amount and lower tax rates. With Democrats expected to pick up seats in both the Senate and the House, and in this financial environment, who knows what the amount turns out to be.

Aside from the exemption amount, however, a major change may be the issue of "portability." Under current law, in 2009 when exemption amounts are $3.5 million, a husband and wife do not automatically receive the benefit of protecting $7 million from estate tax. If all of the assets go directly to the surviving spouse by Will, title or beneficiary designation, the surviving spouse, at the second death, is only able to protect one exemption amount.

E.g., husband has $3.5 million and wife has $3.5 million. Husband dies and all assets are now owned by his spouse. There is no tax at his death but at her death she has $7 million of assets and only one $3.5 million exemption amount. Thus, there is over $1.5 million of tax to pay.

If, however, the husband’s exemption was "portable," even though all of his assets went to his spouse at his death, she would still receive the benefit of $7 million of estate tax protection at the second death. Now, since there is no portability, a married couple only receives the benefit of both exemption amounts if assets are transferred into a credit trust at the first death and the couple’s assets are properly arranged. If there was portability, the major inconvenience and complication of changing titles and beneficiary designations would be avoided.

Although increasing exemption amounts would be a major benefit for affluent individuals, a step that would be just as important and could help even more married couples would be if exemption amounts were portable.