Do You Know Who Will Decide Where You Are Buried?

It’s something many people don’t think about when planning, but the consequences of having no plan, or a bad plan, can be heartbreaking.

A few months ago I was contacted by Jenny*, whose father had died the day before. At the time of his death Jenny’s father was married to a woman who was not Jenny’s mother and he had not left any written instructions for his burial.

Jenny was extremely distraught because her father’s wife would not tell her anything about the funeral arrangements for her father. Jenny’s father was a veteran and she knew he wanted to be buried at Ft. Snelling Cemetary. Jenny could not find out from anyone what had happened to her father’s body, where he was to be buried, where the funeral was, or even if there was to be a funeral. It was a heartbreaking story, but unfortunately Jenny’s stepmother was acting completely within the law. Because Jenny’s father had not left any written instructions about who was to make burial decisions for him, Minnesota statute said that his wife was the person who got to make the decision.

This heartbreak could have been avoided with some good advice and proper planning, but nobody ever took the time to do it until it was too late. Don’t let this happen to you. Give us a call and let us help you set up a plan so that no detail will be forgotten.

*Not her real name.

Reconsider Outright Inheritances

How to Protect Your Heirs and Your Legacy from Bad Decisions and Outside Influences

Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn’t as hard as you might think. – Suze Orman

After working diligently for decades to achieve your financial goals, you understandably want to preserve your gains and leave an enduring legacy to the next generation. For better or for worse, though, your heirs have free will. Even while you’re alive and very much capable of directly communicating with your children, favored charities and others, you might already be uncomfortably familiar with the limits of your influence.

As you contemplate the future, it’s easy to ponder disagreeable scenarios. What if your adult child squanders the business you leave them by getting involved with a dubious partner or burning through cash reserves and taking speculative risks? What if the non-profit that you co-founded mismanages the property that you leave it or runs afoul of legal issues?

Your carefully outlined plans for passing money onto the next generation can be derailed in many ways:

  • A widowed spouse remarries unwisely;
  • An unanticipated or unforeseen tax consequence drains the estate;
  • A chronic illness or lengthy nursing home stay disrupts the plan;
  • An aggressive creditor, fraud, financial mismanagement, or some other unfortunate act undoes your hard work and creates a complicated, expensive, dramatic mess for your family.

The good news is that you’re not the first to deal with this anxiety. For centuries, wealthy people have wrestled with how to protect and exert control over the next generation. As a result, they and their advisors have developed quite a toolbox.

This “insider secret of the wealthy” is strategic as well as tactical. But before we dive in, I want to share what is the more common planning option. In many estate plans, inheritances are given to heirs in staggered distributions (such as one-third at age 25, one-third at age 30, and the rest at age 35) or outright with no strings attached. This approach seems straightforward and therefore sensible. But, staggered or outright distributions are less than ideal because they leave your heirs’ inheritance vulnerable to interference from creditors, predators, and courts.

So what can and should be done, instead?

Here’s one powerful answer: Leave an inheritance in a discretionary lifetime trust, rather than outright or staggered.

What is a discretionary trust?

Depending on how it’s implemented in your circumstances, this type of trust lets you pass assets along to beneficiaries now or at your death. As the name implies, you give the trustee discretion over how and when the beneficiaries may access trust assets. Certain uses of the money might be deemed acceptable, whereas other uses will be restricted.

For instance, if your daughter wants to go to medical school, or your son wants seed money to launch a business, then the money is available. However, if your child (or other beneficiary) veers off path or violates the terms and conditions you incorporate into the trust, then the assets are not available. With proper planning and a good choice of trustee, the funds you set aside can last for your beneficiaries’ whole lives and beyond.

How Does This Tool Shield an Inheritance?

First of all, the discretionary lifetime trust cordons off the inheritance. A vengeful ex-spouse, plotting business partner, unshakeable creditor, or plaintiff in a lawsuit against your beneficiary will have a very hard time breaking down the wall surrounding the property and assets you’ve left. Of course, no wall is impenetrable, but this one can be made quite strong.

The trustee has the power to go inside this wall, according to your explicit and pre-determined wishes, and access the funds. But the “bad guys” are generally kept at bay.

You can also ensure that whatever is “left-over” in the trust after a beneficiary dies goes to where you want. You could stipulate that what’s left should be passed to a grandchild, a sibling, or a cherished organization. In this way, you can develop a series of discretionary lifetime trusts and ensure your legacy for decades or longer. This also lets you enshrine your standards and values by imposing them as conditions on the benefits.

You can also empower the trustee to proactively help beneficiaries. For instance, if the trustee notices that your son (sadly) has become an alcoholic or inveterate gambler who cannot be trusted with an allowance, she can be given the discretion to deny or limit the flow of benefits to him and instead use trust funds on his behalf (say to directly pay rehabilitation, rent, or other expenses).

Of course, there are numerous other benefits to discretionary trusts, ranging from estate and income tax planning to proactively passing along financial values.

Although a long-utilized and popular tool for the wealthy, this type of trust has helped protect countless people across the entire wealth spectrum, from the modest to the well-to-do. In many cases, it can help your family too.

You probably have many questions about lifetime discretionary trusts. I’m here to help. Please call me today, so we can explore how I can help you and your family.

What the Recently Released 2016 IRS Inflation Adjustments Mean for You

The Internal Revenue Service has released the official inflation adjustments that will affect 2016 federal reporting for estate taxes, gift taxes, generation-skipping transfer taxes, and estate and trust income taxes. These changes will affect the way your accountant and your attorney help you plan as 2015 comes to an end.

2016 Federal Estate Tax Exemption

In 2016 the estate tax exemption will be $5,450,000. This is an increase of $20,000 over the 2015 exemption and a total increase of $1,950,000 since 2009. The maximum federal estate tax rate remains unchanged at 40%.

What this means is that a person can die in 2016 with up to $5,450,000 of assets before his or her estate will need to file an estate tax return. Of course, there are certain circumstances where an estate tax return will still be necessary – such as to elect “portability” or if a person made substantial gifts during their life. The exact deadline to file an estate tax return varies depending on a person’s date of death, because an estate tax return is due within nine months of the deceased person’s date of death.

Although the estate tax exemption has been increasing and now generally means that most people don’t need to worry about estate taxes, almost everyone still needs a will or a trust to ensure that their assets pass to their intended beneficiaries.

2016 Federal Lifetime Gift Tax Exemption

In 2016 the lifetime gift tax exemption will also be $5,450,000. This is an increase of $20,000 over the 2015 exemption and a total increase of $1,950,000 since 2009. The maximum federal gift tax rate remains unchanged at 40%.

What this means is that if a person makes any taxable gifts in 2016 (in general a taxable gift is one that exceeds the annual gift tax exclusion – see more on that below), then they will need to file a federal gift tax return. For taxable gifts made in 2016, the gift tax return is due on or before April 17, 2017 (the same day as your 2016 income taxes).

2016 Federal Generation-Skipping Transfer Tax Exemption

In 2015 the exemption from generation-skipping transfer taxes (GSTT) will also be $5,450,000. This is an increase of $20,000 over the 2015 exemption and a total increase of $1,950,000 since 2009. The maximum federal GSTT rate remains unchanged at 40%.

What this means is that if a person makes any transfers that are subject to the GSTT in 2016, then they will need to file a federal gift tax return. For generation-skipping transfers made during 2016, the gift tax return is due on or before April 17, 2017 (the same date as your income taxes for 2016). If the generation-skipping transfer does not exceed $5,450,000, then no GSTT will be due; instead, the transferor’s GSTT exemption will be reduced by the amount of the transfer.

For example, if Bob has not made any prior generation-skipping transfers and makes one of $500,000 in 2016, then his GSTT exemption will be reduced to $4,950,000 ($5,450,000 GSTT exemption – $500,000 generation-skipping transfer = $4,950,000 GSTT exemption remaining). The generation-skipping transfer tax is a complex tax, so you’ll definitely want to check with your accountant and attorney before making any large gifts during 2016 (or 2015 for that matter).

2016 Annual Gift Tax Exclusion

In 2016, the annual gift tax exclusion will remain at $14,000. However, one adjustment is happening next year – the first $148,000 of gifts to a spouse who is not a U.S. citizen are not included in the total amount of taxable gifts. This is an increase of $1,000 above the 2015 exclusion.

Here’s how the annual gift tax exclusion works. If you make gifts to the same person that are $14,000 or less, then no gift tax return will probably be necessary. However, if the gifts to one person exceed $14,000 in 2016, then you’ll need to file a federal gift tax return. For taxable gifts made in 2016, the gift tax return is due on or before April 17, 2017 (the same day as 2016 income tax returns).

If the taxable gift does not exceed $5,450,000, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift.

For example, if Bob has not made any taxable gifts in prior years and makes a gift of $500,000 to his daughter in 2016, then Bob’s lifetime gift tax exemption will be reduced to $4,964,000 ($500,000 gift – $14,000 annual exclusion = $486,000 taxable gift; $5,450,000 lifetime gift tax exemption – $486,000 taxable gift = $4,964,000 lifetime gift tax exemption remaining). As you can see, the interplay between the annual gift tax exclusion and the gift tax exemption can become complex once you add multiple gifts and recipients, so you’ll want to check with your accountant or attorney before making any substantial gifts.

2016 Estate and Trust Income Tax Brackets

Finally, estates and trusts will be subject to the following income tax brackets in 2016:

If Taxable Income Is:                            The Tax Is:

Not over $2,550                                      15% of the taxable income

Over $2,550 but not over $5,950         $382.50 plus 25% of the excess over $2,550

Over $5,950 but not over $9,050         $1,232.50 plus 28% of the excess over $5,950

Over $9,050 but not over $12,400       $2,100.50 plus 33% of  the excess over $9,050

Over $12,400                                           $3,206 plus 39.6% of the excess over $12,400

The income tax rates for estates and trusts are very compressed. An estate or trust will hit the top 39.6% rate at only $12,400 of taxable income in 2016. Estates and trusts are also potentially subject to the 3.8% net investment income tax (on top of the above rates), depending on their income level and source of income.

Bottom line: if you’re a trustee or executor, you should talk to your accountant and attorney now to ensure that you’re making the most income tax efficient decisions possible given the circumstances of the estate or trust.

These States Will Usher in Changes to Their Death Taxes in 2016

In 2015, there are still 20 U.S. jurisdictions that collect a death tax at the state level: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington. Even if you don’t live in one of these states, the state estate tax may affect you in the future since many people move from time to time. It may affect your beneficiaries, because they may live or move to one of these states.

The following states will see changes to their state death taxes in 2016:

  • While Connecticut’s $2,000,000 estate tax exemption will not change in 2016, legislation was enacted in 2015 which caps the estate tax payable by any given estate at $20 million for deaths occurring on or after January 1, 2015.
  • Delaware’s estate tax exemption matches the federal estate tax exemption which is indexed for inflation on an annual basis. Therefore, Delaware’s estate tax exemption will increase from $5,430,000 in 2015 to $5,450,000 in 2016.
  • Keep an eye on the District of Columbia estate tax exemption – in 2015 the D.C. estate tax exemption is $1,000,000; however, a new D.C. law provides that the exemption will increase to $2,000,000 and eventually match the federal exemption when revenue surplus targets are met.
  • Like Delaware, Hawaii’s estate tax exemption matches the federal exemption, so Hawaii’s estate tax exemption will also increase from $5,430,000 in 2015 to $5,450,000 in 2016.
  • Maine enacted legislation in 2015 which will match its estate tax exemption to the federal exemption beginning in 2016. Thus, the Maine exemption will increase from $2,000,000 in 2015 to $5,450,000 in 2016.
  • Maryland’s estate tax exemption will increase from $1,500,000 in 2015 to $2,000,000 in 2016 and will continue to increase annually until it matches the federal exemption in 2019. In addition, in 2019 Maryland will begin recognizing portability of its state estate tax exemption between married couples, including same-sex married couples. (Currently Hawaii is the only state that recognizes portability.)
  • Minnesota’s estate tax exemption will increase from $1,400,000 in 2015 to $1,600,000 in 2016 and will continue to increase annually until it reaches $2,000,000 in 2018. In addition, married couples can take advantage of ABC Trust planning to defer payment of both Minnesota and federal estate taxes until after the death of the surviving spouse.
  • New York’s estate tax exemption will be as follows for 2016:
    • $3,125,000 for deaths between April 1, 2015 and March 31, 2016; and
    • $4,187,500 for deaths between April 1, 2016 and March 31, 2017.

The exemption will then continue to increase until it matches the federal exemption in 2019. Aside from this, gifts of New York property made between April 1, 2014 and December 31, 2019 will be subject to a three year look-back period. This means that any gifts made during this time-frame will be brought back into the New York taxable estate if the person making the gift dies within three years of making the gift. If you anticipate making gifts of New York property or if you are a New York resident, you should consult with us about how much your estate will be exposed to the New York and federal gift and death taxes.

  • The 2015 Rhode Island estate tax exemption is $1,500,000 and is scheduled to be indexed for inflation in 2016 and later years. Nonetheless, in this low inflation environment the Rhode Island Division of Taxation announced on October 22 that the estate tax exemption will remain at $1,500,000 for 2016.
  • In 2016 Tennessee’s inheritance tax will disappear, bringing the number of U.S. jurisdictions that collect a death tax down to 19.
  • Washington began indexing its estate tax exemption for inflation on an annual basis in 2014. The 2015 exemption is $2,054,000, but the 2016 inflation-adjusted exemption has not been released yet.

As you can see, the days of easily planning for estate taxes have significantly changed due to portability of the federal estate tax exemption and a myriad of state-level death taxes. If you have any questions about the best way to protect your estate from federal and state death taxes, please contact my office.

National Estate Planning Awareness Week – October 19-25

Get Ready: 2015 National Estate Planning Awareness Week Begins on October 19

In 2008 the National Association of Estate Planners & Councils (NAEPC), in conjunction with Rep. Mike Thompson (D-CA) and 49 of his colleagues, helped pass a law which declared the third week in October “National Estate Planning Awareness Week.” This year National Estate Planning Awareness Week falls on October 19 through 25.

What is the Purpose of National Estate Planning Awareness Week? (more…)

Estate Planning Today Must Include Digital Assets and Social Media

It wasn’t very long ago that we had only paper for financial and tax records. We could simply point to a file cabinet or drawer and tell someone, “Everything is in there when the time comes.” But now we have computers and the internet, and so much of our lives is online. Unless we include our digital assets and social media in our estate planning, our family or administrator may not be able to find critical documents. (more…)

The Shocking Truth About Asset Protection Planning

Some view asset protection planning with a skeptical eye. They believe there is a moral obligation to pay one’s debts. They think that asset protection planning is immoral because it prevents a creditor from collecting on a judgment entered by a court.

The truth is the U.S. justice system is unpredictable. Defendants are faced with ever-expanding theories of liability, being sued just because they appear to have “deep pockets,” and judgments entered against them based on desired outcomes instead of the law.

What, then, can you do that will ethically and legally protect your hard-earned assets from creditors, predators, and lawsuits?

What Asset Protection Planning Is, and What it Is Not
The first step in protecting your assets is to understand that planning to preserve and secure your property in advance of a claim, or the threat of a claim, is a legitimate form of wealth planning. The goals of asset protection planning are to:

  • Provide your creditor with an incentive for settling a claim;
  • Improve your bargaining position;
  • Offer you options when a claim is asserted; and
  • Ultimately, deter your creditor from filing that lawsuit.

On the other hand, asset protection planning is not about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors. In addition, it will not be effective to shield your property from an existing claim, and it must be done long before there is even the hint of a claim.

When Done Right, Asset Protection Planning is Completely Legal and Ethical
Using all legal tools available to help clients protect their hard-earned assets from future claims is consistent with the rules of professional conduct that govern the actions of attorneys. In fact, these rules require attorneys to pursue representation of their clients with diligence and advocacy. What these rules do not allow, however, is assisting or counseling a client in fraudulent or criminal conduct. Therefore, you must be wary of an attorney who offers to assist you in protecting your property after a lawsuit has already been threatened or filed. This type of conduct is not ethical or legal.

The Final Truth About Asset Protection Planning
While you may drive carefully and steer clear of barroom brawls, unfortunately you cannot avoid all activities that create liability. Putting together a plan to preserve and protect your assets in advance of a claim is a completely acceptable and, more importantly, legal form of wealth planning.

Please call me if you have any questions about this type of planning and to get started on protecting your assets from future creditors, predators, and lawsuits.