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.
Learn more
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,
This is the second of two articles on reviewing a trust. In this one, discuss how we evaluate a living trust agreement, and how that differs from developing an estate plan.
My team and I examine dozens of things when we evaluate a trust document. To give you an idea, a few of them are:
- Does the trust agreement confirm to third-parties that a married trustor/trustee has authority to act when his/her spouse cannot (if desired by client)?
- Does the trust agreement include provisions to alter distributions to a surviving spouse in the event of remarriage after the death of the first spouse?
- Does the trust agreement include a common trust provision when one or more of the primary beneficiaries has not yet graduated from college?
- Does the trust agreement give the trustee of a continuing trust an appropriate amount of flexibility to make disproportionate distributions based upon the relative needs of the beneficiaries?
- Does the trust agreement set up continuing trusts for the beneficiaries, which are tailored to the needs of each trust beneficiary?
Is there evidence that the trust is properly funded? An unfunded or partially funded revocable living trust does not avoid probate. Great care must be taken to ensure that all necessary assets held by the trustor individually are either retitled to the trust, or that the trust is considered as an appropriate “designated beneficiary.”
The difference between evaluation of a trust and creating an estate plan
In trust reviews, my intention is to provide you with an objective analysis of the document, and nothing more. Still, my review may be very beneficial to you because your estate plan will eventually be interpreted by attorneys and financial professionals that you do not know. So it is far better to identify ambiguities or omissions in your estate plan while you are alive and healthy than when you are not.
When I am hired for estate planning, I conduct an in-depth "discovery" process that includes:
Gathering personal and financial information
First I need to review your personal data and your financial information, and discuss a potential plan to meet your goals and objectives. I need to learn about your family and how the various members handle money. I understand that this is sensitive information, something not always easy to talk about. I am not shocked by any characters lurking in your family tree – we all have our fair share of them!
Discussing goals and values
You have built up a large estate, and you probably have very specific wishes that you want someone to carry out. Before I can recommend any course of action, we need to meet in person so that I can learn about you, your values, what you are trying to accomplish and, maybe most importantly, what you want to avoid. When I am creating a plan for both spouses, it is an absolute requirement that both spouses meet with me.
Focus areas in an estate planning engagement
Here are a few of the many questions I ask the first time we get together to discuss your estate plan. The following is not a complete list - it is a sampling:
- Did you have any prior marriages?
- Have you signed any pre- or post-marriage contracts?
- Do you have an “umbrella” liability insurance policy?
- If any children are under 18, have you decided who would be their guardians?
- Do you have any business interests?
- Do you wish to leave money or assets to charitable or religious causes?
- Are you concerned about providing for your grandchildren’s education?
- Do you wish to prevent anyone from receiving a portion of your estate?
- Do you wish to make any provisions in your estate plan for your pets?
The more I understand about your circumstances, the better I can educate you about your choices and guide you so that your family members won’t need to make stressful decisions in trying times. You will have the peace of mind of knowing that you have “done right” by your family.
All the best,
This is the first of two articles on reviewing a trust. In this one I address whether a Palo Alto family with a living trust should have the creator of the trust do the review, or find a different attorney to take a fresh look.
Q: We live in Palo Alto, California and in the 90s our family chose a Burlingame estate planning attorney to establish a living trust. Now we are trying to verify if the attorney who drew it up really is trustworthy and experienced with living trusts. We need a trust review. Specifically:
- Is it better to go to the same attorney for this "check up" or someone new?
- Since we are asking for a trust review, would the fees be much lower than if we were starting from scratch?
A: You were smart to use an estate planning attorney instead of using off-the-shelf forms or packages from a self-service legal website. You are smart to check and update your living trust, too. Circumstances can change alot in a short time. In fact, it is a good idea to do a trust review and update your trust every three to five years.
Vetting estate planning attorneys using Avvo
I am glad to hear that you are vetting estate planning attorneys before hiring anyone. One way to check out a lawyer is to look on Avvo. Search for "estate planning" in the Palo Alto area and see which lawyers' names appear with high Avvo ratings. See if they've answered questions and read the answers to see what you think of their approach.
Checking out attorneys using the State Bar website
Also check out the State Bar website. Use the "Advanced Search" feature and the "Additional Search Criteria" to find a specialist in Estate Planning law. Less than 1% of all California lawyers are certified as specialists in Estate Planning. In order to be certified, a lawyer has to pass a specialized bar exam and meet rigorous experience requirements.
Also, check out these individuals' websites to see what their approach is to estate planning to see if you think the "chemistry" will be right.
What you can expect to pay
You get what you pay for! If price is your most important criterion, then skip all of the above and just phone lawyers until you find the one with the lowest price. Just remember, if they don't do it right, it cannot be corrected after you die or become incompetent.
Depending on the complexities of your situation (and whether you're married or single, have children who need to be protected, etc.), an experienced attorney's fees will be anywhere from $2,000 to $10,000. As a very rough rule of thumb, figure out your net worth and multiply by 0.10% to 0.25%. That usually approximates the complexity of your estate and the cost of planning for it properly.
For example, if you have an estate worth $3 million dollars, you should expect to pay between $3,000 and $7,500... a little less if your situation is really "plain vanilla"; a little more if it's complex.
Look for the next article on trust reviews
In the next article on trust reviews, tentatively titled "How is Review of a Living Trust Different from Estate Planning?" I'll show an example of what we examine when we do a trust review, and how a trust review differs from creating an estate plan.
Getting legal help
If you are currently working with a highly qualified estate planning attorney that you are comfortable with, it is probably best to continue working with him or her. On the other hand, if you have doubts about the advice you are getting or the experience you have working with the person, it's time to look elsewhere.
All the best,
Uncertainty due to Congress's delays
As an estate planning attorney, 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 makes achieving that objective very difficult. Clients are becoming more and more skittish about making estate planning decisions because of the uncertainty caused by Congress’s delays in addressing the federal estate tax issue.
Presently (in 2010), there is no federal estate tax. However, speculation abounds that Congress may enact an estate tax for 2010 and impose it retroactively. Moreover, the federal estate tax that is scheduled to become effective on January 1, 2011 (unless Congress acts before then), carries an exemption of only $1 million and a top tax rate of 55%, substantially less than the exemption of $3.5 million and 45% top tax rate of 2009.
Don't do nothing
Despite the uncertainty that many of my clients feel as a result of the current federal estate tax situation, I encourage them to take affirmative steps rather than doing nothing. Following 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 $1 million dollars of property as exempt beginning in 2011. 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 55% tax rate.
- 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 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.
Learn more
The right move now can save you money in 2011 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,
Failure to craft a solid and thoughtful estate plan can have disastrous tax consequences for families with significant assets.
If you live in Santa Clara County or surrounding areas, think carefully about your net worth
Chances are, you don’t think of yourself as having a high net worth estate. That’s one of the curiosities that seems to come with living in Silicon Valley. And yet, practically anyone who owns a house in Palo Alto, Los Altos, Portola Valley, Atherton, Woodside, or Menlo Park runs the risk of having estate taxes decimate their estate.
Why? Because beginning on January 1, 2011, an individual will only be able to pass along $1,000,000 ($2 million for couples) to his or her heirs free of estate taxes. If your estate is worth more than that, it will be subject to estate taxes of as much as 55%.
Figuring how much your estate is worth
So, for example, if you’re married and own a house worth $1.5 million, an IRA or 401k worth $500,000, and have a $1,000,000 life insurance policy, your estate is worth $3 million for estate tax purposes (a common misconception is that IRAs, 401ks, and life insurance don’t count for estate taxes. While these assets avoid probate and while life insurance is income tax free, they are part of your estate for estate tax purposes). Your estate tax rate on that extra $1 million is 49% - that is, $490,000!
A-B trusts can reduce tax liability
Simple planning (the use of an “A-B Trust” also called a “Bypass Trust” or a “Credit Shelter Trust”) can reduce that amount to $200,000. More advanced planning may be able to eliminate it entirely.
Oh, and by the way, if your taxable estate is worth $3 million, your tax will be approximately $945,000 without planning.
Bottom line: You run the risk of losing a very high percentage of your assets to the federal government upon your death unless you have planned carefully to minimize estate taxes. Your intended heirs may be left with bequests of a far lower value than you intended.
All the best,