Update Your Estate Plan

I recommend to my clients that they come in for an estate plan check-up every two years. An estate plan check-up is a time when I meet with my client, ask about what has changed in her life in the past two years, and describe what changes have taken place in the law that might affect her estate plan. After we have our conversation, I ask whether, in light of what we just spoke about, would my client want to change anything in her estate plan.

Usually, the answer is “yes.” Why? Because the laws affecting estate tax is changing fairly often these days and that impacts how your estate plan is structured. Frequently, in order to avoid paying estate tax to the state or the federal government, I will create one or more trusts in your will. A trust is a great device to get money out of your estate, and therefore not have to pay estate tax on it, but it can be a burden in terms of living with it. You have to file tax returns for the trust every year and sometimes prepare an accounting to the beneficiaries of the trust so they know how much was earned, through which investments, and how the income from the trust was distributed. A lot of extra work that you may not want to go through if you don’t need to.

On the other hand, maybe you never needed to think about estate taxes, but your mother died and left you a significant inheritance. Now you have some real money to think about. That can change your estate plan.

Your estate plan may change because you have had a big fight with your executor (or divorced him if it was your husband) and now you don’t want that person to act as your executor. Or perhaps the couple that you chose to be your children’s guardian have moved away from your neighborhood and your kids haven’t seen them in a few years. So you want to name a different guardian.

Your estate plan is never set in stone. It’s not a one-shot deal that you never have to re-think until someone dies. If it has been more than two years since you last talked to your estate lawyer, make an appointment now. You might find that you need to change more than you thought.

Estate Planning If You Are Not Wealthy

You may not think you need to have a will. After all, you don’t think of yourself as wealthy. And you think you won’t need to pay any estate taxes (those are only for the rich, right?). And you’re fairly young and in good health, so you aren’t dying anytime soon. But you could be wrong – about all of your assumptions.

There are many reasons that people own their property in joint ownership. One of those reasons is so that the other owner automatically inherits upon your death. But, there are also reasons why that could be a bad idea. You may have accounts that can be “payable on death.” And for those accounts, you would not need a will. But, it is unlikely that everything you own is in joint ownership or a “payable on death” account. So, you need a will.

You probably have heard that you don’t pay “death taxes” unless you have an estate of more than $3.5 million. That $3.5 million is the federal estate tax exemption. So if, you die and your estate is less than $3.5 million, then your family does not pay federal death tax. But if your estate is more than $675,000, you will pay estate tax to New Jersey. And if you start counting the equity in your house, the balance in your retirement account, a life insurance policy that is not in a life insurance trust, and your stocks (even with the hit it took in the stock market these past few months), you might easily be past the $675,000 number. Do you want to pay estate (death) taxes to New Jersey? So, you need a will.

Do you have minor-aged children? Do you want your relatives arguing over who should be the guardians of your children? Do you think that one of your relatives shouldn’t even be the guardian of your pets, much less your children? Are you certain that you will not die until the youngest child is over 18? So, you need a will.

Do you want your family wealth to be destroyed by your creditors, by an ex-spouse, by the stupid decisions of your college-aged kids, by your spouse re-marrying and giving your money and things to the new spouse? So, you need a will.

Of course the wealthy know that they need estate planning. And the majority of them spend the time and money to come up with a plan that leaves them with the peace of mind that comes from being in control as much as possible. They don’t leave things to chance. You may think you don’t need to act like them because you don’t have the same amount of money. But don’t you like the idea that you can leave things the way you want them, not to chance? Don’t you like the idea that your loved ones will be protected from bad luck and bad decisions? So, you need a will. Go call an estate lawyer. You’ll be glad you got a will.

 

Powers of Attorney

A Power of Attorney is a legal instrument that gives certain legal powers from you to another person that you designate. Why does everyone need one? People who are in an accident or who are no longer competent to make their own decisions, need to continue to make financial transactions as long as they are alive. Who will pay the bills, make bank deposits and withdrawals, prepare your tax return, or manage your investments? Who will sign legal documents for you if you cannot, for one reason or another? A durable power of attorney will make life easier for you and your family if times get tough.

The person who signs a Power of Attorney is called the Principal. The Power of Attorney gives legal authority for another person (called an Attorney-in-Fact) to make property, financial and other legal decisions for you. You can give an Attorney-in-Fact broad legal authority, or very limited authority.

Your Power of Attorney can be “immediate” or “springing.” An immediate Power of Attorney is in effect as soon as the Principal signs the Power. The Attorney-in-Fact can go out and act as the agent of the Principal even if the Principal did not intend the Attorney-in-Fact to take immediate action. A springing Power of Attorney does not take effect until you become disabled. The springing Power of Attorney is sometimes used when you do not intend for the Attorney-in-Fact to be able to act as your agent until you are not competent to act for yourself.

The issue with a springing Power of Attorney is that your agent may have to jump through some hoops before he can use the Power of Attorney. Since it cannot be used before you are disabled, you need a doctor (or perhaps two doctors) that will certify that you are not competent. Your agent may not be able to find doctors who are willing to sign a legal document that does certify that you are not competent. Or the institution that your Attorney-in-Fact presents your Power of Attorney to does not accept your document and wants your agent to use their form (very common with banks). If you are not competent, you cannot sign another Power of Attorney.

Obviously, you want your Attorney-in-Fact to be someone you totally trust. You can name your spouse or a relative or even a close friend, so long as that person is at least 18 years of age. Most married persons choose their spouse as their Attorney-in-Fact. You may also wish to name one of your children to act as your Attorney-in-Fact, if your spouse cannot act as your agent. It is not recommended that you name two (2) persons to act jointly as your Attorney-in-Fact. If they cannot agree on an action to take, you have gridlock and no action will take place.

You should ask that person if he wants to act as your Attorney-in-Fact. The person who agrees to act as your Attorney-in-Fact will owe you a fiduciary duty, which means that your best interests must always be placed first while acting as your agent. The Attorney-in-Fact does not have to be compensated, but, especially if the duties are complicated or time-consuming, you may wish to consider compensation.

Decide on who you will designate as your Attorney-in-Fact and call your lawyer to get a durable Power of Attorney signed. If you have already signed one, review it with your lawyer to make sure that the document you signed years ago still meets your needs.

What to Ask Your Estate Planning Attorney

You’ve made your appointment to get your estate planning done and you want to make sure that you cover all the bases with your lawyer. What should you ask her?

Your conversation should include a discussion about wills, trusts (although they are not needed in most cases, you might be one of the persons who should have one), health care directives that appoint someone to act as your health care representative and gives your doctors some guidance on what procedures you do and don’t want done, and a durable power of attorney which allows your agent to manage your personal affairs (such as taking care of your banking, signing any legal documents, paying your bills).

You would also want to talk about estate taxes, both federal and state. The federal limits went up in 2009 to $3.5 million that you can leave to your heirs without paying estate tax. However, the state estate tax is still $675,000. If you have some equity in your house, a retirement plan and some mutual funds, you could be over the state limit and might need some tax planning.

You should be prepared to talk to your lawyer about all of your assets and how they are titled. Is your house in joint tenancy or a tenancy by the entireties? Do you have separate or joint bank accounts? Do you have Payable on Death designations on some of your accounts? Your attorney will want to know these things.

Do you have minor-aged children? Your attorney will discuss guardians with you. You hopefully know whom you want to name as guardian, but your lawyer may have some thoughts on whether to name a couple or just part of the couple, how many back-up guardians you should name, etc.

Do you have pets that you want to provide for? Ask your lawyer about how to accomplish your wishes. She should have some suggestions for you.

You should have a good idea of how you want your estate distributed. Your attorney can give you some strategies if you can’t think of how you want to accomplish a specific goal.

Finally, ask about the fees involved with the drafting of your documents. You should not pick a lawyer based on who is the cheapest or most expensive, but the lawyer should explain whether she charges a flat fee (and how much that fee will be) or whether she charges by the hour (maybe you have a lot of existing wills, trust documents, divorce agreements and other legal documents to review before the lawyer can start creating the best estate plan).

Other questions may come up during your meeting with your attorney. It might be a good idea to bring a pad and pen with you to jot down your questions and to write down the issues that you need to follow up with that arise during the meeting. If you aren’t comfortable with the lawyer you are meeting with, ask around for the name of another lawyer. Your estate planning lawyer should be your lawyer for a long while and you want to feel that you can discuss anything with her.

 

Using Wills from the Internet or a Book

Have you ever heard the commercials on radio and television for companies that do a will for you for a very small fee, much smaller than a lawyer’s fee? Is it worth it to use a will form from a company that is on the internet or that is printed in a book?

How do you know if the will you get from a book or from an internet company will do the job until it’s too late? You don’t. You could have a will from an internet company that does distribute your assets to the people you want in the way you want but it might cost you thousands of dollars in state estate tax. Or, the internet form will not tell you that you should put all of the money that your young children will inherit in a trust. Or the trust may end when your child turns 18. Do you want your 18 year old to inherit thousands of dollars all at once? Will they use your money wisely?

Does the form from the internet tell you exactly how to have the will signed (you need witnesses who are not beneficiaries under the will and who can be found by the court when you die? Your instructions may not be that thorough or they may not give you certain tips that a lawyer would give.

If you want an estate plan that does not fit with the form’s fill-in-the blanks, what do you do then? You may not have any options to change the form. Or by changing the form, you may create unintended consequences.

If you have any legal questions about your estate plan, you cannot ask the internet company for legal advice – they will refer you to an attorney.

People hate spending money for experts. They will try to do their own plumbing, self-diagnose their illnesses, and create their own legal documents. You think you are saving money by doing it yourself and occasionally you are. But there are many more times that by doing it yourself, you make things worse. And when you call in the experts, it costs more to fix the problems that you created than it would have if you had gone to the expert first. Don’t do surgery on yourself and don’t write your own will. Call an estate planning lawyer, someone who knows the right questions to ask you. That way, you will have the will that works the way you intended. You can pay me now (to write your will) or pay me later (to fix your probate problems), but paying me later is always more expensive.

 

New Year’s Resolutions

Many people create their personal list of New Year’s resolutions and then abandon them by February or March. This year, be different, create a roadmap of how you will achieve your goals.

For example, if one of your resolutions is to organize your financial records (and that’s a great goal in these uncertain times as well as every year at tax time), your road map should start with buying certain supplies – perhaps an accordion file, certainly a fireproof box, file folders. Then, start organizing your papers by different categories. Your road map should state when you are going to take each step, maybe week by week or month by month.

If your goal is to lose weight, then write down very specific ways in which you will make changes – choosing different foods to lower your calorie count, exercising a certain number of days per week. Write down your exercise goals in your calendar so that you will actually do them. Find an activity that gets you off the couch that burns calories, dancing, gardening, tennis with your friends – they all will help.

Maybe you need an outsider to keep you motivated. If you are strapped for cash, enlist the help of friends. Everyone is great at keeping someone else’s New Year’s resolutions. They will offer good suggestions and provide accountability. If you want to keep your friends out of the picture, hire a professional. There are life coaches, personal trainers, nutritionists, financial planners, and lawyers. They will all help you achieve different goals.

Add estate planning to your New Year’s resolutions. Everyone who is over the age of 18 needs certain basic documents and those documents need to be updated periodically. If you have never had an estate plan done, call a lawyer who specializes in estate planning now. Every one of us has a story of someone who died unexpectedly. And when they die without an estate plan, it makes it so much harder for the family left behind.

Get a fresh start now and get your life moving in the direction that makes you happy . Then add in those items that you know that you should do but always put off. Once you do those things, you will feel so relieved. And accomplishing these goals is a wonderful gift to your family.

End of Year Review

Before the tax year ends on December 31^st, you should be doing some planning to make sure you are maximizing every option the law allows and to give yourself peace of mind. What should you be doing?

1. Immediately schedule an appointment with your accountant, financial planner and estate planning lawyer;
2. Organize your tax and financial records;
3. If you have an estate plan, check it to make sure it still carries out your wishes (were there any changes in your personal circumstances – was anyone born, did anyone die, did you move to another state, did you get married?);
4. If you don’t have an estate plan, organizing your records and scheduling an appointment with an estate planning lawyer are your first steps;
5. If you have estate tax issues (and here in New Jersey, they start if you have more than $675,000 in your estate), make gifts to your children (be aware of the “kiddie tax”), family, and friends (limited to $12,000 from you and $12,000 from your spouse to each person, but no limits for educational and medical expenses if paid directly to the providers);
6. Make gifts to charity (as much as you want to donate);
7. Check the title on your assets – did you re-title your assets as your estate plan requires; did you fund your revocable living trust, if you have one.

Do You Know Anything About Your Parents’ Estate Plans?

This is one of the most sensitive subjects that a family never talks about. Parents rarely discuss money when their children are young. And they rarely talk about their financial situation when the children are grown up and the parents are getting frail. But as difficult as it may be, you should try to have a frank discussion with your parents about their money situation and their estate planning. In many ways, it could impact your life and your money.

Maybe you are lucky and your parents have a large amount saved. Now you know that it is unlikely that you will need to support them financially. It is possible, however, that an inheritance from them may increase your assets to the point where you will owe estate taxes. And your estate plan may need to change to shelter those assets from taxes. Or, your parents could have left the maximum amount possible to your children. Would that change your plans in a different way?

Perhaps when you talk to your parents, you may find out that they wrote a will when you were a small child and the will hasn’t been updated in 20-30 years. That will probably does not carry out their current wishes and your parents should be calling their estate planning lawyer immediately for a new will.

It is even possible that your parents do not have a will, a durable power of attorney or a health care proxy. And that can be a time bomb waiting to happen. You could receive a call in the middle of the night from one parent that the other was just rushed to the hospital and no one had any idea what your parent would have wanted for in the event of catastrophic illness. And your other parent doesn’t know where the financial documents have been kept or who to call. That scenario doesn’t need to happen.

If you find it awkward to start this conversation with your parents, talk about it in terms of how a “friend” found themselves in the situation where one of her parents suddenly died and the other parent was caught unprepared for managing life alone. You can emphasize that you are having this talk so that you can carry out their wishes and lessen the burden on the surviving parent. You can also focus on the planning that needs to be done to ensure that their last years are spent as close to their plans as possible. If one of them is ill and may need a nursing home in the future, you should suggest a call to an elder care lawyer. Find out where the documents are located and who should be called if there is a medical emergency or if there is a death. Make sure you know about funeral desires, pet care, and computer passwords. You may need to broach the subject more than once before they open up and really talk about their estate planning and their finances.

Finally, estate planning is more than money. There may be keepsakes that they would want you or your sibling to have or jewelry that they no longer wear that they may want to pass to you now. If there are stories from your parents’ childhood that you want to record for the future, sit them down with a camcorder and let them talk about their childhoods, about your childhood, and about family history that you only knew bits and pieces about. Ask questions about your parents’ values, life lessons, and memories that they want your children to treasure as much as they do.

You will be very glad if your parents will open up about their estate planning to you and your siblings now before there is a crisis. Estate planning when there is an emergency is the worst time to plan.

What If My Spouse Is Not a U.S. Citizen?

There is a great deal of speculation about estate taxes but given the current state of the economy, most people believe that Congress will not repeal estate taxes. The government needs the income from estate taxes. Therefore, you need to know certain rules that may pertain to you if your spouse is not a U.S. citizen.

First, if you or your spouse owns property (real estate or stocks or bonds) outside the United States, all of this property is included in your estate for tax purposes.

When you die, the amount you own in excess of the state estate tax limit ($675,000 in New Jersey) or the federal estate tax limit ($2,000,000 in 2008, going up to $3,500,000 in 2009) is subject to estate taxes. If your spouse is a U.S. citizen, you can give her/him everything you own, no matter how much that is, and you do not owe any estate tax. However, when your spouse then dies, everything he/she owned before plus what he/she inherited from you, is now subject to estate tax. It is different if one of you is not a U.S. citizen. Under those circumstances, any amount over $2,000,000 in 2008, or $3,500,000 in 2009, that is given to your non-citizen spouse is taxed at a tax rate of 45%. Why are foreign spouses treated differently? Because the government is concerned that your foreign spouse will take the money that is inherited from you and go back to her/his native land. And then you will never have paid taxes on your estate.

One way to solve the estate tax problem is for the non-citizen spouse to become a citizen. This can be done while you are both alive or even when you have already passed on.

If your spouse does not wish to become a U.S. citizen, then you can have a “Qualified Domestic Trust” (usually called a “QDOT”) created in your will. The money your spouse inherits from you is placed in a QDOT and estate taxes on your estate can be postponed. The QDOT must have a U.S. citizen trustee, the surviving spouse must be entitled to receive all of the income that the trust assets generate, and the QDOT must be established within 9 months of your death and must be elected on your estate tax return.

The QDOT assets are taxed when QDOT principal is withdrawn from the trust, when the trust does not conform to QDOT requirements, and when your spouse dies.

If you or your spouse are not U.S. citizens, it is important that you consult an estate planning lawyer right away. That is, unless you like giving your money to the government.

 

 

 

 

Gifts and Gift Tax

The federal tax code permits any person to give up to $12,000 per year to an unlimited number of persons without paying any gift tax or filing a gift tax return (did you even know there was such a thing as a gift tax and a gift tax return?). You can give to any people  you like – children, grandchildren, siblings, friends. If your spouse joins you in the gift, the two of you can give up to $24,000 to any person, without paying gift tax or filing a gift tax return. Giving away part of your estate is an old but effective strategy to save on estate taxes.

You can give money, stock, savings bonds, partial interests in real estate, or partial interests in your business. The recipient of your gift does not pay gift or income taxes on the gift. The annual gift that you are allowed to make must be completed by December 31 of each year. If you give a gift by check, the check must be deposited in the recipient’s account by the end of the year. If there are stock transfers, the transfer must be done by December 31^st. Since the transfer of stock as a gift is not considered a sale, you do not pay capital gains tax and the recipient doesn’t pay the capital gains tax until he/she sells. Your recipient takes your cost basis and your holding period. This means if you owned the stock for more than a year before you gave it to your son as a gift, your son now owns a long-term capital asset. And when he sells the stock you gave him, even if it is a month after you gave him the stock, he pays the long-term capital gains tax due.

If you want to give a gift of more than $12,000 to any one person, you can give away up to $1 million without being required to pay gift tax. If you give a gift over the $12,000 limit, you must report the amount of the gift on a gift-tax return (Form 709) which must be filed with your income-tax return.

Right now, with the stock market so battered, people are feeling the pinch and may not want to give any gifts. But the stock market will come back and every year that you do not decrease the size of your estate may be a lost opportunity to save on estate taxes. As of January 1, 2009, you can give an unlimited number of $13,000 gifts ($26,000 if your spouse joins in the gift).

The best guess is that the entire gift and estate tax scheme will be changing with the new Congress and President being sworn in next year. Although we cannot predict what they will do, the expectation is that estate taxes will go up and it may be harder to decrease the size of your estate to save on estate taxes. If you have a large estate, talk to your financial advisor and your lawyer to find out whether gift giving is right for you.