Category Archives: News and Current Events

What Does Back to School Have to do with Estate Planning?

As summer comes to an end and kids and parents both start getting ready for back-to-school week, estate planning may be the last thing on anybody’s mind; but the beginning of a new school year can actually be the perfect time to give your estate planner a call. Whether your baby is heading off to preschool or college, our office can help you plan for the future and ensure he or she is protected as the school year unwinds.

Any parent of a grade-, middle-, or high-school student knows that the first thing sent home during back-to-school week is the emergency contact forms. These are the forms on which you list who the school should call in case of an emergency when parents can’t be reached, and who might be authorized to make medical decisions for your child if the parents are unavailable. The names you put on these forms can be a perfect starting point for considering who you (and your children) love and trust enough to serve as guardians of your minor children should anything happen to you.

Parents of college-age students (currently or soon to be 18) have a whole different set of legal issues to consider. Although you may still think of your 18 year as your baby, he or she is looked upon as an adult under the law. This means that hospitals and medical personnel are no longer required to ask the parent’s permission before performing medical procedures. In fact, once your child is 18 health care providers are no longer required to share information with the parents at all.

Most college students (and parents) are unaware of this side-effect of turning 18, and parents and children alike can run into frustrating roadblocks should an accident occur. You can avoid these roadblocks by simply having your young adult execute two documents before heading off to school: a healthcare directive nominating you as his or her healthcare agent, and a HIPPA Authorization Form listing you as one of the people who have permission to receive information about his or her medical records and status.

Back-to-school is an exciting time for both parents and children. Taking care of legal and estate-planning business at this time can lift a heavy burden of stress from both parents and children, leaving you all free to enjoy the new year together.

Changes in Estate Tax Law Require Regular Review of Estate Plans

The past few years have seen a number of significant changes in estate tax law; so much so that estate planners—as well as anyone with a will, trust, or estate plan themselves—have had to stay on their toes! The most significant event in recent estate tax history was the lapse of the estate tax in 2010. This lack of tax was so momentous, and was such a surprise, that we are still seeing the effects of it two years later.

A recent article from Reuters describes the ongoing saga of the Tweten family of California, and how the disappearance of the federal estate tax in 2010 caused (and may still be causing) a lengthy legal battle between father and daughters. Leonard Tweten and his wife of 58 years, Eileen, founders of Magnolia Audio Video, established a trust in 2008 which utilized a common formula clause to help minimize estate taxes.

“The formula clause typically divides the estate so that children get the amount of assets in the federal estate tax exclusion (currently $5 million per person), with the rest going to a marital trust for the surviving spouse. This allows the full amount of the exclusion to pass to the heirs tax-free.”

This formula clause is a wonderful tool when the estate tax exclusion amount hovers around $2 million, exactly the amount it was in 2008 when the Twetens set up their trust. Unfortunately, “in 2010, the exclusion was unlimited, because there was no estate tax. So when Eileen died in April of that year, her whole estate, rather a few million dollars, would have gone to the kids, leaving Leonard out of the money.”

The Twetens were not unaware of the exclusion, and made an eleventh hour change to their trust only 12 days before Eileen Tweten’s death. Unfortunately, their efforts were not enough. “The couple’s adult daughters, Nancy Crowe and Janet Houston, petitioned the court to invalidate that amendment on grounds of forgery and incapacity, while their father petitioned to allow the trust’s modification.”

The court eventually had to throw out the amendment, “noting that it had not been notarized as required by the trust”, but sided with Leonard Tweten in spite of this, letting the original intent of the Tweten’s estate plan stand. The Tweten’s daughters, however, plan to appeal the court’s decision.

The lesson we can all take away from the Tweten’s experience is that no matter how safe you may feel with your current estate plan, it is absolutely essential to review your trust regularly, and consult your estate planning attorney about any changes to estate tax law that may have been enacted since your last review. Contact our office for more information.

Tax Law Allows Married Couples to Reduce Their Estate Taxes

Married couples take note: Congress passed a law in 2010 that can significantly reduce the amount your estate pays in estate taxes. Unfortunately, most couples are either completely unaware of this opportunity for savings, or they find out about it too late to take advantage of it.

This recent article in the Wall Street Journal gives an example to explain the law both under the previous law and the newer, 2010 law: “A husband and wife together have $7.5 million of assets, $6 million of it in a business owned by him and the rest owned by her. Under prior law, if they died and each partner left everything to the other (with no trusts), the estate of the second-to-die partner would owe federal tax on $2.5 million—even though the law gave each spouse a $5 million exemption. Under the new rules, when the first partner dies—say it’s the wife—the executor files an estate-tax return preserving the value of her $5 million exemption. The result: At the husband’s death, the wife’s exemption is added to his, and the entire $7.5 million passes to heirs tax-free.”

Taking advantage of this opportunity isn’t difficult to do… but only if married couples (or their financial/legal advisors) are aware of the law. And in this case it’s not enough to be simply aware of the law, couples will need to be made aware of the law in time to take advantage of it within the limited time frame. “An estate-tax return must be filed soon after the first partner’s death—usually within nine months—in order for a couple to get this new benefit.”

For more information about this beneficial tax law, or to find out how to take advantage of it before it’s too late, please contact our office.

Should Heirs Pay Taxes on Assets They Can’t Sell?

Throughout history artists and their artwork have often been on the leading edge of controversy. In a recent brou-ha-ha between the heirs of the New York art dealer Ileana Sonnabend and the U.S. Internal Revenue Service the controversy is over nothing less than the value of art—although perhaps not “value of art” in the philosophical way it often gets discussed in universities. Instead, this controversy is over the much more practical questions of art and taxation.

According to this article in the New York Times, the IRS is trying to demand that the heirs pay $29.2 million in taxes on a work of art which most appraisers have valued at $0. “The object under discussion is ‘Canyon,’ a masterwork of 20th-century art created by Robert Rauschenberg… Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.”

Not only are the heirs unable to ever sell the piece of work, they also cannot donate the piece to a museum and claim a charitable deduction. There are very few legitimate purposes for the piece of art under current law. Currently the piece is on a long-term loan to the Metropolitan Museum of Art in New York; something for which the family, as far as we know, receives no monetary profit.

The IRS, however, “has appraised ‘Canyon’ at $65 million and is demanding that the owners pay $29.2 million in taxes;” an act which, as the article notes, “puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell ‘Canyon’ to zero-out their bill, they could go to jail for violating eagle protection laws.”

Affordable Care Act Likely to Improve Situations of People with Disabilities

The Affordable Care Act (ACA) is a hot topic lately, and of great concern to people of all walks of life; but people with disabilities, or who rely on government benefits to help them pay for health care and living expenses, have even more at stake in the game and more reason to be concerned. It is this population of elderly or disabled individuals who, according to this recent article in Forbes, have had to (in some states) limit their income in order to continue receiving affordable health insurance through federally funded programs. But hopefully, the ACA is about to change all that.

“The most obvious and most significant health industry reform important to [elderly or disabled individuals] is the elimination of pre‐existing conditions as a bar to purchasing private health insurance. However, ACA also eliminates annual or lifetime caps, rescission of insurance policies, non‐renewability, and higher premium costs for persons with pre‐existing conditions.”

Before the passage of the ACA many disabled persons couldn’t qualify for health insurance from private insurers, leaving public programs such as Medicaid as their only option. The problem with relying on Medicaid is that once your income reaches a certain amount you no longer qualify. For disabled persons with “pre-existing conditions,” losing Medicaid benefits while still unable to qualify for private insurance was equal to disaster, and resulted in many people self-limiting their income.

Now, however, private insurance companies will no longer be able to bar individuals with pre-existing conditions. Thankfully, this should “open the door to many more people to confidently join the workforce, knowing they will not do so at the cost of having medical needs met.”

If you or a loved one has a special needs trust, or would like to know how the ACA may affect your government provided health insurance or benefits, please contact our office.

Should Zombies Pay Estate Taxes?

How dead do you have to be before the government can tap your estate for estate taxes? Do you have to be only kind of dead, or do you have to be fully dead-dead? This is the subject of a new law review article by Adam Chodorow of the Arizona State University law school, as well as the topic under discussion in this tongue-in-cheek article in the New York Times.

When it comes to the legal rights of the undead Chodorow believes that “The important question is determining whether zombies should be considered truly deceased or partly alive. That distinction is crucial financially.” The article continues searching for answers to this and other particularly unusual questions in a hilarious but educational vein. Never has estate planning been so interesting—or trendy!—and yet readers will find themselves learning a little bit about the law in spite of themselves. Consider the following:

“But there are some tax downsides to zombiedom. When you actually die — for clarity, let’s call this ‘die-die’ — the appreciation in the value of your assets is wiped out for tax purposes. Say a vintage car you bought for $50,000 is worth $100,000 when you die-die. Under I.R.S. rules, this doesn’t cost your heirs taxes on the $50,000 gain when they sell it. Instead, the car is valued at $100,000.”

It’s the Stepped-up basis rule applied to the undead.

The article is obviously written in fun, but it brings up some legal issues that even the living would do well to think about. There have been a lot of changes to gift tax and estate tax law in the past few years, and if you haven’t created your estate plan, or if you have an estate plan but haven’t reviewed or updated it recently, you may have worse things to worry about than a zombie apocalypse. Call our office and make sure your assets and your family are protected from every kind of disaster.

With $5 Million Gift Tax Exclusion Set to Expire, Is Now the Time for You to Give?

When legislation in 2010 raised the lifetime gift tax exclusion amount from $1 million to $5 million many wealthy families rejoiced, expecting that they would now be able to give large gifts to children or grandchildren and be able to save millions in taxes at the same time. But for all the rejoicing, the unsteady economy has made many people cautious, and has parents and grandparents thinking twice before giving away wealth that they may need themselves in later years.

According to this article in Bloomberg Business Week, however, the time has come for families to take a careful look at their finances and decide if they want to take advantage of the $5 Million gift tax exclusion before it expires. “Legislation enacted in 2010, which raised the lifetime gift-tax exclusion to $5 million from $1 million for each person starting last year, is set to expire. For 2012, the inflation- adjusted figure is $5.12 million for each person. It will drop to $1 million on Jan. 1 unless Congress acts.”

Parents who want to take advantage of the gift tax exclusion, but who worry that their children may not yet be ready to handle such a large financial gift, do have options. As the article points out, “Many [families] are setting up irrevocable trusts for children or grandchildren and transferring assets such as second homes that have the potential to appreciate.” This not only allows the assets to appreciate, but also allows parents and grandparents to breathe easy while young children or grandchildren have time to mature before receiving a gift or inheritance.

If you think your family may benefit from taking advantage of the gift tax exclusion before the end of the year, please contact our office. We can help you explore your options and learn more about what legal changes may be in store in the coming year.

Do You Know How Much Your 401(k) Is REALLY Costing You?

Do you know how much your 401(k) is costing you? Are you sure? What most people don’t know is that many employees with “free” retirement plans through an employer actually pay a number of hidden fees. According to a recent article in the Huffington Post, “71 percent of plan participants don’t think they pay any fees for their company’s retirement plan. In reality, they pay a variety of fees including investment management, administrative and advisory fees, and more — investment management fees usually comprising the bulk of the expenses.”

All of this is about to change, however, thanks to new laws being enacted by the Department of Labor. CNN Money reports that “A new federal rule took effect July 1 that requires 401(k) plan providers to disclose certain 401(k) fees, and employers to distribute these disclosures to plan participants by Aug. 30.” The hope with this new disclosure rule is that it will increase transparency, and help both employees and employers stay aware of how much their “free” 401(k) may or may not be costing them in administrative fees.

We live in a culture of constant demands and distractions, and it is all too easy to fill out the paperwork to set up a 401(k) with an employer and then forget about it, assuming that as long as nothing changes, everything will keep working the way it’s supposed too. Things do change, however, both in the world of investment and in our own lives. All too often we see clients who miscalculate their 401(k) growth in relation to their retirement needs, or whose valuable retirement savings is lost to taxes when the owner passes away unexpectedly. In all cases, it is important not only to be aware of what’s happening to your savings, but also to be proactive about protecting it, and this is where our office can help.

Whether you are already retired or just getting started with your savings, our firm can help you evaluate your assets, plan for their growth and upkeep, and ensure that they end up in the right hands if something should happen to you. The temptation to procrastinate or bury your head in the sand can be strong, but the knowledge of the consequences of inaction can be stronger. Contact our office and let us help you protect your retirement savings for yourself and your loved ones.

Facebook Founders Use GRATs to Avoid Excessive Taxation; You Can Too

News sources recently revealed that Facebook founder Mark Zuckerberg—as well as other Facebook top brass—use Grantor Retained Annuity Trusts to protect their assets and investments from excessive taxation. Grantor Retained Annuity Trusts (more commonly called GRATs) are a perfectly legal—and very efficient—way to protect and pass significant assets from one person to another without incurring an exorbitantly high tax bill.

According to the article cited above, “GRATs offer a perfect vehicle for wealthy investors who put money in start-ups, while other trusts don’t.” But we don’t recommend GRATs only to wealthy startup investors. GRATs are “an excellent way to shift wealth to others at little or no tax cost and with minimal legal and economic risk.” As such, they can be the perfect tool for business owners, professional investors, and many others.

Setting up a GRAT allows the investor/grantor to give assets over to the trust for a pre-determined number of years. During this time the assets appreciate and the grantor receives “annual payments adding up to the asset’s original value plus a return based on a fixed interest rate determined by the Internal Revenue Service.” At the end of the trust term the assets (at their new value) are transferred to the beneficiary named in the trust with none of the usual gift or estate tax on the appreciation.

This makes GRATs sound like the perfect (and perfectly simple) tool, but nothing is perfectly simple. The pre-determined lifetime of your GRAT will depend on your individual circumstances, as well as the tax laws at the time, so you’ll want to make sure you have the help of an experienced and knowledgeable attorney helping you design your trust. Contact our office for more information.

Republican Primary Inspires Discussion of Trusts

If you follow current events at all it is impossible to ignore the fact that we are now in the thick of the Republican primary race—and that the Presidential election will not be far behind. With the political machine in full swing there have been quite a few news stories about the candidates’ financial backgrounds, and more than a little talk of “blind trusts.”

Many of our readers will already know that a blind trust is a vehicle which holds the wealth of a candidate (or a politician serving in office) in an effort to avoid any conflicts of interest. We thought this might be a good opportunity, however, to discuss trusts in general: Which trusts are out there, what are the differences between them, and what purposes do they serve?

Revocable Trust: A revocable trust is one of the most commonly used trusts because it is able to be revoked or changed so long as the grantor (the person who created the trust) is still living. There are many other trusts that fall under the category of “revocable trust”, including a pet trust (which addresses the physical and financial care of your pets), an education trust (which provides for your child’s educational expenses), and many more.

Irrevocable Trust: An irrevocable trust, logically, is one which cannot be revoked or changed after it has been signed. The irrevocability is what makes these trusts useful for tax planning and asset protection. Some types of trusts which fall under the category of “irrevocable trust” include life insurance trusts (which save the beneficiary on the policy from paying exorbitant estate taxes), spendthrift trusts (which reduce the beneficiaries’ estate taxes and protect trust assets from creditors’ claims), and more. It is important to note that any revocable trust becomes irrevocable upon the death of the grantor.

Charitable Trust: A charitable trust is one in which at least one of the beneficiaries is a charity or non-profit. These trusts allow the grantor to claim a portion of their contribution as a charitable deduction under income tax laws. A charitable trust can be either revocable or irrevocable to begin with, but if distributions will be made during the grantor’s lifetime the trust must be irrevocable.

Special Needs Trust: Sometimes also called a “Supplemental Needs Trust”, is a trust created for the benefit of a person receiving government benefits—this usually includes someone with a physical or mental handicap—and its purpose is to allow outside sources to provide the beneficiary with supplemental funds without endangering their right to receive government benefits. A special needs trust can be either revocable or irrevocable, but usually includes a clause instructing that the trust be dissolved if its existence disqualifies the beneficiary for government benefits.

We have only discussed some of the most commonly used trusts here, but there are many, many different kinds of trust which can be valuable for estate planning or asset protection. If you have any questions about trusts or estate planning, please contact our office.