How Low-Interest Rates Create Estate Planning Opportunities

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One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intrafamily lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.

The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intrafamily lending has already occurred, these low rates provide a chance to amend the terms of current promissory notes to obtain these rates.

There are two opportunities presented:

  • The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
  • If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.

Here are a few situations where these loans are typically used:

  • Parents extend a loan to adult child, who is going through a challenging financial period.
  • Parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.
  • Complex estate planning, where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.

These intrafamily loans are usually part of sophisticated estate planning. Other methods include Grantor Retained Annuity Trusts (GRATs), or Charitable Lead Trusts (CLTs), which also become more attractive in a low interest rate environment.

With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication. The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.

Speak with an experienced estate planning attorney about how your estate could benefit from the current low interest rate environment.

Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”

COVID-19 and Estate Planning

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As Americans adjust to a changing public health landscape and historical changes to the economy, certain opportunities in wealth planning are becoming more valuable, according to the article “Impact of COVID-19 on Estate Planning” from The National Law Review. Here is a look at some strategies for estate plans:

Basic estate planning. Now is the time to review current estate planning documents to be sure they are all up to date. That includes wills, trusts, revocable trusts, powers of attorney, beneficiary designations, and health care directives. Also, be sure that you and your family members know where they are located.

Wealth Transfer Strategies. The extreme volatility of financial markets, depressed asset values, and historically low-interest rates present opportunities to transfer wealth to intended beneficiaries. Here are a few to consider:

Intra-Family Transactions. In a low-interest-rate environment, planning techniques involve intra-family transactions where the senior members of the family lend or sell assets to younger family members. The loaned or sold assets only need to appreciate at a rate greater than the interest rate charged. In these cases, the value of the assets remaining in senior family member’s estate will be frozen at the loan/purchase price. The value of the loaned or sold assets will be based on a fair market value valuation, which may include discounts for certain factors. The fair market value of many assets will be extremely depressed and discounted. When asset values rebound, all that appreciation will be outside of the taxable estate and will be held by or for the benefit of your intended beneficiaries, tax-free.

Grantor Retained Annuity Trusts (GRATS). The use of a GRAT allows the Grantor to contribute assets into a trust while retaining a right to receive, over a term of years, an annuity stream from the Trust. When the term of years expires, the balance of the Trust’s assets passes to the beneficiaries. The IRS values the ultimate transfer of assets to your intended beneficiaries, based on the value of the annuity stream you retain and an assumed rate of return. The assumed rate of return, known as the 7520 rate comes from the IRS and is currently 1.8%. So, if you retain the right to receive an annuity stream from the trust equal to the value of the assets plus a 1.8% rate of return, assets left in the trust at the end of the term pass to your beneficiaries transfer-tax-free.

Charitable Lead Annuity Trusts. Known as “CLATs,” they are similar to a GRAT, where the Grantor transfers assets to a trust and a named charity gets an annuity stream for a set term of years. At the end of that term, the assets in the trust pass to the beneficiaries. You can structure this so the balance of the assets passes to heirs transfer-tax-free.

Speak with your estate planning attorney about these and other wealth transfer strategies to learn if they are right for you and your family. And stay well!

Reference: The National Law Journal (March 13, 2020) “Impact of COVID-19 on Estate Planning”

Five Estate Planning Mistakes to Avoid

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While it’s true that no estate is completely bulletproof, there are mistakes that people make that are big enough to walk through, while others are more like a slow drip, draining retirement finances in a slow but steady process. There are mistakes that can be easily avoided, reports Comstock Magazine in the article “Five Mistakes to Avoid When Planning Your Estate.”

  1. Misunderstanding Estate Law. Some people are so thrown by the idea of an estate plan, that they can’t get past the word “estate.” You don’t need a mansion to have an estate. The term is actually used to refer to any and all property that a person owns. Even modest people need a plan to help beneficiaries avoid unnecessary costs and stress. Talk with an estate planning attorney to learn what your needs are, from a will to trusts. Make sure that this is the attorney’s key practice area. A real estate or personal injury attorney won’t have the same knowledge and experience.
  2. Getting Bad Advice. It takes a team to create a strong estate plan. That means an estate planning attorney, a financial advisor and an accountant. Be wary of firms that focus entirely on selling trusts. There’s definitely a role for trusts in estate plans, but there are many other tools that are needed. Buying an insurance policy or an annuity is not an estate plan.
  3. Naming Yourself as a Sole Trustee. Naming yourself as a sole trustee puts you and your estate in a precarious position. What if you develop Alzheimer’s or are injured in an accident? A trusted individual, a family member, a longstanding friend or even a professional trustee, needs to be named as a backup trustee to protect your interests if you should become incapacitated.
  4. Losing Track of Assets. Without a complete list of all assets, it’s nearly impossible for someone to know what you own and who your heirs may be. Some assets, including retirement funds, life insurance policies, or investment accounts, have named beneficiaries. Those people will inherit these assets, regardless of what is in your will. If your heirs can’t find the assets, they may be lost. If you don’t update your beneficiaries, they may go to unintended heirs—like ex-spouses. Your attorney should help you compile that list to make sure that your successor agents and beneficiaries are informed.
  5. Deciding on Options Without Being Fully Informed. When it comes to estate planning, the natural tendency is to go with what we think is the right thing. However, unless you are an estate planning attorney, chances are you don’t know what the right thing is. For tax reasons, for instance, it may make sense to transfer assets, while you are still living. And for other reasons, it might be best to wait until you pass to transfer the assets. However, that might also be a terrible idea, if you choose the wrong person to hold your assets or don’t put them in the right kind of trust.

Estate planning is still a highly personal process that depends upon every person’s unique experience. Your family situation is different than anyone else’s. An experienced estate planning attorney will be able to create a plan and help you to avoid the big, most commonly made mistakes.

Reference: Comstock Magazine (Dec. 2019) “Five Mistakes to Avoid When Planning Your Estate” 

What Happens If I Don’t Have an Estate Plan?

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It’s so much better to have an estate plan than not to. With a will and/or trust, you can direct your assets to those whom you wish to receive a legacy, rather than the default rules of the State of California. This is according to a recent article in the Houston Chronicle’s entitled “Elder Law: Will you plan now or pay later?”

You should also designate an independent financial agent (known as an executor, power of attorney and trustee). You may want to have an estate planning attorney create a special trust to provide for family members who are disabled, along with trusts for minors and even adult children.

Here are three major items about which you may not have considered that may require changes to your estate plan or motivate you to get one. Years ago, the amount a person could leave to beneficiaries (the tax-free exemption equivalent) was much lower. You were also required to either use it or lose it.

For example, back in 1987 when the exemption equivalent was $600,000 per taxpayer, a couple had to create a by-pass trust to protect the first $600,000 upon the first to die to take advantage of the exemption. The exemption is $11.58 million in 2020, and the “portability” law has changed the “use it or lose it” requirement. There may still be good reasons to use a forced by-pass trust in your will, but in some cases, it may be time to get rid of it.

Next, think about implementing planning to have some control over your assets after you die.

You could have a heart attack, a stroke, or an unfortunate accident. These types of events can happen quickly with no warning. You were healthy and then suddenly a sickness or injury leaves you severely disabled. You should plan in the event this happens to you.

Why would a person not take the opportunity to prepare documents such as powers of attorney for property, powers of attorney for health care, living wills, and medical privacy documents?

It’s good to know that becoming the subject of a court-supervised conservatorship proceeding is a matter of public record for everyone to see. There is also the unnecessary expense and frustration of a guardianship that could’ve been avoided if you’d taken the time to prepare the appropriate documents with an estate planning or elder law attorney.

Why would you want to procrastinate making an estate plan and then die suddenly without ever taking the time to make your will? Without valid estate planning documents, like a trust, your family will have to pay more for a costly probate proceeding.

Reference: Houston Chronicle (Jan. 16, 2020) “Elder Law: Will you plan now or pay later?”

COVID-19 UPDATE: Emergency Estate Planning Decisions to Make Right Now

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Though it may be hard not to panic when the grocery store shelves are empty, the number of confirmed cases of COVID-19 keeps rising, and we see sobering statistics across the globe … we will not overcome this challenge with a panicked response.

Nonetheless, there are certain things we all need to be doing right now – and your public health officials are the best resource on how to stay personally safe and help prevent the virus from spreading.

When it comes to the seriousness of this outbreak, however, there also are some critical estate planning decisions you should make – or review – right now.

Ask yourself these questions:

  1. Who will make medical decisions for me should I become severely ill and unable to make these decisions myself?
  2. Who will make my financial decisions in that same situation — for example, who will be authorized to sign my income tax return, write checks or pay my bills online?
  3. Who is authorized to take care of my minor children in the event of my severe illness? What decisions are they authorized to make? How will they absorb the financial burden?
  4. If the unthinkable happens – what arrangements have I made for the care of my minor children, any family members with special needs, my pets or other vulnerable loved ones?
  5. How will my business continue if I were to become seriously ill and unable to work, even remotely … or in the event of my death?

These are the most personal decisions to make right now to protect yourself and your loved ones during this emergency. Now is also a good time to ask yourself if you have plans in place for the smooth transfer of your assets and the preservation of your legacy.

You may be stuck at home but there are still choices available to you to prepare yourself if you or a loved one contract COVID-19.  We are ready to help walk you through these decisions, understand the ramifications of your choices, and memorialize your plans in binding legal documents. We are currently offering no-contact initial conferences remotely if you prefer. Book a call now and let us help you make the right choices for yourself and your loved ones.

George Michael’s Charity Continues

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One of George Michael’s sisters, 55-year-old Melanie Panayiotou, was found dead on Christmas Day, exactly three years after her brother died at his home in Goring-on-Thames, Oxfordshire at aged 53.

London’s Metropolitan Police said in a statement that emergency services were called to a home in north London, due to “reports of the sudden death of a woman, aged in her 50s.”

The Wealth Advisor’s recent article, entitled “George Michael’s sister Melanie donated her share of $128m inheritance to charity before her death on Christmas,” said that George had left most of his $128 million fortune to Melanie and his other sister, Yioda.

Sources say that the former’s share will be donated to charity. George was active in LGBT causes after coming out as gay in 1998 and was also very involved in numerous HIV/AIDS charities.

George began his philanthropy in 1984, when his fame started to grow. He joined together with other British and Irish pop stars to form ‘Band Aid’ to raise money for famine relief in Ethiopia. Michael also donated the proceeds from his 1991 single “Don’t Let the Sun Go Down on Me” to 10 different charities for children, AIDS and education. He was also a patron of the Elton John AIDS Foundation.

In 2003, George joined other celebrities to support a campaign to help raise $26.3 million for terminally ill children run by the Rainbow Trust Children’s Charity. He also famously gave $20,000 to a ‘Deal or No Deal’ contestant for IVF treatment and $33,000 to a debt-ridden woman crying in a café.

After his death, numerous charities revealed he had privately supported them for years.

“George’s family share his caring spirit,” the source told the Sun, speaking about Melanie’s donation of her inheritance. “Knowing that some good is going to come out of this double-tragedy has provided a small amount of comfort.”

Melanie, who was a hairdresser, traveled around the world with her brother George during the peak of his music career and was said to be devastated over his death.

While her cause of death has not yet been revealed, Melanie is expected to be buried at the Highgate Cemetery next to her brother. Their mother was also buried in the same location.

Reference: Wealth Advisor (Jan. 7, 2020) “George Michael’s sister Melanie donated her share of $128m inheritance to charity before her death on Christmas”

Will My Heirs Pay Inheritance Tax?

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Will My Heirs Pay Inheritance Tax?
Tax return check on 1040 form background

U.S. News & World Report explains in its article, “What Is Inheritance Tax?” that estate taxes and inheritance taxes are often mentioned as if they’re the same thing. However, they’re really very different in concept and practice.

Remember that not every estate is required to pay estate taxes, and not every heir will pay inheritance tax. Let’s discuss how to determine whether these taxes impact you.

Inheritance is considered to be taxable to heirs. Whether heirs need to pay this is based upon the state in which the deceased lived and the heirs’ relationship to the benefactor.

Inheritance tax is a tax imposed by the state on a portion of the value of a deceased person’s estate that is paid by the inheritor of the estate. There is no federal inheritance tax. Currently, there are only six states that impose an inheritance tax, according to the American College of Trust and Estate Counsel. The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Inheritance tax laws and exemption amounts are different in each of these six states. In Pennsylvania, there’s no inheritance tax charged to a surviving spouse, a son or daughter age 21 or younger and certain charitable and exempt organizations. Otherwise, the inheritance tax is charged on a tiered system. Direct descendants and lineal heirs pay 4.5%, siblings pay 12% and other heirs pay a hefty 15%.

Whether inheritance tax applies is determined by the state in which the deceased lived. Estate taxes are deducted from the deceased’s estate after death and aren’t the responsibility of the heirs. Some states also charge their own estate taxes on assets more than a certain value. The states that charge their own estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and Washington, D.C.

Decreasing estate taxes are the responsibility of the deceased prior to his or her death. They should work with an estate planning attorney to map out strategies that can lessen or eliminate estate taxes for certain assets.

Remember that inheritance taxes are state taxes. They are imposed by only six states and are the responsibility of the heirs of the estate, even if they live in another state. In contrast, estate taxes are federal and state taxes. The federal estate tax is a 40% tax on assets more than $11.58 million for 2020 ($23.16 million for married couples). This is charged, regardless of where you live. Some states have additional estate taxes with their own thresholds.

Inheritance taxes are paid by the heirs, and estate taxes are paid by the estate. An estate planning attorney can help to find ways to reduce taxes and transfer money efficiently.

Reference: U.S. News & World Report (October 8, 2019) “What Is Inheritance Tax?”

How Joint Tenancy Creates Problem for Seniors

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Parents putting children or other family members as joint owners of their assets is another example of what seems like a simple solution for a complex problem. It doesn’t work, even though it seems like it should.

As explained in the article “Beware the joint tenancy trap” from Monterey Herald, putting another person on an account, even a trusted child or life-long friend, can create serious problems for the individual, their estate, and their heirs. Before going down that path, there are several issues to consider.

When another individual is placed as an owner on an account or on the title to real property, they have legal ownership in that property equal to that of the original owner. This is called joint tenancy. If a child is made a joint tenant on a parent’s accounts, they would be entirely within their rights to withdraw every single asset from those accounts and do whatever they wanted with them. They would not need the original owner’s consent, counsel, or knowledge.

Giving anyone that power is a serious decision.

Making a child a joint owner of assets also exposes those assets to claims by the child’s creditors. If they file for bankruptcy, the original asset owner may have to buy back one-half of the asset at its current market value. Another example: if the child is in an accident and a judgment is recorded against the child, you may have to buy back one-half of your joint tenant property at its current market value to settle the claims.

There are other complications that come with the title. If one joint owner of the asset dies, joint tenancy provides for the right of survivorship. The property transfers to the surviving joint tenant without going through probate and with no reference to a will. Even though it can bypass the probate process, it means that the distribution won’t necessarily follow what the parent intended in his estate plan. If the parent dies and the asset transfers directly to the joint tenant—let’s say a daughter—but the will says the assets are to be split between all of the children, her claim on the asset is “senior” to the rest of the children. That means she has the right to keep all of the assets that were held in joint tenancy and all four siblings split the remaining assets.

If there is any friction between siblings, not having equal inheritances could create a fracture in the family that can’t easily be resolved.

Tax exposure is another risk of joint tenancy. When someone is named a joint owner, they have the original owner’s cost basis. When one owner dies, the remaining owner gets a step up in basis only on the proportion of the assets the deceased person owned at death.

Let’s say a son and father are joint owners on an account. When the father dies, the son gets a step-up in basis on one-half of the assets—the assets that the father owned. However, the son’s half retains the original basis. In contrast, if that account was owned solely by the father, all the heirs will inherit the property with a full step-up in basis on the father’s death.

Given the complexities that joint tenancy creates, parents need to think very carefully before putting children’s names on their assets and real property. A better plan is to make an appointment to speak with an estate planning attorney and find out how to protect the parent’s assets through other means, which may include trusts and other estate planning tools.

Reference: Monterey Herald (Sep. 11, 2019) “Beware the joint tenancy trap”

How Does Power of Attorney Work?

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Questions often arise about how different estate planning documents work together, and they are frequently very good questions. Powers of Attorney (POA) are some of the most commonly used estate planning documents and they are also some of the most misunderstood estate planning documents, says nwi.com in a recent article “Estate Planning: Do Powers of Attorney lapse?”

A POA is a document that authorizes another person to act on behalf of the person making or signing the document. The person named in a POA can also be referred to as the Attorney-in-Fact, or AIF. The authority granted to the AIF is usually spelled out in the document itself. Some POA documents grant a wide range of authority, while others are limited to a specific action. An estate planning attorney can create a POA that suits a person’s particular needs, which is far better than a generic document that may not be accepted because it is too broad.

There are also different types of POAs. Durable POAs usually do not terminate upon a person’s incapacity and are frequently drafted for the purpose of caring for a person in case they are incapacitated. There are also other limited or special POAs that only work for a specific date or time frame. At the end of that time frame or upon that date, the POA terminates.

It’s important to note, however, that all POAs terminate upon the death of the maker or principal. The only power that can survive after the death of the maker is the authority to dispose of the maker’s remains, and that varies by state. This means that the POA will not nominate an executor, and cannot do anything to give someone authority over your body or your property after you die.

A POA can also be terminated at any time by the principal. This termination should be in writing, and it can be terminated by revoking the POA within the terms of a new POA, or by execution of a revocation. Either way, the person should notify the AIF that they no longer have the authority to act under the revoked POA, and any entity who may have a copy of the revoked POA should be notified that it is no longer valid. The revocation can also be recorded at the county recorder’s office. An estate planning attorney in your state will know what rules apply in your area.

When a POA was created is also important. Although a POA signed years ago is still legally valid, estate planning attorneys often look at the date of execution for the simple fact that banks and other financial institutions are reluctant to accept POAs that were created too long ago. In that case, institutions sometimes will require an affidavit affirming that the document is still valid and that the AIF has the authority to act under it.

However, it is recommended that when you have your estate plan reviewed every three or four years, you also have your estate planning attorney update the Power of Attorney. This way there is less of a chance that a bank or other institution will balk at the document. The same goes for your health care proxy, also known as a Health Care Power of Attorney.

Reference: nwi.com (November 3, 2019) “Estate Planning: Do Powers of Attorney lapse?”

Do Name Changes Need to Be Reflected in Estate Planning Documents?

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When names change, executed documents with the person’s prior name can become problematic. For example, what about a daughter who was named as a health care representative by her parents several years ago, who marries and changes her name? Then, to make matters more complicated, add the fact that the couple’s daughter-in-law has the same first name, but a different middle name. That’s the situation presented in the article “Estate Planning: Name changes and the estate plan” from nwi.com.

When a person’s name changes, many documents need to be changed, including items like driver’s licenses, passports, insurance policies, etc. The change of a name isn’t just about the person who created the estate plan but also their executors, heirs, beneficiaries and those who have been named with certain legal powers through power of attorney (POA) and health care power of attorney.

It’s not an unusual situation, so there are some different solutions that can address this situation. It’s pretty common to include additional identifiers in the documents. For example, let’s say the will says, “I leave my house to my daughter Samantha Roberts.” If Samantha gets married and changes her last name, it can be reasonably assumed that she can be identified. In some cases, the document may be able to stay the same.

In other instances, the difference will be incorporated through the use of the acronym AKA—Also Known As. That is used when a person’s name is different for some reason. If the deed to a home says Mary Green, but the person’s real name is Mary G. Jones, the term used will be Mary Green A/K/A Mary G. Jones.

Sometimes when a person’s name has changed completely, another acronym is used: N/K/A, or Now Known As. For example, if Jessica A. Gordon marries or divorces and changes her name to Jessica A. Jones, the phrase Jessica A. Gordon N/K/A Jessica A. Jones would be used.

However, in the situation where the sisters-in-law had such similar names, most attorneys want to have the documents changed to reflect the name change. First, the names are too similar, as are their relationships with the testator. It is possible that someone could claim that the person wished to name the other person. It may not be a strong case, but challenges have been made over smaller matters.

Second, the document being discussed in the case above is a healthcare designation. Usually, when a health care power of attorney form is being used, it’s in an emergency. Would a doctor make a daughter prove that she is who she says she is? It seems unlikely, but the risk of something like that happening is too great. It is much easier to simply have the document updated.

In most matters, when there is a name change, it’s not a big deal. However, in estate planning documents, where there are risks about being able to make decisions in a timely manner or to mitigate the possibility of an estate challenge, a name change to update documents is an ounce of prevention worth a pound of trouble in the future.

Reference: nwi.com (October 20, 2019) “Estate Planning: Name changes and the estate plan”