Stapleton Elder Law

Phases of Estate Planning, From Saving to Preservation

While the process starts early, with saving and building wealth, the long game requires protecting that wealth during retirement, which could be many decades long.

It’s hard to imagine during your 30s or 40s that retirement will actually arrive. Life is busy, with careers, raising families and saving for retirement, including investing in IRAs, 401(k)s and other savings vehicles. During those years, your estate plan is a necessary part of planning for retirement and protecting your family with documents that include a will, health care proxy and power of attorney.

As Marco Eagle’s article, “Money Talks: Estate planning tools” explains, the next phase is the retirement stage, when the focus shifts from accumulation to preservation and maintenance of the nest egg.

Growth is a component of any retirement plan, but protecting your purchasing power during retirement is critical. You also want to generate a predictable stream of income during retirement, in order to avoid compromising your lifestyle.

The final stage of successful retirement planning is often overlooked: that’s the estate planning phase or the strategy of a succession plan to pass assets to your family. There are many estate planning tools that can be used to execute an estate plan. You can create a personal trust. Under this arrangement, your assets are transferred into a trust during your lifetime and then transferred by the trust at death. It’s important from both a tax standpoint and an allocation standpoint, regarding who receives what and how much. This is what your estate plan does for you and your family.

Work with an experienced estate and trusts attorney to establish your estate plan, so you can achieve your final objectives when passing assets to the next generation. Some individuals like the ability to exercise control with an effective plan to pass assets to their beneficiaries, without the need for trusts or probate.

There are many types of insured annuity strategies that will pass assets immediately to the beneficiaries, without the need of probate. Avoiding probate is frequently part of a strategy to make the assets available, immediately after the death certificate is issued.

Many people incorporate life insurance as part of their estate plan in an effort to provide an asset for beneficiaries that is, for the most part, tax free. While it’s always good to avoid taxable events upon death for your heirs, this is one of many tools to be incorporated into your estate plan. An estate planning attorney will be able to provide you with guidance that is best suited for your family.

Reference: Marco Eagle (June 11, 2017) “Money Talks: Estate planning tools”

To learn more about estate planning strategies that meet your goals, please visit our website.

States Cutting Estate Taxes to Attract Affluent Residents

It is hard to believe that as many as nine states have eliminated or lowered estate taxes in the past three years. More states are joining the estate tax revolution.

Minnesota and Maryland are increasing their estate tax exemption, trying to make their states more attractive to wealthy residents. Maryland will increase a $3 million exemption to $4 million in 2018, and Minnesota upped its exemption to $2.1 million, retroactive to January. Not to be left out, New Jersey increased its per person exemption to $2 million this past January.

If that wasn’t enough, according to, Fox Business’s article, “Why More States Are Killing Death Taxes,” the Garden State plans to totally eliminate its estate tax, making New Jersey one of about six others that have ended their estate taxes in the last ten years.

The tax-cutting trend stems from an intense competition between the states for affluent and wealthy taxpayers. Residents owe income taxes every year. However, there are those who are willing to move out-of-state to avoid death taxes. In addition, with the federal estate and gift tax exemption increasing to more than $5 million, states with death taxes really stick out.

There are two holdouts, Massachusetts and Oregon. These two are the only states with estate-tax exemptions of $1 million or lower, compared to nine in 2009. The tax in both states will increase annually because neither adjusts for inflation. Some Massachusetts lawmakers are concerned about losing residents to other states because of its estate tax, a $400 million revenue generator last year. Massachusetts is looking at upping the exemption to half the federal level and maybe excluding the value of a residence.

It’s a different story in Oregon where efforts to raise the exemption have met with resistance in the legislature. The estate-tax revenue of $200 million for the two-year cycle ending June 30 is 50% higher than forecast, which has been helped by strong housing and financial markets. Nevertheless, few people are expected to leave Oregon to avoid its estate tax.

In another six states, it’s the inheritance tax that is creating pressure on the government. An inheritance tax is payable by the person who inherits assets, not the estate of the person who died. Inheritance tax rates and exemptions often vary, according to the heir's relation to the decedent. For instance, in Nebraska, there’s no tax on assets left to a spouse, a top rate of 1% on assets passed to lineal relatives or siblings and a top rate of 18% on assets left to non-relatives.

As for New Jersey and Maryland, here are some further details: while both states have trimmed their estate tax, they have not yet modified their inheritance taxes. At least Maryland has large exemptions to its inheritance taxes. New Jersey’s estate tax actually exempts lineal descendants.

Reference: Fox Business (June 16, 2017) “Why More States Are Killing Death Taxes”

Please visit our website to learn more about estate taxes and tax planning. 

Equal Distributions May Put Support at Risk for Special Needs Children

Your first instinct as a parent may be to divide assets equally among children in your will. However, if your family includes a special needs child, that decision could have a negative impact on your child’s future.

Parents do their best to let their offspring know that they are loved, each in their own unique way. When the family includes a special needs child, their needs are different. However, they are not loved any less than their siblings. The same holds true for estate planning for a special needs family. According to Tickertape, “Estate Planning for Special Needs Children: Trying to Be Even-Steven?”, estate distributions with a special needs child typically need to be different than distributions to their siblings. It’s not about fairness, it’s about good planning.

Children with special needs are typically eligible for state and federal benefits that provide them with assistance for their long-term support. Among the most common are Supplemental Security Income (SSI) and Medicaid. In many states, SSI may qualify children for Medicaid, or Medicaid comes automatically with SSI. These are need-based benefits that are means-tested. SSI recipients have a strict assets threshold of $2,000 for an individual. If a special needs child gets an inheritance, it might push him or her, above that ceiling. This could result in ineligibility for the program benefits that might be used to cover medical, therapeutic, or housing needs.

When money is paid directly to the child as beneficiary, it can cut SSI benefits. The same is true, if the special-needs heir disclaims the inheritance.

Government benefits may be retained, if an inheritance is set up in a Special Needs Trust (SNT), which is designed to help a beneficiary with special needs and preserve government aid while protecting assets. The trust allocates inheritance assets to the child with special needs, but it’s via a third-party.

However, there might be tax implications. While the inheritance itself isn’t taxed, the income that it generates in a special trust is typically taxable at trust tax levels. Creating an SNT can be complicated, and the rules can vary from state to state. Speak to a qualified trust attorney to be sure that all income is reported properly and there are no deductions left on the table.

Be certain to consider the net tax implications and eligibility requirements of any government programs, when you create an estate plan. Talk with your children about your plan and the decisions you are making with regard to the future care for your special needs child. This will help everyone in the family be better prepared and ready to work together to maintain the integrity of the family, which is part of your legacy.

Reference: Tickertape (June 14, 2017) “Estate Planning for Special Needs Children: Trying to Be Even-Steven?”

To learn more about special needs trusts, please visit our website.

 

Power of Attorney and Anticipated Inheritance from a Relative Who Lives in Another State

If someone has designated you as their agent with a Power of Attorney, it’s important to understand what this legal document does and does not empower you to do.

A Power of Attorney (POA) gives you the legal right to manage a person’s financial affairs while they are alive, according to an article on NJ.com, “Inheriting money from out-of-state relative.” What most people don’t realize is that the POA is only in effect, while the person who named you their agent is living.

When the person dies and you are the beneficiary, you’ll need to know what your tax liability may be.

There are two distinct types of taxes that may be imposed by a state where the person is a resident at the time of their death. An estate tax may be required to be paid on the estate of an individual before the property is transferred to the beneficiary. There is also the inheritance tax. This tax is imposed on certain individuals who inherit property from an estate. Whether a state estate tax or inheritance tax must be paid, is dependent on the laws of the state where the person was a resident at the time of death, not the state where the beneficiary lives.

The estate of a person who is a resident of New York and dies between April 1, 2017 and Dec. 31, 2018 is subject to a New York estate tax, only if the value of the estate exceeds $5.25 million. On January 1, 2019, the New York estate tax exemption will equal the federal estate tax exemption. It is anticipated to be about $5.9 million.

In some states, the relationship between the testator and the heirs may make them subject to an inheritance tax.

If the relative, for example, owns real property in New Jersey, there’s an inheritance tax of 15% imposed by the state on the value of that real property. When a person inherits the estate assets, there would be a step-up in basis for any appreciated assets. This means that there shouldn’t be any capital gains tax on those assets, if they’re disposed of for the date of death values.

An estate planning attorney will be able to help you work through the tax consequences and the practical steps that need to be taken, when inheriting assets from a family member who lives in a different state.

Reference: NJ.com (June 6, 2017) “Inheriting money from out-of-state relative”

Please visit our website to learn more about the steps to take and options when receiving an inheritance.

Daughter of Chicago Radio Legend Hoping Fans Will Help Her Estate Battle

Herb Kent’s daughter Robbin and grandchild were completely left out of his will, which she says was the result of improper influence by his girlfriend. This won’t be an easy will to contest.

Legendary Chicago radio personality Herb Kent’s daughter used to go with him to public events and is widely known in the music industry. When he died at age 88 in October 2016, she and her son, Kent’s only grandchild, were completely left out of the will. Robbin says she is launching a crowd funding website to raise money to pay for legal fees that will result from the estate battle.

“It is with a heavy and exhausted heart that I come to you all for assistance in these trying times. Along with losing my father, I am in the midst of a tedious legal battle over my father’s estate,” Robbin said in a post on the funding site.

The Chicago Sun-Times, in the recent article, “Famed DJ Herb Kent’s daughter is contesting her father’s will,” says that although Kent’s net worth wasn’t known at the time of his death, the Hall of Fame DJ worked for 65 years in the Chicago radio market, performed at paid gigs nationwide and taught at Chicago State University for many years. He owned at least two residences.

Robbin and her father’s longtime girlfriend, Linda Stanford, had a contentious relationship, according to the elder Kent’s friends. They also say that Kent’s mental health declined over the last few years of his life. Robbin is accusing Stanford of manipulating her father in his last years. Robbin argues that they weren’t married, and her father had dementia. She says Stanford took advantage of him and “ran amuck.”

According to the will filed in the county probate, signed by Herbert R. Kent, Stanford is designated the executor of the estate, with his longtime radio producer as the successor executor (if Stanford is unable to fulfill her role). Robbin and Kent’s only grandchild were both left out of the will entirely.

Robbin was quoted as saying that she does not think her father would have wanted his only heir to be left out, and that she fully intends to fight for what she believes is rightfully hers.

Reference: Chicago Sun-Times (June 8, 2017) “Famed DJ Herb Kent’s daughter is contesting her father’s will”

Please visit our website to learn more about creating a solid estate plan that reflects your goals and concerns. 

 

Tax Bill That Follows Sale of Famed Painting Needs Careful Trust Planning

With a record-breaking price of $110.5 million, the auction of a painting by Jean-Michel Basquiat will create an equally enormous tax bill.

Talk about a successful investment: Lise Wilks’ parents spent $19,000 on a Jean-Michel Basquiat painting thirty years ago. The painting, sold at auction at Sotheby’s in New York, was valued at $110.5 million. That’s the good news. The bad news, according to Bloomberg’s article, “Trust Planning Key To Recent $85 Million Basquiat Legacy,” is the capital gain of about $85 million, means that Lise may have a tax bill of about $37 million.

There’s a maximum 28% federal capital gains rate for collectibles, plus a 3.8% levy on investment income for top earners. In addition, New York City residents have another 12% tax. The precise tax bill or cost basis can’t be determined, without knowing whether the Basquiat was a gift or was passed to her through the parents’ estate. You can determine the cost basis by using the value of the work on the date of a parent’s death, assuming it was included in that parent’s taxable estate. Wilks’ parents both died in 2009.

The auction record for Basquiat at the time was $13.5 million. Sotheby’s achieved the $110.5 million Basquiat record, but that included the commission of $12.5 million on top of the $98 million auction price. If you take the Basquiat’s $13.5 million value as an assumed cost basis, her gain would be roughly $85 million. Thus, Wilks’ estimated federal tax is $27 million, plus the 12% New York City and state tax of $10 million.

Some strategies that a person like Wilks might use to offset the gain could include the following:

• Deferring capital gains taxes. Art investors can defer capital gains tax by using a Section 1031 exchange and using the net gains to purchase more art. Collectors can take advantage of this deferral. If you do this, however, be prepared to document your status as an investor.
  
• Capital gains can be offset by donations of cash or art during the year of the sale, or can be carried forward from prior years. Therefore, if a collector donates art to a museum, he or she would receive a deduction of the appraised value.
  
• You can donate to public charities gifts of cash and other non-appreciated property to offset up to 50% of your income. There is a limit of 30% for certain private foundations and this deduction is phased out based on the donor’s income.

Estate planning attorneys generally see families at this level of wealth increasing their philanthropic efforts, when successfully selling an asset at such a rarified price. Some may be waiting to see if an overhaul of the tax code does occur, but if the art market shifts, prices could take a tumble.

Reference: Bloomberg (June 12, 2017) “Trust Planning Key To Recent $85 Million Basquiat Legacy”

To learn more about trust planning, please visit our website.

 

IRS Gives Break to Surviving Spouses

A ruling from the IRS, Revenue Ruling 2017-34, will make it easier for an executor who failed to make a “portability election” to take advantage of a DSUE—deceased spousal unused exclusion amount.

Don’t wait too long to take advantage of a new ruling that, says Forbes in “IRS Offers Estate Tax Relief To Widows And Widowers.” The deadline for this process is January 2, 2018.

DSUE comes from a simplification of the estate tax in 2010 and the two most important provisions of the estate tax for many “moderate” millionaires: (i) the unified credit, which protects $5.49 million from estate tax in 2017; and (ii) the unlimited marital deduction. The unlimited marital deduction allows any amount left to the surviving spouse to be free of estate tax, if chosen.

A big concern of basic estate planning in the past was to make sure that a couple did not waste one of their unified credits. The DSUE saves people from creating trusts to work around losing the unified credits.

The relief offered by Revenue Procedure 2017-34 is available for the estates of decedents who died after December 31, 2010, in instances where no estate tax return was required and none was filed.

The executor can take advantage of the relief by filing an estate tax return with the election and making a reference to the revenue procedure at the top of the first page of the return. It’s available until January 2, 2018. After that, the procedure is available up to two years after the date of death.

This issue should be considered by moderate millionaires (those with a few million dollars), if they are surviving spouses of people who died after 2010, where no estate tax return was filed. Look at the administrative headache of accomplishing the filing versus the chance that you might die with a net worth over the exclusion amount.  It is important to remember: it’s not your current net worth, but rather what your date of death net worth might be.

If this might be of advantage to your family, don’t wait until the very end of the year to begin the process. An estate planning attorney will be able to help take advantage of this relief before it expires.

Reference: Forbes (June 12, 2017) “IRS Offers Estate Tax Relief To Widows And Widowers”

Please visit our website to learn how we can assist you with your estate administration needs. 

 

Happy 4th from Stapleton Elder Law

 

 

 

 

Happy Birthday, America! As we celebrate our nation's freedom, we honor the courageous men and women dedicated to preserving it. Have a safe and happy 4th of July from your friends at Stapleton Elder Law.

When Emotions Get in the Way of Estate Planning

Some parts of estate planning are complex. That is why you want an estate planning attorney with knowledge of tax law and finances. Other areas are simpler, but harder.

How many times have you heard about people who were all set with their estate plan, except they never signed their documents? It’s not unusual, according to an article from Wilmington Biz, “Keep Mental Hang-Ups From Sabotaging Estate Planning.” Many people find it easier to focus on the legal and technical aspects of their estate plan, and when it comes to the emotional part—thinking about death, what will happen to their children, etc.—they can’t bring themselves to finalize the plan.

There are some people who have an issue with deciding how to allocate their assets, after they pass away. A common issue is emotional or moral paralysis. After they worked with their attorney to draft the documents, they freeze when it’s time to sign on the dotted line.

Another issue arises when a person is estranged from his or her children. There are also those who—believe it or not—fear that somehow if they make a will, they will die. It is sort of like if they ignore the inevitable, it will never happen. Crazy, right? Do you think that if you don’t draft a will, then you could live indefinitely?

Another challenging issue is the decision of a parent that makes them feel like they’re favoring one child over others. There may be a good reason: perhaps one can manage money better than another, or a child is married to someone the parents don’t like or trust or maybe the child has an addiction issue.

Because the emotional challenges make it hard for some folks to think straight about much of this, the best approach is to work with an estate planning attorney who can take some of the emotional baggage out of the equation.

These conversations may indeed have psychological ramifications, especially where there is substance abuse, fear of dying or a sense of entitlement.

Discussing the family’s situation and concerns about what the future will bring, is part of the estate planning process. An experienced estate planning attorney will be able to facilitate productive discussions, so that the family can put a plan into place that provides peace of mind.

Reference: Wilmington Biz (June 6, 2017) “Keep Mental Hang-Ups From Sabotaging Estate Planning”

Please visit our website to learn how we can assist your family with their estate planning needs.