During the year 2010, there has so far been no federal or Arizona State estate tax. However, barring action by Congress before the end of the year, the estate tax is scheduled to return on Jan. 1, with an exemption of only $1 million per person and a maximum rate of 55 percent.
I have good news to share with you. The long wait for action to address the unknown status of the federal estate tax may be approaching an end. President Obama has announced a tentative deal with Congressional Republicans earlier this week, which, if finalized, will result in a number of tax benefits, including addressing the estate tax.
In the deal, President Obama made substantial concessions to Republicans. In addition to dropping his opposition to any extension of the current income tax rates on incomes above $250,000 for couples and $200,000 for individuals, he agreed to a deal on the federal estate tax that infuriated many Democrats. The deal would ultimately set an exemption of $5 million per person, and a maximum rate of 35 percent — a higher exemption and far lower rate than many Democrats wanted.
A New York Times article cautioned, however, that the deal is not supported by all parties, and many key Democrats have vowed to fight it. So, resolution may be within sight, but it is not yet a finalized deal.
“The House Democrats have not signed off on any deal,” Representative Chris Van Hollen of Maryland, who has been representing House Democrats in formal negotiations on the tax issue, said Monday night. “We will thoroughly review and discuss the proposed package in the caucus.” Some senior Democrats said an agreement by President Obama to accede to Republican demands on the estate tax could lead to a revolt among lawmakers.
With this positive news in the air, it may be time to schedule a meeting to adjust your estate plans to maximize the impact of this likely change in the federal estate tax law.
December 10, 2010
July 27, 2010
Planning Challenges: Marriage, Divorce and Remmariage
Although this case is unusual, it shows how life changes can destroy the best of plans or intentions. This case highlights the importance of updating those plans after a life event, such as birth, death, marriage, divorce and remarriage. You should especially heed these lessons if you:
A. are divorced and have reconciled or might reconcile with your former spouse;
B. are single and want to solidify control over your assets in preparation of a future marriage;
or
C. are cohabitating with a significant other.
When Howard Herpich and Svetlana Ozerova married in February 2003, they signed a prenuptial agreement in which each waived his or her rights to property that the other brought into the marriage. This agreement also directed that, "in the event of a separation and reconciliation," the document would remain binding. One month after the wedding, the couple separated. Their divorce was finalized in early 2005. In executing the prenuptial agreement, the couple divided up marital assets accordingly and settled their joint financial affairs. Six months later, the Herpiches reconciled and remarried. When Mr. Herpich died two years later, Mrs. Herpich was appointed personal representative over his estate. Mr. Herpich’s two adult children from his prior marriage sought to prevent their stepmother from controlling any part of his estate, claiming that the prenuptial agreement remained in effect. The trial judge sided with Mr. Herpich’s children, determining that the prenuptial agreement remained valid despite the divorce the separated the couple's first and second marriages.
The judge ruled that the terms "separation and reconciliation" encompassed divorce and remarriage and essentially denied Mrs. Herpich any control to her late husband's estate. Mrs. Herpich appealed, and the appellate court reversed the trial judge's ruling, finding that the “separation and reconciliation" wording in the agreement cannot be considered the same as "divorce and remarriage.” The appellate court ruled that the prenuptial agreement had been effectively terminated by the 2005 divorce and was no longer binding, since the original agreement's language had anticipated only one marriage between the Herpiches, not a divorce and a remarriage.
A. are divorced and have reconciled or might reconcile with your former spouse;
B. are single and want to solidify control over your assets in preparation of a future marriage;
or
C. are cohabitating with a significant other.
When Howard Herpich and Svetlana Ozerova married in February 2003, they signed a prenuptial agreement in which each waived his or her rights to property that the other brought into the marriage. This agreement also directed that, "in the event of a separation and reconciliation," the document would remain binding. One month after the wedding, the couple separated. Their divorce was finalized in early 2005. In executing the prenuptial agreement, the couple divided up marital assets accordingly and settled their joint financial affairs. Six months later, the Herpiches reconciled and remarried. When Mr. Herpich died two years later, Mrs. Herpich was appointed personal representative over his estate. Mr. Herpich’s two adult children from his prior marriage sought to prevent their stepmother from controlling any part of his estate, claiming that the prenuptial agreement remained in effect. The trial judge sided with Mr. Herpich’s children, determining that the prenuptial agreement remained valid despite the divorce the separated the couple's first and second marriages.
The judge ruled that the terms "separation and reconciliation" encompassed divorce and remarriage and essentially denied Mrs. Herpich any control to her late husband's estate. Mrs. Herpich appealed, and the appellate court reversed the trial judge's ruling, finding that the “separation and reconciliation" wording in the agreement cannot be considered the same as "divorce and remarriage.” The appellate court ruled that the prenuptial agreement had been effectively terminated by the 2005 divorce and was no longer binding, since the original agreement's language had anticipated only one marriage between the Herpiches, not a divorce and a remarriage.
July 23, 2010
Creditor Proof IRAs
The combination of tax deferral and asset protection is a potent, long-term legal and financial strategy. Whether IRAs and other retirement plans are exempt from the claims of creditors of the IRA's owner varies from state to state. In Arizona, for example, IRAs are generally exempt from such claims. But does the same protection apply to IRAs that are inherited? If an original owner dies, and the IRA is not liquidated but instead is inherited by the beneficiary, will the IRA be protected from the claims of the beneficiary's creditors? Again, In Arizona, the answer is “yes.” However, what if the beneficiary lives in a state other than Arizona when the inheritance occurs? This can be a significant concern for an owner of an IRA – such as a parent or grandparent who wants to leave the IRA to a beneficiary but is worried that it may be seized by a creditor. The key variable: How do the laws of the state where the beneficiary lives at the time he or she inherits the IRA address this issue?
In a Florida case, Robertson v. Deeb, the court decided that inherited IRAs are not protected from creditor claims. The court reasoned that the IRA exemption applied only to the original owner and did not extend to the beneficiary. Texas bankruptcy courts reached the same conclusion in In re Jarboe. In that case, Mom died leaving her IRA to Son. Several years later, Son filed for bankruptcy and claimed that the IRA was exempt under the state property code. The bankruptcy trustee argued that the inherited IRA was not exempt, and the court agreed. Conversely, in a recent Minnesota case (In re: Nessa), the bankruptcy court ruled that an inherited IRA was protected. The key difference in this decision is that Minnesota adopted the federal property exemptions from bankruptcy law, whereas Florida and Texas used state exemptions. So, even though Arizona protects the beneficiary of an inherited IRA, your children or grandchildren might one day move to a state (such as Texas or Florida) that does not.
Solution: an IRA Trust. Don't take chances with your hard-earned retirement money. My general recommendation is to leave IRAs to beneficiaries in a stand-alone IRA trust to ensure maximum protection from creditors. Why use a stand-alone trust and not your living trust? For a trust to be a “designated beneficiary” for IRA and retirement plan purposes, very complex rules must be strictly followed. Failure to follow those rules can result in disastrous unintended consequences. Most living trusts simply are not set up correctly to meet the “designated beneficiary” definition. Make sure your living trust is carefully reviewed, and amended if necessary, if you are thinking of naming it as a beneficiary of an IRA or other retirement plan.
If you die without establishing a stand-alone IRA trust, there may still be other options available. For example, a beneficiary who receives an IRA from anyone other than a spouse and is concerned about the IRA’s exposure to creditors may wish to reinvest the proceeds in exempt assets such as homestead property or life insurance. However, whether a particular kind of asset is exempt from the claims of creditors is determined, again, on a state-by-state basis. As a result, the stand-alone IRA trust is the only sure bet when it comes to protecting inherited IRAs.
In a Florida case, Robertson v. Deeb, the court decided that inherited IRAs are not protected from creditor claims. The court reasoned that the IRA exemption applied only to the original owner and did not extend to the beneficiary. Texas bankruptcy courts reached the same conclusion in In re Jarboe. In that case, Mom died leaving her IRA to Son. Several years later, Son filed for bankruptcy and claimed that the IRA was exempt under the state property code. The bankruptcy trustee argued that the inherited IRA was not exempt, and the court agreed. Conversely, in a recent Minnesota case (In re: Nessa), the bankruptcy court ruled that an inherited IRA was protected. The key difference in this decision is that Minnesota adopted the federal property exemptions from bankruptcy law, whereas Florida and Texas used state exemptions. So, even though Arizona protects the beneficiary of an inherited IRA, your children or grandchildren might one day move to a state (such as Texas or Florida) that does not.
Solution: an IRA Trust. Don't take chances with your hard-earned retirement money. My general recommendation is to leave IRAs to beneficiaries in a stand-alone IRA trust to ensure maximum protection from creditors. Why use a stand-alone trust and not your living trust? For a trust to be a “designated beneficiary” for IRA and retirement plan purposes, very complex rules must be strictly followed. Failure to follow those rules can result in disastrous unintended consequences. Most living trusts simply are not set up correctly to meet the “designated beneficiary” definition. Make sure your living trust is carefully reviewed, and amended if necessary, if you are thinking of naming it as a beneficiary of an IRA or other retirement plan.
If you die without establishing a stand-alone IRA trust, there may still be other options available. For example, a beneficiary who receives an IRA from anyone other than a spouse and is concerned about the IRA’s exposure to creditors may wish to reinvest the proceeds in exempt assets such as homestead property or life insurance. However, whether a particular kind of asset is exempt from the claims of creditors is determined, again, on a state-by-state basis. As a result, the stand-alone IRA trust is the only sure bet when it comes to protecting inherited IRAs.
July 22, 2010
Avoid Confusion in Crisis
More and more Baby Boomers are finding themselves making medical and financial decisions for their aging parents. These decisions often fall to one child, with other siblings out of the loop for reasons of distance, conflicting responsibilities, etc. But some families have a lot of leaders – or at least they have a lot of strong-willed adult children who have opinions on what a parent needs or doesn’t need in terms of long-term care.
Key Question: Who Is in Charge? For example, Dad enters a hospital in need of immediate hip surgery. Unfortunately, he has an allergic reaction to medications. He is hallucinating and incoherent. The doctors need to change his treatment, but they aren’t sure who in his family to turn to for a final decision. Dad’s four adult children disagree as to his treatment, and long-simmering sibling rivalries surface just at the time when Dad most needs his family to unify.
Remember, a family is not a democracy. In most families, managing by consensus just doesn’t work. There’s a reason why Dad or Mom was initially in charge. In a crisis, it often takes too long to get a consensus. Relatives that need to be present can’t be there or can’t be reached on the phone. Or worse, while the majority of adult children are in agreement, they allow a lone dissenter to hold veto power over their decision. Whether the issue is health or money, consensus-building usually won’t work in a time of crisis.
What are the types of tools that are critical? The most powerful assets in crisis situations are Dad’s or Mom’s written instructions and choice of leadership. I recommend that every adult has in place at least these two valuable tools: First, every adult should have a Durable Power of Attorney. This provides financial authority to allow a chosen family member to make financial decisions for Dad if he is incapacitated. Second, every adult should have a Health Care Power of Attorney and Living Will. The laws governing these documents vary somewhat from state to state, but the concept is the same: Someone is charged with making all health care decisions for Dad, including whether to withdraw artificial life support. These written instructions are critical for families. The clearer the instructions, the less speculation, controversy and anxiety await adult children in stepping into their parent’s decision-making position.
Key Question: Who Is in Charge? For example, Dad enters a hospital in need of immediate hip surgery. Unfortunately, he has an allergic reaction to medications. He is hallucinating and incoherent. The doctors need to change his treatment, but they aren’t sure who in his family to turn to for a final decision. Dad’s four adult children disagree as to his treatment, and long-simmering sibling rivalries surface just at the time when Dad most needs his family to unify.
Remember, a family is not a democracy. In most families, managing by consensus just doesn’t work. There’s a reason why Dad or Mom was initially in charge. In a crisis, it often takes too long to get a consensus. Relatives that need to be present can’t be there or can’t be reached on the phone. Or worse, while the majority of adult children are in agreement, they allow a lone dissenter to hold veto power over their decision. Whether the issue is health or money, consensus-building usually won’t work in a time of crisis.
What are the types of tools that are critical? The most powerful assets in crisis situations are Dad’s or Mom’s written instructions and choice of leadership. I recommend that every adult has in place at least these two valuable tools: First, every adult should have a Durable Power of Attorney. This provides financial authority to allow a chosen family member to make financial decisions for Dad if he is incapacitated. Second, every adult should have a Health Care Power of Attorney and Living Will. The laws governing these documents vary somewhat from state to state, but the concept is the same: Someone is charged with making all health care decisions for Dad, including whether to withdraw artificial life support. These written instructions are critical for families. The clearer the instructions, the less speculation, controversy and anxiety await adult children in stepping into their parent’s decision-making position.
April 9, 2010
Could the Estate Tax Repeal Cost Your Family More?
Due to Congress's failure last year to pass a revised version of the 2001 estate tax bill or to extend 2009's rules of a $3.5 million exemption and 45% estate tax, the estate tax law expired on January 1. Thus, with the repeal (for now) of the federal estate tax for 2010, it is widely assumed that the estates of high net worth Americans who die this year will be exempt from estate taxation.
Not so fast. While that might be true for some, it is also true that beneficiaries who inherit appreciated assets this year may now face a capital gains tax.
Here’s why. When the estate tax law expired, so did a provision that allowed assets to be "stepped up" to their date-of-death value at the passing of the owner, thus avoiding the levying of a capital gains tax on the appreciation of those assets. Therefore, while the current law has no estate tax, it does tax assets that have appreciated above a $1.3 million exemption when sold by heirs.
This peculiar situation poses some challenges with respect to estate planning. While the demise of the 45% estate tax certainly would help some families more than a 15% capital gains tax would hurt them, for many other families the opposite is true.
According to the Tax Policy Center, this change will negatively affect the families of at least 50,000 taxpayers who die this year. In contrast, the old law affected only about 15,000 estates per year.
This fiendishly complex issue is discussed in a February 13, 2010, Wall Street Journal article, "Why No Estate Tax Could Be a Killer," that includes estimates showing who would be better off under last year's law versus this year's system. The author determined that heirs of estates with assets totaling between $1.3 and $4.3 million would have been better off last year, while those with larger estates will fare better this year.
This is a very interesting argument that is causing a lot of discussion. If your estate includes any low-basis assets, such as stocks, real estate or a family business, you should review your asset situation with your estate planning attorney to gain a clearer notion of how the current law will affect you. While this situation remains unresolved, you should avoid taking any irrevocable actions, such as distributing or selling major assets.
Not so fast. While that might be true for some, it is also true that beneficiaries who inherit appreciated assets this year may now face a capital gains tax.
Here’s why. When the estate tax law expired, so did a provision that allowed assets to be "stepped up" to their date-of-death value at the passing of the owner, thus avoiding the levying of a capital gains tax on the appreciation of those assets. Therefore, while the current law has no estate tax, it does tax assets that have appreciated above a $1.3 million exemption when sold by heirs.
This peculiar situation poses some challenges with respect to estate planning. While the demise of the 45% estate tax certainly would help some families more than a 15% capital gains tax would hurt them, for many other families the opposite is true.
According to the Tax Policy Center, this change will negatively affect the families of at least 50,000 taxpayers who die this year. In contrast, the old law affected only about 15,000 estates per year.
This fiendishly complex issue is discussed in a February 13, 2010, Wall Street Journal article, "Why No Estate Tax Could Be a Killer," that includes estimates showing who would be better off under last year's law versus this year's system. The author determined that heirs of estates with assets totaling between $1.3 and $4.3 million would have been better off last year, while those with larger estates will fare better this year.
This is a very interesting argument that is causing a lot of discussion. If your estate includes any low-basis assets, such as stocks, real estate or a family business, you should review your asset situation with your estate planning attorney to gain a clearer notion of how the current law will affect you. While this situation remains unresolved, you should avoid taking any irrevocable actions, such as distributing or selling major assets.
March 23, 2010
Selecting the Guardian for a Minor Child
Who would you like to be the guardians of your young children if you pass away?
Nothing will stop a good financial, estate, or life insurance plan dead in its tracks quicker than the following question: “Who would you like to be the guardians of your young children if you pass away?”
Squealing brakes. Usually, the parents just look at each other with terror and confusion. In many ways, it's an overwhelming thought and the ultimate conversation stopper. This is where parents really need help from their advisors. Few couples can think through this alone and if they try, they simply stop planning. As a result, they leave their children — the most important thing in the world to them — at risk. No judge in the world wants to appoint a guardian for a minor child; they would rather have the decision made before the case gets before them.
The “least evil” guardian. Parents usually procrastinate choosing a guardian because they're looking for the best one. Considering that parenting is usually a mix of elation, love, guilt, and self-loathing, all at the same time, it's hard to find someone who would be ideal to replace you. Where will you find someone who'll love your children like Mother Theresa would, while investing like Warren Buffett? The answer, of course, is that you never will.
The first thing we suggest is to divide the responsibilities. First, choose someone to raise the children (the guardian). Then, select someone else to invest the money (the trustee). The guardian's job is to raise the children until they reach 18. Once they reach this age, the children, in theory, are adult enough to make their own decisions.
But how do you choose among all the different candidates? The best guardian is the “least evil” one. This is the person among all your client's family and friends, who would never live up to the ideal standards of Mother Theresa and Warren Buffet, but would raise young children better than anyone else.
Benefits of a trust. The trustee can be a family member, or an independent third party like a trust company. Its job is to manage the investments for the children. It's important to remember that, while the children are adults at age 18, a trust can be structured to last longer than the children's lifetimes. This provides a tremendous amount of flexibility to parents when considering how to leave money to their offspring. They don't need to give a lump sum distribution at age 18. A trust, therefore, is the preferred estate planning tool in many cases.
But it also begs the question, “Who should be the trustee - the “Warren Buffett” - for the kids?” Who is that special person who can profitably invest money for your heirs with a long-term perspective? It's a crucial decision.
Nothing will stop a good financial, estate, or life insurance plan dead in its tracks quicker than the following question: “Who would you like to be the guardians of your young children if you pass away?”
Squealing brakes. Usually, the parents just look at each other with terror and confusion. In many ways, it's an overwhelming thought and the ultimate conversation stopper. This is where parents really need help from their advisors. Few couples can think through this alone and if they try, they simply stop planning. As a result, they leave their children — the most important thing in the world to them — at risk. No judge in the world wants to appoint a guardian for a minor child; they would rather have the decision made before the case gets before them.
The “least evil” guardian. Parents usually procrastinate choosing a guardian because they're looking for the best one. Considering that parenting is usually a mix of elation, love, guilt, and self-loathing, all at the same time, it's hard to find someone who would be ideal to replace you. Where will you find someone who'll love your children like Mother Theresa would, while investing like Warren Buffett? The answer, of course, is that you never will.
The first thing we suggest is to divide the responsibilities. First, choose someone to raise the children (the guardian). Then, select someone else to invest the money (the trustee). The guardian's job is to raise the children until they reach 18. Once they reach this age, the children, in theory, are adult enough to make their own decisions.
But how do you choose among all the different candidates? The best guardian is the “least evil” one. This is the person among all your client's family and friends, who would never live up to the ideal standards of Mother Theresa and Warren Buffet, but would raise young children better than anyone else.
Benefits of a trust. The trustee can be a family member, or an independent third party like a trust company. Its job is to manage the investments for the children. It's important to remember that, while the children are adults at age 18, a trust can be structured to last longer than the children's lifetimes. This provides a tremendous amount of flexibility to parents when considering how to leave money to their offspring. They don't need to give a lump sum distribution at age 18. A trust, therefore, is the preferred estate planning tool in many cases.
But it also begs the question, “Who should be the trustee - the “Warren Buffett” - for the kids?” Who is that special person who can profitably invest money for your heirs with a long-term perspective? It's a crucial decision.
Naming a Guardian for Your Children: Six Common Mistakes
If you have named guardians for their kids, you may have made one of these six common mistakes:
You may have named a couple to act as guardians, but you have not indicated what should happen if the couple broke up or one of the spouses died. This means your kids could end up in the care of someone you did not choose.
You may not have named enough alternates to serve if your first choice cannot serve.
You may have considered financial resources of potential guardians when deciding who should raise your children. Your guardians do not have to also be financial decision-makers for your kids; your guardians are the people who will be in charge of your kids' emotional, spiritual and physical well-being – not necessarily their money. It's your responsibility to leave enough money behind to take care of your kids, either through savings or life insurance. You can name someone other than your guardians to take care of that money if the best-choice guardians are not good with money.
You may have not provided for someone to take care of the money you are leaving behind. That means your money could go outright to your kids at 18 – unprotected.
You probably named only long-term care guardians and did not make any arrangements for the short-term care of your kids if you were in an accident. This means your kids could be taken out of your home and into the care of strangers until the authorities could figure out what to do.
You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your kids.
The good news: Avoiding these mistakes is easy when you have the right guidance.
You may have named a couple to act as guardians, but you have not indicated what should happen if the couple broke up or one of the spouses died. This means your kids could end up in the care of someone you did not choose.
You may not have named enough alternates to serve if your first choice cannot serve.
You may have considered financial resources of potential guardians when deciding who should raise your children. Your guardians do not have to also be financial decision-makers for your kids; your guardians are the people who will be in charge of your kids' emotional, spiritual and physical well-being – not necessarily their money. It's your responsibility to leave enough money behind to take care of your kids, either through savings or life insurance. You can name someone other than your guardians to take care of that money if the best-choice guardians are not good with money.
You may have not provided for someone to take care of the money you are leaving behind. That means your money could go outright to your kids at 18 – unprotected.
You probably named only long-term care guardians and did not make any arrangements for the short-term care of your kids if you were in an accident. This means your kids could be taken out of your home and into the care of strangers until the authorities could figure out what to do.
You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your kids.
The good news: Avoiding these mistakes is easy when you have the right guidance.
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