Why Have Counselling in Estate Planning? Why a Three-Step Process?

Many people think of estate planning as a way to save estate taxes and perhaps a way to avoid probate. There are many, more important reasons for estate planning.

For example, have you asked the following questions?: How do you want to be cared for when you can’t take care of yourself? If your wife remarries after you die, do you want to make sure that her new husband can’t spend your money? If your husband hits a school bus full of children after you die, do you want to make it harder for the judgment creditors to collect your money when they sue him? If your wife divorces her new husband after her remarriage, do you want to make sure that he doesn’t get half of your money? Do you want to make sure that your guardians know how to share your values while they finish raising your children?

I suggest that most people would answer all these questions “yes”. So how is their plan accomplishing these things?

Problem #1 with Traditional Estate Planning: Most estate plans are upside down! They focus on tax planning instead of the personal concerns, protections, and goals.

Problem #2 with Traditional Estate Planning: Most estate plans just don’t work! A plan works when all of your expectations are met. These expectations aren’t met because clients and professional advisors see estate planning as a transaction ending in documents, instead of the process ending in results. Things change. Estate plans should too.

I believe you will achieve the best estate planning results with a Three Step Strategy™ that uses clear, comprehensive, customized instructions for your own care and that of your loved ones. The instructions might include a will, a trust, a power of attorney, a living will, and other documents.

Step #1: Work with a Counselling-Oriented Attorney as opposed to a word-processing attorney. Most estate planning in the US is little more than word-processing. You don’t need a professional for that! The professional’s value comes from counsel and advice based on knowledge, wisdom, and experience.

Step #2: Establish and Maintain a Formal Updating Program. There is constant change in personal situations, both family and financial. Tax laws and other laws change every year in ways that will impact many estate plans. Finally, because attorneys don’t know everything, the attorney’s experience and expertise change. Without updating, plans won’t work the way the family intended them to. Without a Formal Updating Program, the updating rarely happens.

Step #3: Assure that Your Wisdom is Transferred Along with Your Wealth. In many families, the parents have an abundance of wisdom that has often been earned the hard way. Through Wealth Reception, an approach that prepares children and grandchildren (or nephews and nieces, or godchildren, or friends) to receive wealth; parents’ wisdom can help make their money be a benefit instead of the burden that it often is. Most financial windfalls, including inheritances, disappear within 18 months. You can avoid that unfortunate conclusion to an otherwise worthy inheritance with proper Wealth Reception planning.

(Article adapted from Planning Partners Press)

New The Truth About Estate Planning™ Videos Available Online

We have a distinct process for meeting with prospective clients, just as we do for designing their estate plan.

For the past several months we have been mailing a DVD of  The Truth About Estate Planning™ and a Welcome Guide to prospective clients before they attend a Get Acquainted Meeting.  Clients who watch the video receive perspectives and ideas about estate planning that often they never knew existed.

These videos are now available online on our main web site at www.legacyplanningllc.com.  To watch the videos (2 parts) navigate to the home page of our site with a web browser, then either click on the play arrow on the face of the video, or the “view in YouTube” button on the lower right of the video.

Top 10 Estate Planning Mistakes

Estate planning is a complex and highly specialized area of law with many potential pitfalls. Often people who have been financially successful and have planned well throughout their entire lives simply drop the ball when it comes to properly distributing their assets to heirs. These are some of the most common mistakes people make when planning their estate.

1.         Leaving the Living Trust Unfunded: A living trust is merely a vehicle that allows you to pass your assets outside of probate. However, if there are no assets in the trust, nothing has been accomplished. There is no point in drafting a living trust if the assets are not re-titled into the name of the trust.

2.         Leaving Assets as Joint-Tenancy: Titling assets under tenancy by the entirety / joint-tenancy with-right-of-survivorship (JT/WROS) does avoid probate because the assets pass automatically upon the first death. However, those assets will be subject to federal and applicable state estate taxes when the second person passes away.

3.         Leaving Assets Outright to Beneficiaries: Assets that are left outright to heirs and beneficiaries are exposed to creditors, predators and divorcing spouses. It is much better to leave assets in trust for their benefit. Assets left in trust have potential asset protection. The beneficiaries still have access to the funds but creditors, lawsuits and divorcing spouses normally cannot touch the assets inside the trust.

4.         Little or no Mental Disability Planning: If no or inadequate planning has been done, mental disability often results in the “living probate” of court-ordered and supervised guardianship and conservatorship.  Using a living trust, you can choose who will decide when you’re disabled, who the disability trustee will be, and leave detailed instructions about how you want to be cared for during your disability.

5.         Not Having a Living Will: Some people assume that because they have a living trust they do not need a living will. This assumption is wrong. A living will gives guidelines for your physician to follow in the event you are in a terminal, end-stage, and persistent vegetative state. This is the Terri Schiavo document.

6.         Owning Life Insurance in Your Own Name: Many people are not aware that the death benefit of an insurance policy, owned by the insured is included in their taxable estate. This can cause a large portion of the death benefit to be eaten up by estate taxes. A simple way to avoid this is to create an irrevocable life insurance trust or ILIT. The money will pass outside the estate to the named beneficiaries without being subject to estate tax.

7.         Not Communicating with Trustees and Beneficiaries: It is important to let the people who are named in your estate plan, either as trustees or beneficiaries, know what role you are asking them to play. Proper communication with these people (and providing them training) will go a long way to ensure a smooth transition during the settlement of your estate.

8.         Not Knowing Where All the “Stuff” Is: A scattered estate plan by a secretive decedent may cause some assets to be left uncollected, undistributed and even lost.

9.         Not Putting Your “Stuff” into the Trust: Things like furniture, art and clothes do not have a title to them. Therefore, they must be transferred into the trust using a bill of sale. Assets left outside the trust will go through probate. There is no point in probating your “stuff” if it can pass through the trust to your heirs.

10.       Not Updating Your Estate Plan: Each year Congress passes new laws, the IRS issues new regulations and circumstances in your own life change. All of these things can affect your estate plan. It is imperative that your estate plan is reviewed on an annual basis to avoid unintended results.

The Three Costs of Estate Plans

The value of an estate plan is not just in the cost of the documents.  The value of an estate plan is measured by whether it meets your needs and expectations, and the needs and expectations of the people that will be left behind to administer it and live under it.

In reality, there are three costs to any estate plan: (1) the initial cost of the documents; (2) the cost of updating and maintaining the plan (or not doing so); and finally (3) the typically largest cost of estate administration.

Most people (and financial advisors) have been taught to ask what the cost is for only the first cost of an estate plan, the cost of the initial documents.  They shop around law firms in town asking, “What will you charge me for it?” and “it” is typically a word-processed, fill-in-the-blank, bare-bones form document. 

 A second cost of an estate plan is the cost of keeping it updated and maintained.  Typically clients don’t know when a change in the law makes their plan outdated, and attorneys don’t know when a change in the client’s life means the plan needs to be updated.  Because attorneys often charge by the hour, clients are afraid to call the attorney because they don’t know how much it will cost.  So many plans are never updated.

 The third cost of an estate plan is the cost of administering the plan, a cost that will be borne by your loved ones after you are gone. Many attorneys will charge only a small fee for document preparation, with the expectation that they will then make it up with a probate proceeding in the future when you are gone.  The cost of administration can often equal 2%-8% of the total value of an estate, costing thousands of dollars for attorney fees, trustee fees, accountant fees, probate fees and other costs.  This is often true even for those with living trusts, because at the time of death plans are often not fully funded, and both a probate and trust administration are required.

When looking at the cost of an estate plan, you must look at all three costs to determine which estate planning firm offers better value.  An initial low cost for “it” can often be the most expensive plan overall, due to the hourly costs of updating and maintenance, and the often very high costs of administering a plan that is unfunded and outdated.  On the other hand, a plan customized to you and your family, and regularly updated and maintained by participation in a formal maintenance and update program, can often cost much less overall (and actually work!) due to the much lower costs of estate administration at the end.

The New Estate Tax Law

In December 2010 the President signed a new tax law that affects every trust written and signed by married couples.   Significantly, it allows a much greater amount of assets to pass to beneficiaries without estate tax.  Although we expect this change to greatly reduce the Federal tax liability for our clients, we strongly encourage our clients and strategic partners to continue to emphasize estate planning both to implement other goals of estate planning and also reduce Oregon state estate tax liability.

 SHORT TERM FIX – UNCERTAINTY STILL RULES

The new law is, once again, short term in nature – it sunsets December 31, 2012.  As an aside, that coincides with the next federal and Presidential elections.  The new law reflects the strong election victory of the Republicans in November.  If the President is able to win re-election in 2012, he will likely bring many more Democrats with him, as he did in 2008. If he does, we suspect a smaller estate tax exemption amount after 2012.  If the law sunsets in 2012, the exemption reverts to the 2001 level – $1 million.                    

So once again Congress has provided only a short-term fix to estate tax issues.  As a result, we need to plan for a number of possibilities for the future. 

$5 MILLION EXEMPTION PER PERSON AND “PORTABILITY”

 The new law allows a person to pass $5 million at his/her death without estate tax.  It also allows a married couple to pass $10 million.  In the past, a married couple could use both spouses’ exemptions only if the first spouse to die left the exempted amount to a non-spouse, either by going directly to the kids or by placing these assets into a credit shelter trust, or in our language, a Family Trust.  This trust sheltered the exemption amount from estate tax, yet the surviving spouse still had access to the assets.  In our process, this trust also protected the assets against remarriage, creditors and predators.  Now, you can pass the first $5 million directly to the surviving spouse without losing the deceased spouse’s exemption.  This is known as portability.           

 Under the new law, a Family Trust is not necessarily required to gain the advantage of both spouses’ tax “coupons”.  In other words, you still get to use the $5 million exemption of the first spouse to die, upon the death of the second spouse.  In order to use this exemption, however, you must file the estate tax return (Form 706) at the first death.  In the past, this form was not required unless the deceased spouse had an estate in his/her trust that exceeded the exemption amount.  This requirement is significant because the 706 can be an overwhelming and complicated tax return, requiring appraisals and proof of values.  Typically this tax return is filed by the attorney, and virtually all 706 tax returns are personally reviewed by an IRS agent.  In other words, the audit risk is very high.

When Oregon estate planning attorneys initially learned about the portability provisions, they assumed that Family trusts (credit shelter trusts) were now unnecessary and should be eliminated from estate plans.  However, as they have continued to talk and think about the difficulties involved, even attorneys who only consider tax effects are now advising clients to continue using Family trusts as their primary planning tool to reduce or avoid estate tax.  This is especially true because Oregon has its own estate tax with a $1 Million “coupon,” with no portability provisions.

ASSET PROTECTION AND FLEXIBILITY ARE STILL CRITICAL

Many families will still want to use a Family Trust, even if taxes are not an issue.  Some reasons include:

1. Protecting these assets from a lawsuit against the surviving spouse.
2. Preventing the surviving spouse from unintentionally disinheriting the decedent’s children if the surviving spouse remarries.
3. Protecting the growth in value of the deceased spouse’s property during the life of the surviving spouse from future estate tax.
4. Allowing flexibility for the surviving spouse to manipulate his /her income taxes after the first death.
5. If the law sunsets again in 2012, we go back to the old system.

In our process, we will continue to counsel our clients on the options and allow them to decide which goals are most important to them.  We suspect many of our clients will want to continue to use the Family Trust as a planning tool. 

GIFT TAX EXEMPTIONS ALSO INCREASE

The law also increases the lifetime gift exemption to $5 million.  In 2001, the gift tax laws were “decoupled” from the estate tax law.  As the estate tax exemption rose from $1 million to $3.5 million to an unlimited amount in 2010, the gift tax exemption remained at $1 million.  The new law re-unifies the exemptions so they match each other.  The law does not change the annual gift exclusion amount, which is indexed to inflation and will stay at $13,000 for 2011.

There are 2 different gift tax laws.  The first is the annual gift tax exemption.  This is the amount you can give to anyone each year without any tax consequences.  This is the $13,000 per year per person.  Since the IRS cannot keep track of every gift, if you give a person under $13,000 in a calendar year, the IRS doesn’t care and doesn’t want to know.  If you give any one person more than $13,000 in a year, you are required to file a gift tax return (Form 709) and the amount over $13,000 is subtracted from your estate tax exemption ($5 million).

The other gift tax rule is the lifetime exemption, which under the new law is $5 million.  This law allows a person to gift away $5 million during his/her lifetime, and this rule is cumulative.  You can give away $5 million in total, not $5 million per beneficiary.  As stated above, if you give away more than $13,000 in a calendar year, you must tell the IRS and subtract the excess amount from your $5 million lifetime exclusion.  For example, if John gifts $1 million to his daughter, when John passes away, he can only pass $4 million free from estate tax.  If you gift more than $5 million during your lifetime, every additional dollar will be taxed at 35%.

GIFTING AND COST BASIS RULES

Gifting is always a difficult issue because of the cost basis rules.  Basis is what you pay for something.  If you buy a piece of property for $100,000, your cost basis is $100,000.  If you sell this property in 10 years and it is worth $300,000, you will pay capital gains on the $200,000 increase in value (assuming it is not your personal residence or you do not 1031 exchange into a new property).  If you gift this property to your son, his basis is your carry over basis – $100,000.  If he sells it, he pays the capital gains tax.  If, instead, you die and your son inherits the property, he receives a step-up in basis.  This means his basis is the $300,000 value at your death, so he can sell it for $300,000 and pay no capital gains tax. 

So, barring other considerations, it is better to inherit an asset than to have it gifted to you.  In the example above, the son saves at least $30,000 in taxes by inheriting the property.

NEW ESTATE TAX RATES

Tax rates have also changed.  Without these changes, any amount over $1 million passed at death was taxed at a starting rate of 41% and could rise to a rate as high as 60%.  The new law implements a flat rate of 35%.

OPTIONS IF SOMEONE DIED IN 2010

For clients or family that died in 2010, this law imposes some new rules.  Prior to the new law, there was no federal estate tax due in 2010 no matter how large the estate, but the rules regarding step-up in basis were modified.  For step-up in basis purposes, the old law stated the executor can allocate a step-up in basis of $1.3 million to assets inherited by anyone, including the surviving spouse, other relatives, or non-relatives, and the surviving spouse could claim an additional $3 million step-up.

Under the new law, you have a choice.  You can either choose to use the new $5 million exemption and receive a full step-up in basis, or you can pass an unlimited amount of assets, but be subject to the 2010 step-up in basis limits.  Obviously, most people will choose the new option, but for folks with an estate greater than $5 million ($10 million for couples), it is prudent to calculate the tax under both scenarios and discuss the various options with your planning team.  If you choose the unlimited option, you do need to file an estate tax return to claim your step-up in basis limits.

GOOD ESTATE PLANNING GOES BEYOND TAXES

As we observe the landscape of estate planning after these changes, one of the questions people ask is should you still plan if you do not have a taxable estate?  The answer to that question is a resounding YES!

Planning always comes down to goals.  Tax reduction or elimination is always an important goal, but it is almost never the most important.  Almost universally, people want to take care of their families, including their spouse and kids.  After providing for their families, some goals we see include:

1. Reducing the amount of hassle.
2. Avoiding probate.
3. Protecting privacy.
4. Reducing attorney fees.
5. Protecting the assets in the hands of my spouse and then my kids from things such as divorce, remarriage, alimony, child support, creditors, predators, addictive behavior or disability.
6. Preventing my beneficiaries from inheriting too much, too soon.
7. Paying for post-secondary education for grandchildren or other individuals.
8. Reducing or eliminating estate taxes.

In our process, Revocable Living Trusts meet all of these goals. 

A FORMAL MAINTENANCE PROGRAM IS THE KEY TO GOOD PLANNING

These changes also raise an important decision that we have emphasized with all of clients and planning partners – being in a formal maintenance program.  All of our trust clients will receive notice that laws have changed.  Those who planned within the last year or are a part of our annual maintenance program will automatically have their plans updated. 

(This article was adapted from and used with the permission of attorney Andrew Sigerson, Legacy Design Strategies LLC, in Omaha, NE)

Planning for Financial Incapacity Workshop – Wed, Nov 17th – Central Point OR

There is a huge gap in the planning finanical planning and estate planning professionals often provide clients: planning for financial inability or incapacity.  If there is any planning at all, it is often in the form of a bare-bones financial power of attorney.  These normally contain no instructions from the principal to the agent, and sometimes are not accepted by holders of the principal’s accounts.  Also, it is not uncommon for powers of attorney to be abused.

 This coming Wednesday, November 17^th, I am presenting a free one and one-half hour educational workshop on the topic, “Powers of Attorney: The Good, The Bad, The Ugly.”  In this workshop I will explore the use and misuse of powers of attorney, which are our predominant method of planning for mental incapacity, and also explain a superior planning alternative by using a living trust.

 The workshop will begin at 10:00 a.m. at Twin Creeks Retirement, located at 888 Twin Creeks Crossing, Central Point OR 97502.  There is no requirement to register in advance.

 Planning professionls or clients are welcome to attend.  I am also willing to provide a private workshop on this topic for the clients of professionals.  To schedule a date and time please contact me at (541) 324-1800.

Zero Tax Planning

A few weeks ago I heard estate planning attorney Dave Holaday speak on the topic of “Zero Tax Planning” at the National Network of Estate Planning Attorneys collegium in Orlando, Florida.  It sounded to me like a concept that would be very interesting to clients.

In contrast to the conventional approach (keep assets until death, leave to the family, and pay as little tax as possible), zero tax planning eliminates any estate tax through the use lifetime gifting to family members, gifting at death to charity, and the full use of estate tax exemptions.

It begins with the concept that paying estate tax is 100% voluntary.  The approach includes these factors:

• Make sure you have what you need during life
• Decide what you want the kids to have rather than simply leaving them what is left
• Implement one or more strategies  during life to achieve family wealth transfer goals
• Make lifetime and/or testamentary charitable gifts to reduce estate tax to zero

The process begins with the client answering four questions:

• How much estate tax would you like to pay?
• How much would you like your children and grandchildren to inherit?
• Your estate will ultimately go to three places; tax, heirs and charity.  Ideally, how would you like it to be divided?
• Under your current plan, how do you think it will be divided?  How do you feel about that?

Once the client’s goals are understood, the attorney and client together develop a plan to reach the client’s goals.

If you’d like to discuss these concepts in person and develop your own family plan, contact Jim Eagar at Legacy Estate Planning, LLC at (541) 324-1800.  Offices in Grants Pass and Medford, Oregon.

Trusts are not Magic Books; Estates Still Need to be Properly Settled

In talking to people who have chosen to  use living trusts as an estate planning tool, I’ve learned that many seem to think their trust will act as a “magic book” when there is a disability or death.  By that, I mean that they believe that because they have a trust, no action will need to be taken to settle the estate.

Anytime there is a death, there are four main tasks to be completed.  First, the assets of the deceased must be inventoried and valued.  Second, debts and claims against the estate must be evaluated, and legitimate claims must be paid.  Next, tax issues must be dealt with.  If a taxable estate, state and federal estate tax returns must be prepared and filed.  A personal income tax return must be filed for the partial year of death.  Fourth, the assets must be distributed to the beneficiaries in accordance with the trust instructions.  Depending upon the size of the estate and the level of pre-death updating and maintenance of the plan, these tasks can be quite complex and time consuming, and often take months if not years to complete.

However, often those with trusts have presumed that somehow having a trust will exempt them from doing these tasks.  It is not uncommon for a surviving spouse to do nothing.  At the second death, the family learns that the instructions of the trust were never implemented and the tax planning was not done.  If a disclaimer trust was used, it is often too late to set up the family trust, and the tax exclusion of the first spouse to die is lost.  The failure to properly administer the estate at the first death may cost the family hundreds of thousands of dollars in estate taxes which could have been avoided.

Anytime there is a disability or death, anyone with a trust should seek the appropriate assistance of an attorney who specializes in estate planning and settlement.  The attorney can help the successor Trustee to complete all of the actions necessary to settle the estate, and ensure that all requirements are met.

Providing for Your Pets after You’re Gone

Often pets serve as loving companions, and are treated as members of the family.  Many people prepare estate plans to provide for their loved ones after they pass on, but did you know you can also plan to provide for the care of your pet in your estate plan?  Oregon has one of the most progressive pet trust statutes in the United States.

 

A Trustmaker can designate a sum of money or other property to be held in trust for the care of any pets living at the time of his or her death.  The Trustmaker appoints a Trustee who is responsible to manage the property for the benefit of the pet(s).  It’s also wise to appoint a successor Trustee in case your first choice isn’t willing or able to serve.   The trust document should specify the standard of care that the pet is to receive to ensure that the Trustmaker’s wishes are carried out.

A Caretaker for the pet must also be identified.  This person’s job will be to provide for the daily well-being of the pet.  This can be the same person as the Trustee, or a different person.  You might want to consider two different people if the Caretaker is someone who doesn’t do well managing money, but would provide the best home for your pet.  If the Trustee and Caretaker are different persons, the trust should specify what types of reports or information they should share to ensure good communication.  If desired, a third-party independent “Trust Enforcer” can also be appointed to ensure that the pet is well cared for and the trust funds are used only for the benefit of the pet.

The trust terminates when the pet dies, or when the last pet dies if several pets were provided for.  The trust designates who is to receive any funds left when the trust ends.

If you don’t have an estate plan yet and would like to provide for your pet, be sure to discuss your desire for a pet trust with an experienced estate planning attorney so it can be included in your plan.  If you already have a plan that does not contain a pet trust, contact an estate planning attorney so that a pet trust can be added to your plan.

For additional information please contact Jim Eagar at Legacy Estate Planning, LLC, at (541) 324-1800.  www.LegacyPlanningLLC.com.

Powers of Attorney: The Good, The Bad, The Ugly

A financial durable power of attorney appoints another person, your “agent” or “attorney-in-fact”, to handle your financial affairs for you.  Typically, the power of attorney gives the agent the power to sell, transfer, manage, invest, or gift your assets.   Attorneys often prepare powers of attorney as a part of estate planning.  They are to be used in case you become mentally incapacitated and are unable to handle your own financial affairs. 

However, not all powers of attorney are of equal value or effectiveness.  The most effective powers of attorney are those which give very broad powers to the agent, but list those powers very specifically and in detail.  For instance, it is helpful if a power of attorney specifically gives the agent the power to manage IRAs, give gifts (including to themselves), and create trusts and modify trusts in order to facilitate Medicaid planning.

Probably the least effective powers of attorney are those that purport to grant very broad powers, but do so without giving specific powers.  Many do-it-yourself powers of attorney fall into this category.  Also, even many of the powers of attorney typically prepared by attorneys often do not include enough specificity, particularly when needed for Medicaid planning. 

Powers of attorney can also have an ugly side.  First, they can be refused by the 3rd party we want to accept them.  If a bank or other financial company does not want to accept a power of attorney, there is often no other alternative but to go to court to establish a guardianship and/or conservatorship.  This can cost thousands for court and attorney fees, can cause conflict between the incapacitated person and other family members, and takes control away from the family and gives it to the court.

A second real negative of powers of attorney is that they can be abused.  It is not uncommon for estate planning or elder law attorneys to encounter situations where an agent, typically a family member, has taken advantage of the authority they have been given.  I know of a recent example where the son who was the agent sold his mother’s house without her agreement, and cleaned out all of her bank accounts.  The problem is that powers of attorney are often given to one person, who has no accountability or supervision.

Given the negatives of using powers of attorney, is there better option?  Many believe that using a trust for disability planning has significant advantages.  For instance, in my trust design process, the clients decide how they will be determined to be disabled by selecting who will be a part of their “disability panel.”  This panel is often made up of both doctors and family members.  Clients also determine who will mange their affairs while they are disabled (disability trustees) and often choose co-trustees to provide accountability.  They also provide detailed instructions to the trustees regarding how they want to be cared for while disabled.

Clients find that financial institutions are often more likely to accept a disability trustee’s authority than that of an attorney-in-fact.  It’s not hard to see why.  Instead of being presented a single document purporting to convey authority (a power of attorney), they receive a copy of the disability planning process from the trust, a copy of the disability panel’s decision, and a certification of the disability trustees. 

While a power of attorney is certainly better than no planning at all for mental disability, it is certainly not the only or best planning tool.  If you are in need of this type of planning, I recommend you consult with an attorney skilled in the use of trusts as disability planning tools.