Most people understand the need to protect, and assign, their assets after their death. They know who will care for their children or pets, who will receive the family heirloom brooch, and who will inherit their financial assets. In this day and age, however, there is a new category of assets to consider: digital assets. Internet users should be considering what will happen to their digital assets, including social media accounts, email accounts, online document storage, and other resources, after they die.
A list of digital assets should be included in your estate plan. Consider how you will provide your survivors with a list of account locations, usernames, and passwords. Begin by making a list of all the accounts you have opened. Consider listing emails, social networking sites, photo sharing and editing platforms, online document storage or hard drive backup services, online banking, digital stock portfolio information, and more. Talk to your estate planner about what services they provide or suggest, and remember to update the list often, at least once every 30 days, or whenever you update passwords or open new accounts.After making a list of your digital assets, decide what you want done with those assets. Should the social media page be updated and allowed to continue "in memoriam?" Should only your partner or children have access to your online journal and financial information? Make a list of how you wish each account to be dispensed, which may include allowing them to continue, transferring ownership, or canceling services. Understand that some services, like Facebook, will provide loved ones with a reproducible digital copy upon request, and that restrictions can be placed on each account, to meet your post-mortem request, but these things can only be done if you have left thorough instructions.Unfortunately, there is no perfect solution for how to transfer password information to your loved ones. Any method will put the security of your accounts at risk, so consider the options and select one that you can live with. A single password and username can be left, for a service like google docs, where a master list is complied, a list can be left with the estate planner, a physical list can be locked in a safe or safety deposit box, or password services, like Legacy Locker, or Dead Man Switch can be used to transmit password information. Ultimately, how passwords are communicated is a matter of personal preference, and comfort.
All the best,
Continued uncertainty due to Congress's delays
At just about this time last year I posted a blog article called What to Expect of the Estate Tax in 2011. Well, another year has now passed and the estate and gift tax laws are still in disarray.
As I said last year, one of my primary objectives is to ensure that my clients are comfortable with the estate plan they have formulated. However, the current state of the estate tax law continues to make it very difficult to achieve that objective. Congress continues to delay addressing the federal estate tax issue, and clients continue to be skittish about making estate planning decisions.
Presently (in 2012), a U.S. citizen can give away assets worth $5,120,000 ($10,240,000 per couple) without having to pay any federal estate tax or gift tax (note: non-resident aliens and certain green card holders are still subject to a lifetime limit of only $60,000!).
However, these lifetime exemptions are scheduled to revert to $1,000,000 ($2,000,000 per couple) at the stroke of midnight on December 31, 2012. The tax rate on gifts over those amounts will also increase from the present cap of 35% to a whopping 55%.
Now is the time to act!
Despite the uncertainty that many of my clients feel as a result of the current federal estate tax situation, if your estate is likely to be worth more than $1,000,000 ($2,000,000 if you're married), now is the time to act: every dollar you give away this year (while the exemption is high) is one less dollar on which your heirs will pay taxes. Of course, you need to keep enough assets so that you don't run the risk of running out of assets yourself. But assuming that you're not likely to run out of money during your own lifetime, you can make sure your heirs aren't stuck with paying taxes needlessly.
If you're concerned that your beneficiaries are too immature to be able to handle a windfall, you can make the gifts in trusts for their benefit.
If you plan to make large gifts this year, I urge you to act quickly ... although it is unlikely that Congress will pass an estate or gift tax bill before the election, they might. And if they lower the lifetime exemption, you will lose out on the opportunity to pass these assets along tax free.
In addition, as we come closer to the end of the year, more people will be scrambling to lock in these exemptions by making large gifts. Based on my present volume of work, I anticipate that anyone who hasn't made an appointment for advanced gifting within the next 30 days will risk not having it done by the end of this year.
Even if you are not in a position to give away $5 million or even $500,000, I encourage you to take some steps to protect your loved ones. So here are a few basic estate planning tips for anyone who is leery about putting together a comprehensive estate plan.
- Make a Will – At the very least, everyone should have a will. A will allows you to set forth how you want your property distributed upon your death. Having a will insulates your estate from being conveyed according to the laws of intestate (death without a will) succession.
- Take Advantage of Available Exemptions – Each spouse may legally claim up to $5.12 million dollars of property as exempt in 2012. This may change depending on what Congress does. Regardless, you should use every penny of the available exemption to your advantage.
- Maximize Your Exemptions – Creating a credit shelter trust (an "A-B Trust") is one of the best ways to maximize the available estate tax exemption. A credit shelter trust allows you to fund the trust with assets equal in value to the available federal estate tax exemption. Any other assets you have may be left to your spouse free of estate taxes. Your spouse can draw from the trust’s assets while s/he is alive. Upon his or her death, the trust assets will be disbursed to your heirs or other beneficiaries, claiming your estate tax exemption. Your spouse’s estate will also be able to reduce or avoid estate taxes at the time of distribution to his or her beneficiaries.
- Purchase Life Insurance in an Irrevocable Trust – If your irrevocable trust purchases a life insurance policy, the life insurance proceeds will be distributed to the named beneficiaries estate-tax free upon your death. On the other hand, if you purchase a life insurance policy and hold it yourself as the “owner”, the proceeds will be part of your estate and subject to estate tax at up to the maximum tax rate (which is scheduled to revert to 55% in 2013).
- Give, Give, Give – My grandmother always told me that it is better to give than to receive. For purposes of avoiding or reducing estate taxes, this is especially true. You can give up to $13,000 per year to as many people as you like without paying gift taxes. By giving more during your lifetime, you lower your heirs’ and beneficiaries' exposure to estate taxes.
Whether you have few assets or a multi-million dollar estate, you must have an effective estate plan. As a certified estate planning, trusts, and probate law specialist (certified by the California State Bar Board of Legal Specialization), I have the skills and knowledge to handle complex estate planning matters. To schedule a consultation to discuss your estate planning goals and needs, please contact us.
The right move now can save you money in 2012 and beyond. Download our free Year-End Asset Protection Update for Bay Area Families to learn about options to consider before Dec. 31st.
All the best,
A sad case currently before the San Francisco Probate Court, In the Matter of the Fiorani Living Trust, deals with the tragic issue of what happens when a person abuses his position as trustee over a special needs trust meant to protect an individual who has developmental disabilities.
Years of financial mismanagement, theft, and downright despicable conduct took place before action was taken to protect Lucia Fiorani, the person the trust was designed to look after. After a concerned relative began asking questions about what was going on with the money Fiorani’s parents had left for her care, the extent of the abuse came to light. Claims against those responsible have been filed under California’s elder abuse and dependent adult abuse statutes to attempt to right the wrongs that were done.
Millions of dollars and property in the Russian Hill neighborhood are at stake as the case continues to work its way through the court system. The lesson for parents and other loving relatives is clear: take care when establishing a special needs trust.
By way of background, special needs trusts are often created for those who lack the capacity to handle their own financial affairs. They can be especially helpful for people with mental or physical disabilities who would lose public benefits (such as Medicare, Medi-Cal, or SSI) as a result of receiving an inheritance or receiving the proceeds from a lawsuit.
Special needs trusts ("SNTs') can be established for children or adults who have problems that make them unable to provide for themselves financially and who lack the ability to pay for their own medical care, food, shelter, and other basic needs. Typically, SNTs are established for people with mental or physical disabilities, health conditions,or the types of personal problems (for example, an individual with substance abuse problems) that might result in their needing public assistance now or in the future.
As illustrated in this case, there is no upper limit on the amount of money and property that can be put into a special needs trust for a loved one's benefit. Many people even use life insurance policies to fund these kinds of trusts.
Special needs trusts, when constructed appropriately, can help protect the disabled person from being taken advantage of and losing the money that is intended for their benefit.
Such trusts offer a way to hold assets for your loved one, while at the same time preventing him or her from being disqualified from receiving Supplemental Security Income (‘SSI’) or Medi-Cal. Although your loved one is named as the beneficiary of the trust, the assets are not counted as his or her available resources because the assets are not within his orher control.
A gift or inheritance that leaves your disabled beneficiary with non-exempt assets in excess of $2,000 is basically a gift to the federal government, as it will disqualify the beneficiary from receiving public benefits until the assets are “spent down” to $2,000 or less. He or she may also not qualify for private health insurance, and could be left paying for his or her medical expenses. Given the high cost of medical treatment, disqualification from Medi-Cal could cause your beneficiary’s inheritance to be exhausted in short order. After that, your beneficiary will be completely dependent on other family members and meager governmental assistance.
To avoid such a situation, you should act now to set up a special needs trust to protect your beneficiary when you’re no longer around to do so. There are many other considerations that must be kept in mind when you are planning for a special needs individual and this article was meant to make you aware of but a few of them. For more information, feel free to contact my office.
See Our Related Blog Posts:
Special Needs Trusts: Estate Planning Strategies for the Special Needs Family
Asset Protection and Rising Financial Abuse of the Elderly
All the best,
The Wall Street Journal ran an interesting article this weekend examining the extent to which gift givers can exert control over their heirs once they are dead and gone. The article reveals several things that might surprise you given the scope of control that can be included in the language of trusts and wills.
The Journal explained that the issue is of special importance given the unusually favorable estate and gift tax rules that are set to expire soon. Currently, the exemption is $5.12 million per person – twice that ($10.24 million) for a couple. The top tax rate applied to amounts beyond that number comes in at 35%. But not for long, the article warns: the current exemption is scheduled to drop to $1 million and the top tax rate will jump to 55% come January 1, 2013. Given the state of affairs, expert recommend acting now, especially when it comes to giving gifts, as such moves made now can be grandfathered in if the law becomes less favorable in the future.
One important thing to remember if you’re trying to avoid taxation is that you cannot exert any control over the assets you’ve handed over. The IRS has already made clear they will deny tax benefits to a trust if the person who creates the trust retains control, even if that control is indirect.
Many people have heard how Leona Helmsley, the widow of a billionaire real-estate mogul, left a million dollar trust to care for her dog. This wasn’t Ms. Helmsley’s only quirky estate planning move, she also required her grandchildren to visit their father’s grave once a year if they wanted to continue receiving payouts. A wealthy family in Connecticut successfully inserted a provision requiring that heirs spell the family name a certain way if they ever wanted to see a dime of the money. Though these represent some especially bizarre examples of restrictions, it’s important to note there are limits.
One limit includes provisions that are contrary to public policy. This includes requirements that promote divorce or demand criminal conduct and has been expanded to include racial discrimination. Provisions that discourage marriage have also historically be deemed unacceptable as well as any that are ambiguous, illegal or essentially impossible to implement. Religious restrictions are usually OK, like those leaving money to pay for a religious education, though they can, at times, be viewed with more suspicion.
When setting up a trust or a will, there are some important things to consider. First, the devil is in the details. Make sure you clearly spell out who is to be included. For instance, consider carefully what you mean when you say “spouse” and come to a decision about whether that can include same-sex partners. Descendants can also be a tricky issue: adopted kids, stepchildren, children from a surrogate and even those conceived from frozen sperm can all be considered “descendants” under certain circumstances. Though the examples may sound wild to you, they certainly aren’t unheard of. You have no way of knowing what shape your family will take in years to come and it’s best to cover all your bases.
One tool for watching over future generations that the Journal discusses is what is known as an “incentive provision.” Such provisions are meant to promote your descendants’ productivity by doing things like matching their income (to encourage working and not laying around) or providing money to get a new business off the ground. Gift givers have to think about the goals they have for their families and if certain gift strategies would help achieve their ends. Giving money to stay-at-home moms may help strengthen a family, but it’s important to realize how hard it is to think through every eventuality.
Another way of maintaining control once you’re gone is to set up an “heirloom asset” trust. These are designed to protect important family assets, such as a house that has been in the family for generations. Experts recommend that the trust be given enough money so that heirs don’t have to fight over who pays for maintaining the old homestead.
Not every kind of activity can be effectively governed from beyond the grave. For example, experts caution against inserting a requirement to test heirs for drugs, because it can be hard to find a trustee willing to undertake this kind of intrusive supervision.
Whether you have a few assets or a multi-million dollar estate, you need to have an effective estate plan. As a board certified estate planning, trusts, and probate lawyer, I have the skills and knowledge to handle complex estate planning matters (certified as a specialist by the California State Bar Board of Legal Specialization). To schedule a consultation to discuss your estate planning goals and needs, please contact us.
Source: “How to Control Your Heirs From the Grave,” by Laura Saunders, published at WSJ.com.
See Our Related Blog Posts:
Three Reasons to Keep Assets In Trust for Your Child
What to Expect of the Estate Tax Law in 2011
All the best,
Though the decision to secure your own representation for estate planning may appear to be a simple financial one, the reality is that the choice touches on a variety of deeply personal issues in your relationship. Don’t let emotions get in the way of your speaking up and doing what you need to do to protect your family’s future.
The 6 key things to consider
A recent article at Forbes.com highlighted some of the issues surround estate planning as a married couple. Getting your affairs in order is crucial to securing your family’s future. (And when blended families are involved, it’s especially important. If a parent remarries, all too often disputes arise following the death of a parent.)
The issue the Forbes article raised is an interesting one: should you work together with one attorney or should each of you get your own representation for estate planning purposes? While it’s certainly true that joint representation is more cost effective in the short term, it can also create issues between the couple, especially if underlying trouble already exists. Joint representation can spell disaster if the couple has problems communicating generally.
The Forbes article mentions the following things to consider when deciding whether you should go it alone or work together when crafting an estate plan:
1. Only one party has children
It’s no surprise that the vast majority of people want to leave their estates to their children. The problem that can occurs is if the other spouse has no children of their own then the parent may fear dying first and leaving their kids empty handed.
2. Disparities in income
A large income gap between spouses can affect joint planning and may be a good reason for each of you to go your own way.
3. One of you typically runs the show
If one party dominates the other in every day interactions, it can spell trouble when the estate planning process begins. A communication breakdown can leave one spouse upset with the final deal, believing his or her opinions were never fully considered. A skilled estate planner should recognize this imbalance and suggest that the parties consider finding separate representation.
4. Length of the marriage
This one’s pretty obvious: the shorter the relationship, the greater reason to get separate attorneys.
5. The number of prior marriages
The author of the Forbes article believes that a solid rule of thumb says that the greater the number of prior relationships a person has, the greater the need for separate representation when it comes time to make plans for the future.
6. Large age gap
The bigger the age difference between you and your spouse, the bigger the reason to contemplate solo representation. The suggestion that you seek separate representation is not meant as a critique of your relationship’s health; it’s meant only to acknowledge the fact that you both are in very different places in your lives and, as such, face unique concerns that can be best addressed with your own estate planning professional.
Though the decision to secure your own representation for estate planning may appear to be a simple financial one, the reality is that the choice touches on a variety of deeply personal issues in your relationship. Don’t let the complicated emotions get in the way of your speaking up and doing what you need to do to protect your family’s future.
Browse our other articles:
Source: “Estate Planning For Couples: Should It Be A Solo Or A Duet?,” contributed by by L. Paul Hood, Jr. and Emily Bouchard in the column by Deborah L. Jacobs, published at Forbes.com.
All the best,
The probate process can be complex and time consuming - especially in San Francisco probate cases involving multi-million dollars estates with diverse holdings. Here are my tips.
When a San Francisco County resident dies and has a will, someone must prove that the will is valid. That process is called “probate.” The first step in the probate process is to file the will with the San Francisco County Probate Court Clerk.
Time is of the essence here since California law says the will must be filed within 30 days after the decedent’s death.
Assets may pass through a trust
It is not uncommon for high-net-worth clients to have a trust. In such a case the majority of the decedent’s assets will pass through the trust, leaving little or nothing to be probated. If there are no assets to probate, then the legal requirements are fulfilled once the will has been lodged with the Probate Court.
However, if any assets are not held in the decedent’s trust, it is likely that they will need to be “probated” and then distributed pursuant to the terms of the decedent’s will. In that case the next step in the probate process is to file a Petition to Probate Decedent’s Estate. The petition must include the name of the decedent, his date of death, his address at the time of his death, and the name of the person filing the petition. The petition must also include:
- The name of the executor or personal representative;
- The names and addresses of the beneficiaries listed in the will;
- The names and addresses of everyone who would be legally entitled to inherit from the decedent if there were no will (that is, the decedent’s “heirs at law”); and
- The estimated value of the estate.
Once the petition has been filed, the court will set a hearing date. The person filing the petition is required by law to provide everyone who is named in the petition with notice of the hearing. That person must also make sure that a notice announcing the hearing is published in a local newspaper. That announcement must be in the format required by the Probate Code.
After the hearing, the probate judge will enter an order either granting or denying the petition. If the petition is granted, a document known as “Letters Testamentary” will be issued granting the executor authority to oversee and manage the estate is accordance with the will and the probate laws of the State of California.
Unfortunately, things might not always go so smoothly. If someone shows up at the hearing to contest the appointment of the executor, the judge will then have to schedule another hearing to allow that person enough time to file formal paperwork. If a contest is filed, it could take several hearings before a decision is made.
And this is only the beginning...
The hard work really begins once the Court has issued Letters Testamentary. No matter how small the estate, the executor must inventory the estate’s property; pay the decedent’s debts; collect any debts owed to the estate; file and pay estate, gift, and income taxes; and file annual accountings each year until the estate is closed. At the end of the process, once the court has issued an order permitting it, the executor must then distribute the remaining property of the estate to the heirs and beneficiaries.
If you are in or facing a probate in California
A qualified local probate attorney is well versed in all aspects of the complex probate process and typically assists Executors in handling these duties and obligations. If you are currently embroiled in or facing probate in California, please get in touch. I am an estate planning and probate attorney certified by the California State Bar Board of Legal Specialization as specializing in these matters, and I represent high-net-worth clients in San Francisco and surrounding areas.
If you found this article useful, also see:
All the best,
Bay Area families are running out of time to take advantage of the generous gift tax exemption in place this year. Now is the time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Get started now »
Bay Area families that have yet to take advantage of the current gift tax exemption are running out of time. As of midnight on December 31, 2012, the $5 million exemption disappears and will be replaced by a $1 million exemption. As it stands right now, gifts in excess of $1 million given after January 1, 2013, will be taxed at a whopping 55% top rate!
Last year, Congress raised the gift tax exemption from $1 million per year to a whopping $5 million per year ($5,120,000 per person, to be precise). In addition, the estate tax rate has been reduced from 55% to 35%. However, the increased exemption and reduced rates will last for only the 2011 and 2012 fiscal years, making it imperative to act now to create and revise estate plans to take advantage of these extraordinarily favorable terms.
According to the IRS, the gift tax occurs when a person or estate transfers money or property to another either for nothing or for something less than the full value of the property. Congress passed the tax specifically in response to wealthy individuals trying to avoid the estate or “death” tax by giving away their assets prior to death. Before this year, the relatively low threshold of the gift tax exemption discouraged large pre-death bequests.
I have previously said that those with a high net worth should do advanced estate planning beyond a basic will. The generous gift tax exemption currently in place makes now the best time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Some strategies include:
LLC: Starting a LLC and then making a large gift to capitalize the company. It’s important to note that the process of creating an LLC takes time; all the necessary documents have to be drafted and then approved by the Secretary of State. A prudent planner would need to begin the process right away if he wishes to take advantage of the favorable exemption.
FLP: Related to starting an LLC is the pooling of assets into a Family Limited Partnership. I have previously discussed the benefits of such partnerships here.
Trusts: Another option involves placing certain gifts in trusts. We advocate using various kinds of trusts to protect assets from creditors and con artists alike. This article from the Wall Street Journal contains an excellent rundown of the various trusts one can create to take advantage of the gift tax exemption. Some trusts, such as the Grantor Retained Annuity Trust can be structured so that there are no gift tax consequences.
Real estate: Real estate, much like closely held businesses, is notoriously hard to value and can greatly increase in worth over time. One only needs to look at the massive increase in home values in the Bay Area over the past 25 years (or the dip for the past several) to know how volatile the real estate market can be. Home prices may be lower now, but can increase in value substantially over the next decade or two, increasingly the value of the gift for the recipient. The current economic environment, in which many asset values are depressed and interest rates are at historic lows, actually makes this a perfect time to make gifts, since these factors can really help maximize the benefits of gifting.
Even if you can only afford to give smaller gifts between $1 million and $4.999 million (small being a relative word), it would still be wise to take advantage of this generous exemption before the year’s end and the $5 million ceiling expires. If you have not yet tried to take advantage of the exemption, you need to act quickly. The likelihood of Congress extending this exemption is widely seen as unlikely given that it is an election year.
Creating a gift plan that will suit your individual needs takes time. Appraisals, business valuations, and trust documents must often be created in order to ensure the gift tax exemption is applied properly in your situation. Talk to your California gift-planning attorney right away if you want to take advantage of the exemption before it ends.
Source: “The $5 Million Tax Break,” by Anne Tergesen, published at WSJ.com.
See our related blog posts:
All the best,
On a $500,000 probate case, fees paid to attorneys, the court, and third parties would probably add up to between $13,890 and $26,890. Probate is often more complex, more stressful, and more time consuming in cases involving large estates (say $5M or more).
“Probate” comes from one of those Latin words that lawyers love to use. Basically it means “to prove.” When you leave a will, someone has to prove to a court that the will is valid. (It’s possible to avoid probate by putting your estate into a living trust. But I discussed that in several 2010 and 2011 blog articles.)
There are three key ways a California probate attorney like me helps clients:
- By consulting with family members
- By going to court with clients or on their behalf (and preparing all of the necessary court paperwork and consulting with the executor on a range of issues that may arise)
- By providing administrative help such as arranging for maintenance or sale of a property (note: this is not one of our “duties” so we bill extra for this service)
Some fees in probate cases are paid to us, some are paid to the court, and some are paid to outsiders. Here is a breakdown:
Fees paid to the Court
- There is a $395 fee payable to the Court for each petition you have to file. In simple probate cases you only have to file two petitions: the initial “Petition to Probate” the estate and a Petition for Final Distribution.
- For more complex cases, you may have to file additional petitions.
- You’ll also have to file a Notice of Probate in a newspaper. You are required to use only certain newspapers, and their charges will vary. Expect the notice to cost anywhere from $100 to $450.
Fees paid to the attorney
Our ordinary attorney’s fee -- called a “statutory” fee -- is based on the fair market value of the assets in the estate. The fee doesn’t take liabilities into account. The probate code establishes a sliding scale:
- 4% of the first $100,000
- 3% of the next $100,000
- 2% of the next $800,000
- 1% on the next $9,000,000
- 0.5% on the next $15,000,000
- A reasonable fee thereafter
Say the only asset in an estate is a $500,000 house, and there is a $400,000 mortgage on it. The statutory fee would be $13,000 based on the full $500,000 value:
- 4% of the first $100k = $4,000
- + 3% of the next $100k = $3,000
- + 2% of the remaining $300,000 = $6,000
- Total: $13,000
Fees paid to the executor
The executor is entitled to charge the same fee as the probate lawyer charges. Often the executor is a family member who will waive the fee. (Most family members start out saying “it’s my family; I’m not going to charge." But in many cases they change their minds after they see how much work is involved and that no one else is helping.)
All of the assets that the decedent owned need to be “inventoried” and “appraised”. The Court appoints the appraiser, whose fees are 0.1% of the value of the appraised assets (so in a $500,000 estate the appraisal fee would be $500).
Here’s how the fees would add up on a simple $500,000 probate case.
- $395 Court filing fee
- $100 publication fee
- $500 appraisal fee
- $395 fee to file Petition for Final Distribution
- $13,000 attorney's statutory fee (see above example under "statutory fee")
- Possibly a
$13,000 executor’s statutory fee
- Total: $14,390 to $27,390
Special circumstances or needs
The above example assumes that everything goes smoothly. If problems pop up, it will take extra money to deal with them. For example, it may turn out that the decedent hadn’t filed any tax returns in years. Or it may be necessary to sell the real estate. For dealing with extra matters, the attorney and the executor are allowed to each charge “extraordinary fees.”
(The difference between “ordinary” services and “extraordinary” services is that the court gets to decide whether the “extraordinary” services were necessary or not and also whether the proposed fee for them is reasonable or not.).
Hiring an experienced probate attorney
If you need probate legal services, consider hiring my firm. Please ring my office at 650.325.8276, or get started here at this website.
If you need free resources, check out the answers I post on Avvo, the items in our Resource Room, and more articles on probate at this blog.
All the best,
The following is a guest post by Bret Nason, Attorney at Law.
As a bankruptcy attorney, I frequently help clients protect their potential future inheritances from the bankruptcy trustee. What if you're not filing bankruptcy yourself, but are seeking to protect family assets in the event one of your children or grandchildren files for bankruptcy?
Section 541(a)(5) of the Bankruptcy Code () provides that property of the bankruptcy estate includes:
"Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date -
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement . . . ; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan."
In other words, if someone dies within 6 months of a bankruptcy filing and the debtor inherits anything or receives life insurance proceeds, the inheritance or life insurance proceeds are part of the bankruptcy estate and could be used to pay the claims of creditors.
If you want your family assets to stay in the family and not go to the creditors of your beneficiaries/heirs, you need to speak to your estate planning attorney. There are many ways to protect these assets, including:
- Leaving the debtor's share of any inheritance to his/her children or to some other family members
- Removing the debtor as a beneficiary
- Including a valid spendthrift provision in your will, and
- Having the debtor disclaim his/her inheritance BEFORE you die
Each state has its own laws regarding asset protection, so speak with your local estate planning attorney before making any decisions.
You may feel the risk of dying in the six months after your child or grandchild files for bankruptcy is slim. While you're probably correct, it does happen. If you know that someone to whom you plan to leave money is considering filing bankruptcy, you should speak with him/her. Too many bankruptcy clients let pride get in the way of speaking with family members and wind up losing assets as a result. After you've had your family meeting, make sure you discuss the issue with your estate planning attorney.
Follow Bret on Facebook or Twitter, or to subscribe to his RSS feed.
All the best,
Giving a fancy pen, cash, or a check are certainly options. But how about giving your special graduate something that will outlast you: a sound estate plan that preserves wealth for them and future generations. Start asset protection planning »
Consider giving children, grandchildren, and future generations a gift that outlasts you
If you have a child or grandchild celebrating a special occasion such as graduation this spring, you may be reflecting on what would be a meaningful gift. How should you express your pride and joy in their accomplishments?
A fancy pen, cash, or a check are certainly options. But how about giving something that will outlast you: a sound estate plan that preserves wealth for them and for future generations?
The first step in developing a sound estate plan is to sit down with an expert to identify all your assets. Your initial meeting might not be with an estate planning attorney like me; rather, it might be with your CPA or financial planner. They can help you take stock of which assets are where.
Next, you need to figure out how best to transfer those assets to loved ones given current tax law.
When it comes to tax law, it seems things are changing by the hour in Washington. But it's a good idea to examine your options sooner rather than later.
In particular, take a look at:
- The best timing for making any gifts to children or grandchildren
- Whether it’s a good time to set up a Grantor Retained Annuity Trust or intra-family loan, thanks to low interest rates. There's always chatter in Congress about eliminating short-term, zeroed-out GRATs.
- Recent or coming changes in estate tax structure and what it means for wealth preservation in your family
- Limits on deductions for charitable gifts. For public charities, it’s up to 50% of your adjusted gross income. When giving cash to private foundations, you can deduct up to 30% of your adjusted gross income and up to 20% for publicly traded stock. For other appreciated property, you are limited to your cost basis. (Your basis in property is generally what you paid for it, but different rules apply to figuring your deduction, depending on whether the property is ordinary income property, or capital gain property.)
Make a lasting gift
Make a resolution to sit down with an estate planning attorney and map out the pieces and plan for your estate. Then you can feel you are giving loves ones something truly meaningful: a more secure financial future.
All the best,