Category Archives: Uncategorized

Back to the Basics

back-to-basicsSchool has just started up again for many students, from grammar school to university. Everyone has had the summer to goof off, and now it’s time to get up to speed. At my office, I have recently met with a number of clients who are finally getting around to their estate planning, a task long-postponed for some. They all have questions for me, ranging from broad questions about how it all works to more sophisticated questions about tax planning; so mid-August seems like the perfect time to reflect on a few basic concepts in estate planning.

What is the difference between a will and a trust? A will is a document that becomes effective at the death of the person who created it, a/k/a the “testator”. To pass property via a will, it is generally necessary to lodge the will with the court in the jurisdiction where the testator lived at the time of death, and to petition the court to admit the will to probate. A probate takes time and costs money. It also has a public character to it, in the sense that the will can be accessed by the public and your nearest family members will receive a copy of it even if they are not beneficiaries under it.

A trust can be created during life and you can place your assets in the trust and administer them as trustee. Upon your death, or upon your becoming incapacitated, the person whom you name as successor trustee can take over the administration of the trust. At your death the successor trustee will administer and distribute the assets according to the provisions of your trust, without need of court supervision. If done properly, a trust will avoid a probate at your death, and also provides a level of disability planning that could avoid a guardianship. This saves money, and also keeps your estate planning out of the public eye.

Why do I need a will if I have a trust? If you have a trust, your assets will pass from the trust to your beneficiaries after your death. However, that only works for the assets that are actually in the trust. Any assets that were not placed in the trust, or were taken out of the trust, will need to be put into the trust after your death. If you have created a trust, you should also have a “pour over” will, meaning a will that leaves all your assets to your trust. If you do not have a pour over will, any assets not placed in your trust will pass according to intestate succession (unless such assets are held in a manner that controls their disposition at your death, such as a beneficiary designation account or a joint tenancy).

I have a trust in place but I want to make a few changes. Does it need to be completely redone or can it just be amended? It depends. If all you want to do is change a beneficiary or a successor trustee, it may make sense to do a simple amendment. If you need extensive changes, or if your trust is simply out of date with the law because of when it was prepared, it may be better to amend and restate it. This means a new trust agreement is prepared, which amends in its entirety the trust agreement you originally had. Sometimes it is less expensive to do this than to prepare a series of amendments.

Where can I get a power of attorney? Powers of attorney for financial matters and for health care are part of an estate planning package. You can also obtain forms on line. In Nevada, as in many states, the probate code provides a form for each of these documents. However, you should be aware that the forms are not necessarily easy to understand and they require you to make certain choices that are best understood if a lawyer explains them to you.

If you do not have estate planning in place or wish to have your existing plan reviewed, contact a qualified estate planning attorney today. Having a good plan in place will give you a sense of peace, knowing you will be taken care of in the manner you wish if you become disabled, and your loved ones or your favorite charities will be provided for at your death.

Gift Taxes in a Nutshell

Title Deed with keysWhen does my generosity, or my desire to give gifts during my life, trigger the application of federal tax laws regarding gift taxes? Consider the following scenarios:

  • Declan wants his daughter Fiona to receive his residence at his death. He and his late wife purchased the property for $30,000 in the early 1950s. He signs and records a deed in 2015 that conveys the property to himself and Fiona as joint tenants. As of the date of the conveyance, the property is worth $300,000. He continues to reside there and to pay all property taxes, insurance and maintenance.
  • Teresa opens a bank account in 2014 and transfers $500,000 to the account. She names herself and her son Juan as joint tenants with right of survivorship at the time she opens the account. Under the account terms, both Teresa and Juan have the right to withdraw the entire amount of the bank account at any time. Juan does not withdraw any funds from the account the first year. He withdraws $40,000 in 2015 to pay his college tuition.

Has Declan or Teresa made a taxable gift? If so, when was the gift made and for how much? Could either of them have achieved the same result but avoided the gift tax rules?

The gift tax is a tax imposed on certain gifts made during life. Not every gift is taxable. The IRS allows a generous annual exemption, currently $14,000, per donee. This means you may give up to $14,000 each year to an unlimited number of recipients without having to file a gift tax return. (The amount was established at $10,000 and is increased periodically for inflation; it has been $14,000 since 2013). Also, you may give unlimited gifts to your spouse (if a U.S. citizen) or to §501(c)(3) charities without incurring a tax. You may also pay tuition for education and medical bills on another’s behalf without tax consequence if you pay such amounts directly to the educational institution or health care provider.

Even if you make gifts that are taxable, Congress has provided for a unified credit that allows you to make otherwise taxable gifts throughout life and at death up to a sum total of $5,450,000 (for those who die in 2016) without paying a gift or estate tax. The credit is “unified” in the sense that it is applied both to gifts made during your life time and to gifts made at death from your trust or estate, up to the maximum credit. Each year the unified credit is adjusted upward for inflation. Gifts made above that amount are taxed at a whopping 40%.

Returning to our examples, the fact is that both Declan and Teresa have made taxable gifts that require a gift tax return to be prepared and filed with the IRS; and both could have avoided this result with some good legal advice and planning.

Declan has made a taxable gift of one half the value of the real property, or $150,000, to Fiona. He can count the first $14,000 toward the annual exclusion, but he still must file a gift tax return for the remaining $136,000. Even worse, since the transfer was made during his life time, if and when Fiona sells the house after his death she will have to pay a capital gains tax on the increase in value from the $30,000 purchase price. Had Declan conveyed the property to her at his death, she would have received a step up in basis, meaning the base price for considering a capital gains tax would have been the value at his date of death, rather than the value of the original purchase in the 1950s. This would have been a huge tax savings to Fiona. It would also have eliminated the requirement of the gift tax return.

Teresa makes a gift of $40,000 to Juan in 2015 when he withdraws that amount from the account. She must file a gift tax return for the gift, after offsetting the amount of the annual exclusion. The joint bank account is treated differently than a joint tenancy in real property; until and unless Juan withdraws money from the account over and above any contribution he may have made to the account, there is no gift because Teresa can still withdraw the whole amount. Here, Teresa could have paid Juan’s school directly for the tuition without any gift tax consequence.

Note that for both Declan and Teresa, assuming no previous gifts have been made, no actual tax is due because the unified credit will cover these relatively modest amounts; but the hassle and cost of preparing the gift tax return could have been avoided. Moreover, if either has an estate that will exceed the unified credit at the time of death, these gifts will have negative consequences for their estates.

If you are thinking of making a large gift, it is well worth consulting with your accountant or estate planning lawyer to ensure you take advantage of the gift and estate tax rules to minimize or eliminate your tax liability.

Bleak House

Bleak House Jarndyce“There are two motives for reading a book; one, that you enjoy it; the other, that you can boast about it.” -Bertrand Russell

As both a lover of great literature and a probate lawyer, I put Bleak House by Charles Dickens on my “to read” list years ago. My father had mentioned it to me several times, noting with amusement that the estate lawsuit at the heart of the novel didn’t end until the money ran out. At 989 pages, it’s not what you’d call a weekend read, but I finally hunkered down and plowed through it. While it is anything but a positive reflection on lawyers and the legal system of nineteenth century England, it is wicked funny and a great read. (Plus, I can boast about it.) G.K. Chesterton is quoted on the back cover as saying it was “Perhaps his best novel…when Dickens wrote Bleak House he had grown up.”

The novel opens on the fog that engulfs the Chancery Court in London where probate cases were adjudicated. The case of Jarndyce and Jarndyce has been in probate for generations; people literally are born into the suit and die before it is resolved. Dickens is pretty vague about the particulars of the case. One character tells us, “‘Why, yes, it was about a Will when it was about anything. A certain Jarndyce, in an evil hour, made a great fortune, and made a great Will. In the question how the trusts under that Will are to be administered, the fortune left by the Will is squandered away; the legatees under the Will are reduced to such a miserable condition that they would be sufficiently punished, if they had committed an enormous crime in having money left them; and the Will itself is made a dead letter.”

Many of the novel’s characters are beneficiaries under the will and spend their lives waiting for the lawsuit to be resolved. One unfortunate young man, Richard, drives himself to an early grave in his obsession to see the suit completed. Miss Flyte, another beneficiary, keeps a series of birds locked up in a cage, intending to let them free when she is free of the lawsuit and receives her inheritance.

Dickens is merciless about the purpose of all the delay: “The one great principle of the English law is, to make business for itself. There is no other principle distinctly, certainly, and consistently maintained through all its narrow turnings. Viewed by this light it becomes a coherent scheme, and not the monstrous maze the laity are apt to think it. Let them but once clearly perceive that its grand principle is to make business for itself at their expense, and surely they will cease to grumble.” Thus, as one character dryly remarks, “Equity sends questions to Law, Law sends questions back to Equity; Law finds it can’t do this, Equity finds it can’t do that; neither can so much as say it can’t do anything, without this solicitor instructing and this counsel appearing for A, and that solicitor instructing and that counsel appearing for B; and so on through the whole alphabet, like the history of the Apple Pie.”

Let’s just say it will not endear you to lawyers or the legal system; but mercifully, the 21st century American probate court little resembles its 19th century English counterpart. Our system is geared toward the timely resolution of disputes; and to the extent it fails, I have found that it is generally because angry litigants—not courts—want to use the legal system to wage Pyrrhic battles.

While the lawsuit in Bleak House forms the backdrop of the case, and gives Dickens the opportunity to train his savage wit on the English legal system, the heart of the story is not really about the lawsuit itself. Bleak House offers a wonderful panorama of characters and richly interwoven plots and subplots. It is partly narrated by Esther Summerson, one of the main characters, an orphan whose family origins are shrouded in mystery. It features unforgettable characters such as Lady Dedlock, the proud and aristocratic wife of Sir Leister Dedlock, who harbors a painful secret; Mr. Tulkinghorn, Sir Leister’s scheming lawyer who spends much of the novel hot on the tracks of Lady Dedlock’s secret, and whose death late in the narrative briefly turns the novel into a murder mystery; and Mr. Skimpole, the financially improvident rascal who remorselessly sponges off others while feigning a child-like innocence about the ways of the world.

Bleak House is well worth putting on your bucket list. And if you don’t want to invest the time reading it, I am informed that it was turned into a brilliant mini-series by BBC, though I have not seen it—yet. I’m putting it on my “to watch” list.

Careful with Deathbed Planning

As death looms, people become much more focused on arranging their affairs.  Even those with few assets will develop a laser-like focus on leaving a suitable legacy.  There are pitfalls to death-bed estate plans or revisions to existing plans.  In a perfect world, an estate plan is constructed carefully after much thought and revisions are made regularly.  However, lawyers and financial advisors are often solicited to make changes when a client fears an imminent demise.

Image

Recently, I helped clients update their revocable living trust after the wife was diagnosed with terminal cancer.  They created their trust 20 years ago and had not made any updates since that time.  In the intervening years, one of their five children had passed away and numerous grandchildren had been born.  The prior version of their trust provided that if one of their children predeceased them, the surviving children would receive the estate equally.  The clients instead wanted the trust share that would have passed to the deceased child to be held in trust for the deceased child’s children or the clients’ grandchildren.  If nothing had been done, the clients would have disinherited their grandchildren.

When making near-death amendments or creating new estate plans, advisors and clients must consider the income tax ramifications. A common mistake is to transfer a home or real property to children or grandchildren prior to death.  Such a transfer results in loss of the step-up in basis of the property to the date-of-death fair market value.  The child or grandchild receiving the property steps into the shoes of the transferring parent or grandparent and takes the transferor’s basis in the property.  Usually, the basis is much lower than the present day fair market value.  When the child or grandchild sells the property, he or she will incur a much higher capital gains tax than necessary.

Finally, to avoid a contest, a medical or mental competency examination can assure that the client is competent to make the change.  These exams can be administered by the client’s regular physician.  By using their normal physician, the client will feel more at ease and the physician will already have a history with the client and be able to differentiate whether the client lacks capacity.

Death-bed planning can be done effectively but there are numerous considerations and precautions to follow.

Talking to Heirs About Their Inheritance

Image

Do your heirs know how much they stand to inherit from you?  Have you ever received an unexpected inheritance?  Many clients debate how they should notify their heirs of the amount and extent of the expected inheritance.  On April 22, 2013, the Wall Street Journal published an aptly-titled article “The Inheritance Conversation. Ugh.”  Many fear the inheritance topic and avoid the subject just as they avoid adequate estate planning.  However, there are practical steps you can take to assure that your heirs are prepared for the receipt of assets and property.

Most recognize the importance of preparing and disclosing information about inheritance to their heirs, yet few take the time properly prepare their heirs.  Children should not receive much financial information until they reach their 20s.  While certain teenagers may be precocious and able to comprehend the value of a dollar, clients must be cautious to avoid undermining their work ethic. Simply telling children how much they stand to inherit can weaken the determination of even the most capable individuals.

Importantly, children of wealthy parents will not learn financial management by osmosis.  Parents must take an active role in educating and informing their children about financial planning and management.  Several advisors recommend a mentorship whereby the heirs are given an opportunity to manage a smaller portion of the assets.  As the heirs gain in knowledge and ability the children or others can be given more knowledge of the family’s wealth.

One crucial element is requiring heirs to secure and maintain jobs.  With their earnings, the heirs can be instructed on the importance of saving and sharing their assets. Most successful wealth transfers occur where children have learned the value of work and wages earned.

I continually remind clients that their best laid plans can be undone by unexpected health concerns or other financial catastrophes (see the most recent recession).  For those who have a revocable living trust, I urge them to remind their children that the children’s shares are not fixed and can be altered.  No one should expect or rely upon a set amount of money or assets passing to them.

Simply start with a basic conversation with family members and other heirs.  Avoiding this topic can cause confusion, mistrust and leave heirs unprepared to manage the family’s wealth.  For those who need assistance in this process, our office is experienced in wealth transfer planning.