Estate planning for the rest of us

My WealthCounsel colleague, Suzann Beckett, offers an answer to one of the most often-asked questions I encounter in social gatherings. 

An acquaintance asked me about estate planning, not long ago. They weren't asking for professional advice, they were literally asking if I could explain what estate planning is, and how it might affect them. It's a good question, one that I wish more people knew the answer to.

First, it's worth knowing that estate planning is not limited to the DuPont's and Carnegie's among us. Admittedly, Bill Gates and Warren Buffet have amassed fortunes so large as to suggest that significant thought needs to go into the planning of their estates. But estate planning isn't just about money. It's also about security, philanthropy, and control of our own interests.

One aspect of estate planning includes our health care plans. Not only can estate planning help determine our eligibility for Medicaid benefits, it can also allow each of us to issue specific directives about our own future health care. Even if a health crisis leaves us unable to speak for ourselves at some point, our prior planning can provide documentation of our wishes, which enables us to maintain control of our own destiny, even if we are temporarily or permanently incapacitated.

In fact, our estate planning can extend to the appointment of a specific person to act as our health care representative, as well as our desire to donate organs upon your death. It isn't just about our money and holdings. It is in a very real sense about us, as people.

Yes, estate planning allows us to make decisions while  in our prime that will come into play even after we are gone (see my previous post about Ben Franklin). And more importantly your decisions are legally binding on those who may, or may not agree with our wishes. Remember, this is your own estate and your own life you are planning to protect.

Beyond health care, estate planning allows us to designate who speaks on our behalf should the need arise. Entering into a power of attorney allows us to appoint the person we trust most to oversee our personal business if we are unable to conduct our affairs ourselves. Many people assume that we must appoint our lawyer when we issue a power of attorney. And you certainly can do that if you wish to. But you can also give that authority to your spouse, or a child, or a close personal friend, or anyone else you wish. A power of attorney is yours to give, or revoke, at your discretion. Estate planning can help you enter into, or terminate a power of attorney, on your terms.

Perhaps the most commonly known aspect of estate planning is the drawing up of a will. But even that can be more far-reaching than most people realize. You have the opportunity to not only decide what happens to your holdings after your death, you also have the chance to establish a trust if you wish to, so that you can provide for the care of a family member, or another charitable cause that is important to you. Trusts can also be used to minimize a tax burden, in some cases. Estate planning can even allow an individual to develop a strategy to avoid probate on some holdings. A practice that allows a well planned execution of our wealth, no matter how big or small, that keeps it all in the family, for lack of a better term – rather than running the entire contents of our lives through the court system before it is distributed to our heirs, or whomever we wish it to go to.

The assumption that only the very wealthy have any need, or the even the option of engaging in estate planning, is incorrect. Almost anyone who has something of value to leave behind can benefit from estate planning. And even those who do not have significant wealth can benefit in terms of health care planning.

Each and every one of us has a unique situation to deal with as we walk through life. There is no blanket answer or master plan that will work for everyone under every possible circumstance. Perhaps the practice of estate planning would be more readily understood of we called it Individualized Planning, instead?

It's worth thinking about, at least.

Many valid issues are raised in this posting.  If you have questions related to any of the issues, please call me or leave a comment below, and I’ll get back to you.

 

Compensating Caregivers

One in Seven Americans are Caregivers

There are some serious issues looming on the horizon for baby boomers.  Almost one in seven Americans looks after a disabled person age 50 or older.  Many compensated and many not compensated, but it is a rapidly growing number (the number has jumped 28% since 2004). It’s an emerging situation that needs the compensation element to be formalized for many.

In the recent November issue of Financial Advisor the article “Compensating Caregivers” quoted a  2009 survey found that 14.5% of the U.S. population – about one of every seven of us – is responsible for the care of a disabled person age 50 or over, up 28% since 2004.  Increasingly, the elderly disabled are paying family members to care for them in family home. This raises a number of issues.

This article takes stock of the situation and urges caution and awareness. It may seem odd, unnecessary, or even heartless, but they advise that the arrangement with caregivers be legally formalized, reported, and in some cases even treated as employment. The reason is two-fold.

Firstly, by formalizing and documenting the arrangement, you make it legally acknowledged and transparent for both the care-giver and care-recipient. As the recipient of care, you may be able to claim an income tax deduction all or part of the payments as qualified medical expenses. Additionally, your payments will be well-documented, should Medicaid eligibility ever become an issue. Without this documentation, the unidentified transfer of funds to family members could be seen as an attempt to cheat the system.

Secondly, simply establishing a legal process for payment of care can help open up family dialogue, and raise awareness – especially among non-care-giving family members. Arrangements of this nature are bound to put stress on all parties, but dialogue, contractual understanding, and compensation can help smooth over difficulties for the care-receiver, the care-giver, and other family members. The care-receiver has a vital say in the arrangement, can avoid feeling like a “burden,” and remain a vital part of the family. Family members can discuss who is to administer care or how exactly they can support one another in fairly supporting the care-receiver. For that matter, too, sibling squabbles can be lessened when it comes to inheritance and estate arrangements if the family care arrangement is legally recorded.

I thank my WealthCounsel colleague in Nevada, Lizette Sundvick, for authoring this commentary on “Compensating Caregivers”.

Foresight, solid financial planning, and an awareness of the extent of any care arrangements are vital. I am always available to assist you with long-term care and other legal issues commonly associated with aging. You are welcome to give me a call to schedule a consultation, or leave a comment below this post, and I’ll share the dialogue with all. 

 

Filing for Bankruptcy: What Can You Protect?

With 1.6 million Americans expected to file for Bankruptcy this year, we know that at least these 1.6 million and very likely many more researching the bankruptcy option have been asking the same basic questions.  “What can I protect?”   “What will be left?”

A recent article in the Wall Street Journal Digital Network addressed these very questions.  My colleague in Nevada, Lizette Sundvick, offers a summary commentary on this article.

Some may opine that we are climbing out of the recession, but the effects are still wearing on us. According to estimate by the American Bankruptcy Institute, more than 1.6 million Americans are expected to file for Bankruptcy this year, with 42% of filers citing “job loss” and another 65% citing “income reduction” as the determining factor. Against this backdrop, it’s unfortunate that bankruptcy hits responsible persons the hardest because they likely have the most to lose. If you are filing this year, then you may have a great deal you wish to protect. I thought I’d share some tips from a recent article on SmartMoney about what you can protect.

• A Home: The protection afforded your home depends on your state of residency.  In addition, different states offer different acreage allowances for city and rural properties. Beyond that, the equity you have in your house also can be important to protect, because most states have an exemption allowing a certain amount of that equity to remain with the homeowner in the event that the home is sold by the bankruptcy trustee.
• Tax-Exempt Retirement Funds: These are usually safe, and IRAs usually can be protected up to $1.17 million per person. Don’t, however, try to dump other assets (i.e., from investments that are not protected) into the retirement fund. This is a no-no.
• A Car: Trying to retain the car is similar to retaining the house, since your level of protection depends on the laws of your state of residency. If the value of the car is below the exemption limit, and it is owned by the filer, then it can be kept. Otherwise, equity up to the exemption can go to the filer in the event of sale. Of course, in the 16 states that allow the federal “wild-card” exemption, the rest of the value of the car may be covered and the car itself retained, but this itself depends on state laws and exemptions.
• Life Insurance Policy: If the policy is term-life insurance, then it is generally safe. Whole-life policies are generally regarded as investment vehicles, however, and in that case it will depend on state exemption levels.
• College Savings: If college savings are held in a 529 plan or a Coverdell account, there are a couple of factors you need to know. If the account is only 2 years old, it is only protected up to $5,000. However, if the account is older than 2 years, it will be safe for so long as the beneficiary is not also the filer.

Generally speaking, the biggest factors are the state-specific exemption levels and allowances. Be sure you obtain competent professional advice to protect your interests (and stay out of hot water).

If you're worried about the future and how you can guard against economic fallout, we can give you some reassurance.  Give me a call to discuss your options.  If you have a question or two, please submit as a comment to this blog post, and I’ll respond in the comment thread or address in a fresh blog post.   

 

"My Mother took care of me, so I'm going to take care of her."

I’m often asked the question, “What are the options for a baby boomer with aging parents?”  I was pleased to see this posting by my fellow Wealth Counsel member Suzann Beckett practicing in West Hartford, CT .  She offers one answer for the many baby boomers facing aging parents wishing to remain in their homes but lacking the financial means. 

Medicare benefits without Life of Poverty

The New York Times recently ran an outstanding article, detailing the basics of Pooled Trusts. Most American's are not familiar with the term, or the tool – but thanks to the Times, a much larger audience had the opportunity to read about a means of caring for aging family members, while intelligently keeping the wolf away from the door.

The unfortunate reality for many of us is that a time may come when we can no longer manage to personally provide appropriate care for a loved one in our own home, or in their own home for that matter. But at the same time, we may not have the financial capacity to afford private care providers that would be able to fill the gap.

Pooled Trusts are designed to bridge that void.

Rather than reiterate the content of a well written and very informative piece, I will simply recommend that anyone with an elderly family member read this piece, if for no other reason than to gain some basic insight into an option that may be available and viable, in certain circumstances.

You can find the story on the Internet at: http://www.nytimes.com/2010/11/05/business/businessspecial5/05TRUST.html?_r=3&adxnnl=1&src=twrhp&adxnnlx=1289307765-CdcouVKW+F0EwVbdadQHMQ

As a woman who has faced these issues in my personal life, with my own family members, I am intimately aware of the emotional and financial drain that advancing age and health issues can impose on a family. In order to deal with these issues to the best of our ability, we need to be aware of our options, and informed regarding the pros and cons of each of those options. This story is a good step in the right direction on that count.

I am so pleased the New York Times published Tara Siegel Bernard's excellent article on this very important topic.

This is good information on one way that baby boomers can prevent their aging parent(s) from going into a nursing home.  If this topic of “pooled trusts” is something that you would like to know more about, I am available to meet with you.

A SPLIT DECISION… YOU AND THE IRS

 

This is not a catchy story, just a practical tax-related one that most people do not yet know about.

Less than two weeks ago we finally got forms to report estates for people dying in 2010… THEN THEY CHANGED THE LAW!

On December 17 the estate exemption was reinstated effective January 1, 2010. The federal estate tax exemption was set at $5 million per person. This will be federal law for two years. Estates can choose to remain under the old 2010 law, but that is not advisable for most estates (run the numbers and compare!) The Washington State exemption remains at $2 million per person; I have idea if or when that will change.

When a spouse dies, if the Will or Trust contains tax planning, there is an opportunity to claim two estate tax exemptions. In other words, married people, through a "trust split" written into their Will or Living Trust, can effectively use two exemptions and keep all assets available for the surviving spouse. The complicating factor is that the federal and state exemptions are NOT the same number in Washington State.

Let me illustrate with two examples. THIS IS NOT LEGAL OR TAX ADVICE – CONSULT YOUR OWN LEGAL OR TAX COUNSEL USING YOUR FACTS!

Let's say we have a combined Washington estate (both spouses added together) of $2.2 million. The estate plan says give all to survivor unless he/she disclaims. Survivor's share of estate is kept in his or her name or Survivor Trust share; disclaimed amounts are allocated to a separate Shelter Trust that uses the decedent's exemption…

There are two basic choices:

I. Survivor keeps all. Here, when survivor dies, under current law $200,000 might be subject to Washington State inheritance tax. Estimated TAX IS $20,000.

OR

II. Survivor disclaims $200,000 or more to reduce taxable future estate to $2 million. Survivor could disclaim the fully allowable $1.1 million (½ of the community property).

a) Survivor must establish a trust share to own those disclaimed assets. This is a small hassle.

b) Survivor will also have to annually file an IRS Form 1041 to report income tax on the Shelter Trust.

c) Under current estate tax law, no tax at death of Survivor. WOULD SAVE $20,000 Washington Inheritance Tax. Is the hassle worth it to you?

d) You could gift assets or spend them on yourself instead.

 

NOW, what if the combined estate is $5 million?

SAME PLAN DESIGN; but if Survivor keeps all when survivor dies, under current law $3,000,000 would be subject to Washington State inheritance tax when he or she dies. Estimated TAX IS $390,000.

OR

Survivor disclaims $2,000,000 to fully fund the Shelter trust without triggering a tax now. This is LESS than ½, but completely uses the State and most of the Federal exemptions.

1) Survivor must establish a trust share to own those disclaimed assets. This is a small hassle.

2) Survivor will also have to annually file an IRS Form 1041 to report income tax on the Shelter Trust.

3) Under current estate tax law, no tax at death of Survivor.

4) Is it worth it to you? SURE LOOKS LIKE IT TO ME. Split!

Use current state exemption of $2mm for that amount to go to Shelter Trust to avoid triggering a state tax now and both state and federal later. (Note that you COULD overfund and pay only state inheritance tax of $50,000 to hopefully avoid a combined state and federal tax later.)

If you suffered the loss of a spouse in 2010, I want to offer my sincere condolences. Keep in mind that your loved one did this planning to benefit you and future heirs too. It was a thoughtful and unselfish act and another nice memory of someone who thought of others.

223,000,000 GUNS OR SO… THINK THIS MIGHT BE A PLANNING ISSUE?

Folks are on both sides of the issue of gun ownership. We all know that there are a lot of things in life that are dangerous: cars, chainsaws, rugby, commercial fishing… and guns.

Lately I have been pondering the issue of individual responsibility. I often people cite their "constitutional rights" as if that was the total equation concerning gun ownership. But it seems to me that rights and responsibility for their exercise go hand in hand.

On to a concept fairly new for me: the gun trust. It's usually a living trust used to purchase a suppressor or other regulated firearm without the necessity of going through the local Chief Law Enforcement Officer for permission… often denied without much chance to fight it. With a trust you can apply directly to the BATFE for a tax stamp.

Some gun shops give out trusts for free to promote sales, without considering the consequences. You may even be tempted to draft your own or to download a trust from the Internet. Talk about DANGEROUS… Let me explain a bit.

About a year ago I overheard a discussion about a "free living trust" that would simplify the process of acquiring a suppressor, short barreled rifle, or something similar regulated by federal law. Sounds good, right? I mean the trust was "free…"

I did some research and discovered a number of firearms-related issues. The major one I call the "Accidental Felony."  With 223,000,000 or so firearms in this country, and people passing away each year, guns go from owner to owner very often. Consider that a well-meaning friend or family member that follows the terms of your estate plan might possess or transfer a firearm WITHOUT COMPLYING WITH LOCAL, STATE AND FEDERAL LAW. If the transferee of the firearm is unable to legally possess it… you can see how the problem gets bigger and bigger.

For example, failing to observe the Gun Control Act of 1968, Title II, concerning "National Firearms Act" firearms can result in 10 years in prison and a fine of $250,000… per count. Other similar laws are on the books for every type of firearm. These laws are nothing to ignore. Again, somebody can accidentally violate them.

In Washington State persons other than felons and some other prohibited categories can own any type of rifle. Here's another example… you can own any rifle like an AR-15. It is the civilian version of the M-16 and is semi-automatic like many other types of rifle. However, some states call it an "assault rifle" and prohibit private ownership. What if you, from Washington, give it to your brother in your Will… he lives in the other state… next, what if he was convicted of domestic violence… which prohibits his ownership of ANY firearm under federal law in my example…

See the accidental problems that simple, legal ownership followed by transfer of a gun can cause?

 

CONSIDER THIS:

1. Firearms are part of the American ethos, part of the landscape.
    
2. Often, firearms are heirlooms and some have significant financial value too.
    
3. Local, state, and federal laws abound; they are not really in synch. They affect possession, ownership, transfer etc. etc. of all classes of firearms... which makes it VERY DANGEROUS to simply distribute them via a normal Will or normal Living Trust. These tools contain NO SPECIFIC GUIDANCE on how to do so without committing the "accidental felony."
    
4. Many gun stores give away free living trusts merely to expedite their sale of an NFA item. The ones I have seen are amateurish at best, defective and void at worst. What a questionable practice, and one that creates danger for customer AND gun shop AND innocent parties who rely on them in future…

SO WHAT IS A GUNDOCX TRUST AND WHY DID I CREATE IT?How do you allow others to use your firearm without breaking the law? What if your spouse goes to sell, give away, or loan your firearm when you are travelling, or you are disabled, or you pass on? Can I own a machine gun in another state, legally, when I live in this state which doesn't permit me to own it?

I created GunDocx to deal with all of these issues, and more. Attorney Foss Hooper joined my team of one, and we invented a complete trust system to help you acquire, possess, and transfer your precious firearms collection during your life and thereafter, REDUCING AND HOPEFULLY ELIMINATING THE CHANCE OF SOMEONE COMMITTING THE ACCIDENTAL FELONY.

GunDocx is one of a growing family of special purpose trusts available from Brislawn Lofton, PLLC. Special Needs, IRA Preservation, Asset Protection, Minor Child Auto and Charitable Income Trusts are only a few of them. Give me a call or send an email if you have an issue that cries out for creativity… we just may have something that will delight you.

The Tax "Deal" - the Forecast is Dark Clouds on the Horizon

My fellow member of WealthCounsel, Richard Wohltman of Alexandria, VA,  posted this relevant commentary on the Tax “Deal” currently being ushered through Congress. 

There has been a lot of talk this month about the "deal" to extend the Bush tax cuts. That "deal" also includes a substantial increase in the amount that can pass to your heirs without paying any federal estate tax. The 'exemption amount' will be increased to $5,000,000 per person.

The stated reason for that increased exemption amount is to help 'small' business owners and family farmers pass the business or farm to their heirs without having to pay estate taxes. It also means that all but a very limited number of multi-millionaires will have to file and pay federal estate tax.

Dark Clouds are Forecast.

There really are dark clouds on the horizon even if the "deal" is passed by Congress before the end of the month. The increase in the exemption is going to add billions of dollars to the federal deficit. The Treasury is going to have to borrow that money and we are all going to have to pay taxes or have benefits reduced just to pay the interest on those loans. And the day will come when the loan will have to be paid in full.

There is a more pressing problem, however, for estate planning. The "deal" only lasts two years! At the end of 2012 we will find ourselves right back where we are now -- facing a stupendous increase in the number of estate tax returns and tax payments when the exemption amount falls to just $1,000,000 starting January 1, 2013. The problems from the end of the Bush tax cuts (and the increased exemption amount from the "deal") return in 2o13. The uncertainty of how all of the estate and gift taxes will be interpreted once the large exemption disappears is the big grey cloud on the horizon for estate planners.

Estate planning attorneys have been hoping for some stability in estate tax policy so plans can be designed based on a clear expectation of how estate taxes will be calculated when death occurs. That stability disappeared with the Bush tax cuts. Estate planning attorneys all knew we were faced with the potential return to the 'old rules' with only a $1,000,000 exemption in 2011 and had to plan for the return of the middle class taxable estate. The same lack of stability continues since we can only look at what happens at the end of the next two years.

What does all this mean to you?

Don't think that the "deal" will make your estate planning easier just because you don't have Five or Ten Million Dollars. The vast majority of our clients require extra tax planning if the exemption returns to 1 Million Dollars.

Your estate planning lawyer must assume that the lower exemption will return and is forced to include options to address the substantial estate tax liability that will return in 2013. Your estate plan will continue to require more complication just to protect your family and your business with the automatic termination of the "deal" in 2013.

Where's the silver lining?

Just remember, if there is a silver lining in every grey cloud, that doesn't mean that the grey cloud is gone.  Don't let the proposed silver lining blind you to the limits inherent in any "deal" that lasts only two years!