Scenario #1

Jason’s mom has to go for hip replacement surgery. She is in extreme pain and the surgery is the only thing that might help. She is 85 years old and has had heart problems for years. She knows that she has executed a Health Care Proxy Directive, but has no idea where it is. She tries to remember and through the pain and somewhat of a fog due to the painkillers she’s self-administering (and not clearly remembering when she took the last one), she and Jason search for the document. It gets to be time to go to the hospital and they still have not found the document. Jason’s mom undergoes the surgery without a Health Care Proxy Directive in her chart.

Scenario #2

Jane’s dad has cancer. He had surgery and is undergoing chemotherapy. He gives Jane a legal document naming her the Successor Trustee to his Revocable Living Trust (he is currently the Trustee) and provides instructions for how she is to administer the funds in the trust to take care the family. Jane takes the opportunity to request that she no longer be one of his Health Care Proxies. Her feelings about removing someone from life support have changed and she feels that she will have difficulty following his wishes in that regard. They agree her father’s best friend would be a better choice.

Would you rather be Jason or Jane?

Both are facing the mortality of a parent. Jason has undergone a fruitless, frustrating search for his mother’s documents while noticing that she’s a little “out of it” due to the extreme pain and her self-medicating. While he waits, he is faced by the uncertainty of what happens if there are complications during the surgery due to his mother’s heart condition.

On the other hand, Jane feels her father’s love in his actions of showing how he wants her to take care of the family as successor trustee. She also expresses her love for her father and her family by sharing that she does not feel that she will be comfortable fulfilling his wishes as his Health Care Proxy.

What can else can we take away from these scenarios?

1. Know where your documents are kept and tell close family members so that they can be found when needed. Ask close family members where their documents are kept. If Jason had been told earlier where the “Important Papers” were kept, his mother would not have had to try to remember through the pain and medications. While your Will should be secure, such as in a fire safe, your other documents need only be in safe place. Too often a stack of “important papers” in an envelope from a lawyer’s office gets put in a “decide later” pile. To help our clients with this, we put their documents in a binder that can be kept on a bookshelf.
2. NOW is the time – later can be too late. In the case of an accident or sudden illness, there is no time for remembering, searching, or informing your loved ones of the location of your documents. Without a plan, each family member’s understanding of your wishes can be fertile ground for arguments. We help our clients develop a documented plan that helps avoid and prevent family arguments, leaving a legacy of peace to their family.
3. Planning is a gift of love and an opportunity to define what you want to leave behind. Planning shows that you care what happens with your family. But in addition to taking care of your assets and guardian choices, your loved ones will most likely want to remember who you were and your special qualities. We help our clients preserve their personal stories, values and family traditions so that your loved ones have something tangible to remember the most important aspects of your life.

If you’d like to learn more about Health Care Proxy Directives and estate planning, call our office today to schedule a time for us to sit down and talk. Call today and mention this article.

Do you know if your family would have to pay an estate tax on your assets if you died today? If you’re like most people, you’re probably worth more dead than alive. It’s not uncommon for average, middle class families to be worth over $1 million at death by virtue of term or permanent life insurance that is counted in the taxable estate.

If that describes you, you must keep your eye on the estate tax changes expected at the end of this year. That’s because in 2011, Congress did something it’s never done before—it raised the ceiling on the estate tax exemption to $5 million—for two years only. At the end of that two-year term, the estate tax exemption amount is scheduled to drop to $1 million.

Because many families could be affected by a reduction in the exemption amount—and in an election year, that would be a very unpopular move—most professionals believe Congress will act to reduce the estate tax exemption, but not necessarily to the $1 million it will automatically become if Congress doesn’t act.

No one really knows what Congress will do with the estate tax. There are a number of bills under consideration of varying impact on families. What we do know, though, is that the estate tax exemption amount will likely be reduced so that this period of very expansive gifting of estate assets will end.

And that’s bad because gifting is a very powerful tool in reducing the amount of taxes families pay when a loved one dies—sometimes saving valuable family assets such as farms, ranches, and businesses from being lost to the biggest creditor in the world—the IRS.

Estate planners and financial advisors have long known how to make gifts out of your estate of appreciating assets so they don’t count in your taxable estate. But under this unique $5 million exemption, people can gift out of their estates very large assets that are growing or will grow. Once an asset is out of a taxable estate, it can continue to grow and benefit loved ones and charities estate tax-free.

For instance, imagine (yes, it’s hard but do) that you have $6 million in cash. If you died right now, your family would pay tax on $1 million at a flat rate of 35% for a total death tax of $350,000. If you do nothing and the estate tax exemption falls to the scheduled amount of $1 million at an effective rate of 55%, your family will pay $2.75 million in estate taxes.

Now, imagine that you have a conversation with a Personal Family Lawyer who recommends that you gift some of your cash into a trust that purchases a life insurance policy on you, a parent, or a grandparent. That policy is owned by the trust and at death the policy pays into the trust—at a rate of two to ten times the size of the original gift. TAX-FREE. Zero tax. Yes, not one penny to Uncle Sam. In fact, that would leave your family with enough to give generously to charities and foundations that you love as well as provide additional resources for your loved ones.

That’s a MASSIVE tax-free gift, isn’t it?

Now, even if you don’t have $5 million, you may have assets that will grow enough that it makes sense to gift them out of your estate while the exemption amount is so high. Even moderate gifts can become extremely valuable inside a tax-free vehicle.

But you won’t know unless you talk to a professional who can guide you and help you formulate a strategy to take advantage of this window—a window that’s getting narrower by the day. To help you get the insight and planning you need to help you take advantage of this perfect tax storm, please come and see us now, because planning can take time and there are only six and a half months left before the window is scheduled to close.

“Not the end, but a new beginning.”

In the next two months, those words will ring out in high school graduation ceremonies all across the country. And if you have a high school senior in your home, then chances are that things are about to change dramatically, both for you and your high school senior.

There are a few things that you need to take care of before sending your senior off to college. In essence, you need to really prepare your student for college. While your college-bound student should be emotional and mentally prepared for the challenge of higher education, there is no way to know how they are going to adapt to a new environment, especially if your student is moving far away for school.

Set Them Up for Success

The most important thing you can do is to be involved in the process of enrolling. That means going to orientation with your son or daughter. It means figuring out which courses are required in the first year, and it means helping your student get registered. You don’t have to do it for them, but be there to support the process and help problem-solve.

It’s also smart to take a self-guided campus tour. Have your son or daughter lead the way, just so they feel comfortable navigating in unfamiliar surroundings.

If you haven’t already done so, set your son or daughter up with his or her own bank account. Teach them to account for expenses in a checkbook ledger, and teach them to develop and actually use a budget.

Depending on maturity, this might also be a good time to consider a “starter” credit card with a very low limit. Certain banks, many of which will likely be marketing to students on campus, will offer low-limit cards. Such cards should be used to establish a credit file, not to indulge in rampant consumerism. Judge your student’s maturity level and ability to grasp that concept and make a good decision.

Transferring Other Responsibility

College is a good time to teach your student about taking responsibility for things other than just money and registering for classes. It’s a good opportunity for you to have a serious discussion about the responsibility that accompanies adulthood.

Things you can discuss include health care proxies and living wills. Of course you’ll want to be designated as a decision-maker, but by having these conversations, you can begin to impart a sense of what it means to function in society as a responsible adult and what it means to take responsibility for oneself. There is nothing wrong with creating good legal documents for your college-bound student. In fact, it’s a good idea and it can give you a sense of security in knowing that certain details have been handled.

It’s really never too early to have these conversations. Unfortunately, it’s often too late. While it might seem morbid to have such discussions when a “New Beginning” is at hand, the truth is that these issues need to be addressed. The very beginning is really the best time to plan for any possible eventualities.

We’ll Help You Launch

We can craft custom documents for you and for your college-bound student. To that end, we want to have a very serious conversation with you about your estate and legacy planning. Call our office today to schedule a Family Wealth Planning Session™. Use this opportunity to learn for yourself so that you can be a good role model for your future college student.

]]> http://www.criderlaw.net/not-the-end-but-a-new-beginning/feed 0 http://www.criderlaw.net/not-too-late-to-let-someone-know http://www.criderlaw.net/not-too-late-to-let-someone-know#comments Tue, 24 Apr 2012 00:43:38 +0000 Matthew Crider http://www.criderlaw.net/?p=1226 Download PDF of this article here: Not Too Late To Let Someone Know

April 16th was National Healthcare Decisions Day. The point of this day of awareness is to encourage adults to share their private wishes about medical care and end-of-life decisions. Way too many adults harbor the mistaken belief that their loved ones would “just know” what would be desired in an emergency situation. That assumption could have adverse consequences.

The last thing your family needs in a moment of crisis is a family fight, and that’s exactly what could happen if your loved ones disagree about what you “would have wanted.” It’s a problem that is so easy to address…so easy to avoid, that it makes absolutely no sense to leave this issue to chance.

A National Case Study

Do you remember Terri Schiavo? The case in Florida that tore a family apart, drew the attention of national media, and became the topic of debate in households across America? Schiavo was 26 years young when she had a heart attack that left her in a permanent vegetative state. Schiavo’s family went to court and stayed in court for years, all over questions regarding the removal of life support and feeding tubes.

That’s right . . . YEARS in court. People take these issues very seriously, and have strongly held beliefs about these decisions. There is nothing wrong with strongly held beliefs about how you feel about life support. Just be clear about what you want, because not everyone may share your beliefs and desires (including people who may be called upon to make decisions on your behalf).

Get It On Paper

Sharing your desires simply isn’t enough. Make sure that you get your wishes down on paper and that the proper legal formalities are followed. Otherwise, your directives might not be followed despite your best intentions. Besides that, having your wishes expressed in writing will make things easier on your loved ones.

Emotions often run high when emergency situations present themselves. Your family members love you and they will think about life without you around. There might even be feelings of guilt over how certain they are about your wishes, and there might be disputes between your loved ones about what you want . . . unless your wishes are in writing

In Honor of The Holiday

Take this opportunity to share your wishes about end-of-life care and emergency medical treatments with loved ones. Think about and discuss artificial life support (e.g. feeding tubes and respirators).  Consider types of care you would never want, if any, and think about the types of side effects that would simply be unacceptable to you. Talk about options and desires for long-term care, should the need arise.

Finally, you need to decide who you trust to make important decisions on your behalf. We are here to support you as you begin thinking about these important issues. Of course, the topic of conversation isn’t exactly a walk-in-the-park, but it’s won’t be as hard as you think, either.

Get started by giving us a call and scheduling a Family Wealth Planning Session™. We will talk through all of the important decisions that need to be made, and we can help you get educated on the issues so that you can pass on the knowledge to your family and friends. Recognize that time is truly precious and you can’t afford to waste it wondering what will happen to your family (and you) if you become incapable of making your own choices.

If you are currently married with significant assets, you and your spouse have a very limited time to save a lot of money, because after that it’s very likely that Congress will change the rules now in existence and make dying much tougher on your loved ones in terms of federal estate taxes. That is, of course, unless you take this moment – right now — to do some very creative planning that will lock in what’s called spousal portability.

What is Spousal Portability?

Portability is the ability to pass one’s unused estate tax exemption to his or her spouse upon death. It works like this:

The current estate tax exemption (at least until 2013) is $5 million. That means that if you die with less than $5 million, you pay no estate taxes. Five million is a pretty high number, so this exemption is very favorable. It gets even better. Since each spouse in a marriage has a $5 million exemption, the total exemption available to the couple is $10 million. If one spouse dies and has an estate valued at only $3 million, the unused exemption ($5 million – $3 million = $2 million) “ports” to the surviving spouse. He or she can now leave an estate of up to $7 million without incurring any estate taxes.

Portability Hasn’t Always Been The Rule . . . And It Could Very Easily Go Away

The benefits of estate tax exemption portability are obvious. In short, it means that even with little or no estate tax planning, a couple can very likely get away without paying any federal estate taxes (though without planning, your heirs will have to go through a lengthy and expensive probate process). All of these benefits will likely disappear in 2013, when it looks like the estate tax exemption will be reduced to $1 million and portability could very well disappear.

That means you have two choices if you want to take advantage of current laws: Do some planning that permanently takes advantage of the current $5 million portable exemption before it disappears, or plan for you and your spouse to die before 2013 (not the best option!).

There are a number of estate planning tools that allow for married couples to take advantage of the current estate tax laws without dying, and that’s our preferred method of operation. Of course, if you’re below the threshold of $5 million (or $10 million for married couples), you still need an estate plan that will allow your loved ones to avoid lengthy and expensive probate court proceedings.

A little bit of planning can go a very long way, and there has never been a better time to put a plan in place. It could literally be the difference between being taxed on millions of dollars and letting those dollars pass to your loved ones 100% tax free.

Understanding What You Need

That’s what we do best. Our estate plans are customized to meet your needs. Whether that means setting up a complicated network of trusts to avoid taxes or a more simplified plan designed to avoid probate, we have you covered from A to Z. And we want to get to know you. We share a wonderful sense of community with our clients, and it’s our goal to help you plan today so that nobody has to worry tomorrow.

The revocable living trust is the basic building block of most estate plans. It’s the tool that allows your estate to avoid the expense, time consumption, and uncertainty of probate court, and it is the tool that can hold just about any of your assets.

While revocable living trusts are ubiquitous in the world of estate planning, it seems that many people are still confused about them, so we are going to clear up a few commonly asked questions.

What does revocable mean?
It means that you can “undo” the trust at any time. In almost all cases, it also means that you can amend or change the terms of the trust. Revocable trusts are the ultimate in terms of flexibility, so don’t worry if circumstances change down the road and you want to make adjustments to your plan. You can make any changes you want (with legal guidance, of course).

It’s a trust, so who controls it?
You do! Revocable living trusts are also known as grantor trusts. A trust is a grantor trust when the trust creator (the “grantor”) is also the trust beneficiary. In the case of revocable living trusts, grantors (often joint grantors, since married couples often form these types of trusts) retain authority over the assets as trustees. In short, that gives them full, unfettered discretion over the management of the trust.

Are assets in a revocable living trust protected from creditors?
Generally speaking, no. In the vast majority of states, spendthrift provisions—the clauses that make trust assets inaccessible to creditors—are not generally enforceable for the grantor of a grantor trust (or revocable living trust). In a few states, however, grantor trusts can gain asset protection benefits. Grantor trusts in these states are termed “domestic asset protection trusts,” and they require grantors to comply with very specific rules.

Now that assets are in the trust, what can I do with them?
That answer is simple. You can do anything you want with the assets! You are the trustee, so management of the trust is in your discretion. If you have cash in your revocable living trust, you can open brokerage accounts and trade stocks, bonds, and other financial products through your trust. You also have the option to hold your cash in regular bank accounts or in overseas accounts. In short, you have full discretion over the investment decisions inside your revocable trust.

One word of caution: If you have rental real estate, you probably need to add another layer to your estate plan. The reason is that rental real estate is sometimes classified as a “risky” asset and, therefore, needs to be insulated from the other assets inside your revocable trust.

Finally, it’s not necessary to put your retirement investments (such as 401(k) or IRA accounts) into your revocable living trust. The better course of action is to specify beneficiaries through your retirement plan administrator, which will still allow you to avoid probate.

Pull the trigger
We have a message for you if you haven’t yet created an estate plan for yourself: One day it will be too late. Right now you have the power and the opportunity to make choices that simply shouldn’t be left to your loved ones. If you are interested in meeting with an estate-planning attorney, please call our office, mention this article by name, and request an appointment.

Some people are just naturally ingenious. The attorneys who came up with the idea for creating reciprocal trusts belong in that category. First things first: What is a reciprocal trust?

Let’s look at an example. Assume that Bilbo Baggins and Frodo Baggins are cousins (I know . . . it’s a stretch). Also assume that they are both relatively wealthy. Let’s say they each have $5 million in the bank (again, a long shot for hobbits, but pretend they found a very valuable ring that they were able to sell for $10 million and that they split the proceeds).

Here’s what they could do. Bilbo could set up and fund a trust and name Frodo as the sole beneficiary entitled to income, with the principal passing to Frodo’s children after Frodo dies.

Frodo would set up an identical trust, only with Bilbo as the income beneficiary and Bilbo’s children’s as the ultimate beneficiaries of the principal.

The Benefits of the Arrangement

The main benefit to setting up trusts like this is that the money contributed to the respective trusts by Bilbo and Frodo would be excluded from their taxable estates at their respective deaths. If, however, they had each set up identical trusts for their own benefit (i.e. if they had named themselves income beneficiaries of their own trusts), then the money in the trust would be included in their estates.

You can see that this is a rather ingenious way to avoid estate taxes by creating reciprocal trusts in times when the permissible unified tax credit is high (like it is through at least the rest of this year).

A Little Too Ingenious for the Courts to Stomach

When smart people innovate to circumvent the “spirit of the law,” the courts often intervene to close loopholes. In the case of reciprocal trusts, that’s exactly what happened. Here’s the reasoning they used: Money is obviously fungible. A dollar in my hands could be swapped for a dollar in your hands with neither of us feeling any impact whatsoever. So why should two people who have that obvious realization be permitted to exempt themselves from estate taxes by taking advantage of an “I’ll scratch your back, you scratch mine” relationship?

They shouldn’t . . . or so the courts decided.

The general rule today is that if two trusts exist, the trusts will be “uncrossed” if they meet these three criteria:

• They have substantially identical terms,
• Were created at the same time, and
• Are part of the same transaction.

When trusts are uncrossed, it means that the money in the reciprocal trusts is treated as if it benefits the person from whom it came. In other words, the reciprocal nature of the trusts is undone. Now, if this happens after one of the two reciprocal trust creators dies (which is when it always happens), the results can be devastating, since there is then no opportunity to pursue effective estate tax strategies.

The bottom line is that you don’t want to pursue a strategy that has even a remote chance of not working, since the repercussions are irreversible once you’re deceased. That’s why you need an experienced, professional estate planning attorney in your corner.

A QTIP trust, or Qualified Terminable Interest Property trust, is a special type of A/B trust. Have I lost you yet?

Not to worry… keep reading!

Let’s start at the beginning. An A/B trust is a marital trust system comprised of two trusts, an A trust and a B trust. The A trust is typically referred to as the marital trust, though sometimes it is a QTIP trust (just keep that in mind for now). The B trust is the trust that benefits the broader family.

Here is how it works:
1. A married couple adds the appropriate language to create A/B trusts to their wills or revocable living trusts.

2. Assets are divided so that they are owned in relatively even proportions between the spouses. The entire A/B plan falls apart if assets are owned jointly, since then the assets pass directly to surviving spouses without the tax benefits of the A/B system.

3. When one spouse dies, the entire tax-free portion of his or her estate is transferred to the B trust. This trust can be for the benefit of the surviving spouse, children, grandchildren, and just about anyone else. It is very flexible.

4. The taxable portion of the deceased spouse’s estate is transferred into the A trust. This is a very strict trust that must benefit only the surviving spouse and no one else. By doing this, the law provides that taxes are deferred on the taxable portion until the surviving spouse passes away. When the surviving spouse dies, if his or estate is taxable—if it is greater than the available exemption—then the excess will be taxed at the applicable rate.

Where the QTIP Comes Into Play

The QTIP comes into play at step 4 above. One can elect to make the A trust a QTIP trust.

Why would you want to do this?

Spouses can give unlimited gifts to one another tax-free, but the law is very strictly construed. It MUST be a gift only between spouses. The QTIP election is an exception to that rule. It allows for the creation of a trust that benefits only the surviving spouse during his or her life but then passes on to other beneficiaries like children or grandchildren.

So when might a QTIP election be wise? Well, how about in a blended family situation where both spouses have children from previous marriages? You want to make sure that your spouse is cared for after you die, but then you want the remaining interest in the trust to go to your children (or to whomever else you want) rather than just to your stepchildren.

QTIP elections are the primary reason for using A/B trusts at all, at least until 2013 when the estate tax laws are likely to change and the portability of the estate tax exemption could very well go away.

Let us guide you

This is all very complicated stuff. There’s no way to explain it all in the course of one short article, but then again . . . we don’t need to, because we are here to meet with you in person, and we would very much like an opportunity to do that. Please call our offices and mention this article when scheduling an appointment.

There are some pretty basic reasons to carry life insurance. One of the top reasons we hear is that clients simply want to make sure that their loved ones will be cared for if the client dies other than “as planned.”

That’s certainly fair enough. We all want to make sure that our spouses and children have their financial needs met. With respect to children, they will have financial needs until they are out of college and on their own career paths. Spouses have a range of needs, depending on whether or not they work and whether or not they are the primary breadwinners in the family.

 
It Should Change At Retirement

In theory, the need for life insurance diminishes and should, in theory, disappear at retirement. The reason is that by the time you retire, your children should have their own careers, and you and your spouse should have enough money to live the rest of your lives in relative comfort. So the need for life insurance certainly diminishes over time (even though premiums often increase later in life).

The fact that the need for insurance diminishes over time does absolutely nothing to negate the fact that you likely need life insurance right now. So what is the point that we’re trying to make?

Ownership of your life insurance policy matters … tremendously.

What we’ve been talking about is insurance on your life. The question, however, is who should own the insurance policy on your life?

Well, who do you trust not to kill you for … wait, that’s not where we’re going with this.

Ownership of your life insurance policy matters because if you own the policy yourself, proceeds from the insurance will be included in your estate when you die. Yes, this is true even if you’ve designated a beneficiary other than your estate.

So in reality, something bought out of love (life insurance) can create a huge potential liability for your heirs, since tax rates on estates are some of the highest around.

And That Could Make Your Estate Taxable

On occasion, life insurance policies are large enough to move an estate from non-taxable status to taxable status. That’s simply a waste of your family’s money, because some very simple planning can solve the tax problem completely.

There are two simple ways to remove life insurance proceeds from your estate:

1. Totally relinquish control and ownership of the policy, or
2. Create a life insurance trust to hold the policy

In reality, these two solutions are really the same thing. They involve you giving up the rights associated with ownership of insurance policies on your life. The result is that the proceeds from insurance will not be included in your estate, and as a result, they will not be taxable in any manner whatsoever.

Setting up a Life Insurance Trust

It’s not difficult for you to set up life insurance trusts – simply call us. If you have questions regarding whether or not your existing policies will move your estate into the taxable bracket and you’d like to do something about it, contact our offices.