NEW LARGER EXEMPTION BECAME AVAILABLE ON JANUARY 1, 2009
The biggest estate tax changes in the 2001 Tax Act which has been phased in over time relate to the increase in the exemption equivalent or the amount you can pass to a non-spouse free of estate taxes. As of January 1, 2009, the estate exemption per person has increased to $3,500,000 with an estate tax rate of 45% over that amount. Previously from January 1, 2006, through December 31, 2008 that exemption was $2,000,000. In 2007 and 2008 the top estate tax rate leveled off at a flat 45% over the $2,000,000 estate tax exemption. Previously, in 2001, the estate tax exemption was $675,000 which previously increased on January 1, 2002 to $1,000,000 and to $1,500,000 from 2004-2005. The applicable estate exemption applies in the year that an individual dies. Under the currently existing law, estate tax is scheduled to be repealed in 2010, only to go back to the $1,000,000 exemption in 2011, but it is likely that President and Congress will address this issue sometime in 2009.
During the presidential election, then President candidate Barack Obama talked about freezing the estate tax exemption at $3,500,000 and to tax the excess amount at 45% sometime in 2009. The Democratically controlled Senate Finance Committee has also talked about freezing the estate tax exemption at $3,500,000 and the estate tax at 45% above that amount. This projection was before the recent bank, financial and, automobile bail outs and proposed financial incentive packages that significant costs and may require additional tax revenues on top of the massive deficits.
While a $5,000,000 estate exemption and repeal of the estate tax was discussed when the Republicans still controlled Congress, the window on that change was lost as the Republicans also wanted a reduction in the estate tax rates for estates between $5,000,000 and $20,000,0000. Repeal of the estate tax is very unlikely except for possibly the 2010 single year window if Congress cannot compromise on a more lasting estate tax exemption during 2009 or 2010.
For planning going forward, we cannot predict for certain what changes to the estate tax exemption and estate tax will be. Key is we are spending an unprecedented amount in various bail outs. While not currently being discussed, an estate exemption of less than $3,500,000 could be in the cards if more tax revenue needs to be generated.
Many Couple No Longer Need Mandatory Trust Division at Death of First Spouse
Many existing estate plans for married couples are designed so they either divide the assets in a joint trust at the first death into two or three trusts. The division often puts the Surviving spouse’s assets in the A or survivors trust and the deceased spouse’s share of the assets (including ½ of the community property) is put into a B or Bypass trust. Often this excludes the retirement plan assets which go directly to the surviving spouse. Larger estates can divide the deceased spouse’s share of the asset into two trusts called the B and C (Marital) Trust and end up with an A-B-C trust.
Another alternative is to leave everything to the surviving spouse using the unlimited marital deduction and end up with only one trust. The problem with the second plan is you waste the first spouse’s estate tax exemption and may create a taxable estate if the estate at the death of the second spouse exceeds the then available estate exemption. Many trusts were created when there was a lower estate tax exemption of $600,000 up to $2,000,000 and it was important to divide the trust at the death of the first spouse to avoid estate taxes at the death of the second spouse.
As of January 1, 2009 when the estate tax exemption changed to $3,500,000, many married couples with a total net worth under $4,000,000 and certainly under $3,500,000 are deciding whether they should change their A-B Trust plan (automatic trust division at death of first spouse) to an A-Disclaimer trust (or optional bypass trust) plan. Key to good estate tax planning is to leave the surviving spouse no more than the estate exemption equivalent in total assets and trying to fund a bypass trust or disclaimer trust with the balance but not to exceed the first spouse’s estate tax exemption. If the exemption equivalent can cover all of the assets in a married couple’s taxable estate (including retirement assets and life insurance owned by the insured party) and a married couple does not have significant separate property or children from different marriages, you may want to consider changing from a A-B Trust division at the death of the first spouse, to an optional Disclaimer trust (which is similar to a bypass trust) that gives the surviving spouse more flexibility when the first spouse dies and be made knowing your total net worth at the death of the first spouse and what the then current estate tax exemption is in place.
However, even with smaller estates, if each spouse has different people they want to leave the assets after the second spouse dies, you may still want to use the automatic A-B trust division even if not needed for estate tax purposes. The bypass trust can still make the assets available for the surviving spouse but make irrevocable who gets those assets after the surviving spouse dies. A key question regarding distribution of the estate arises when the spouses have different desired heirs to receive their assets after the surviving spouse dies. This has to be weighed against the additional complexity of a second trust including retitling the assets after the first death and the need for a second income tax return to be filed for the bypass trust. If the entire estate would be under the estate tax exemption which is currently $3,500,000 you may want to change from an automatic trust division to an optional one that leaves decision in the hands of the surviving spouse.
Key is a bypass trust can permanently provide who is to get the B or Bypass trust assets after the second spouse’s death. No division allows the surviving spouse to change who will get all the trust assets after the death of the second spouse. Given that it is possible the estate tax exemption possibly could return to $1,000,000 in 2011, it is prudent for most married couples with close to or over $1,000,000 to have this optional disclaimer trust even if the current estate tax exemption of $3,500,000 would otherwise cover all of their assets both inside and outside of the trust.
Larger Exemption May Eliminate need for Marital Trust (C or QTIP Trust) if Most of the first Spouse to die’s asset can go into the Bypass or B Trust
Larger estates in community property states often divide into three trusts after the death of the first spouse, namely the A or Survivor’s Trust, B or Bypass or Credit Shelter Trust, and the C or QTIP or Marital Trust. The deceased spouse’s share of assets are put in the bypass trust up to the exemption equivalent (in place at the first spouse to die’s date of death) and the deceased spouse’s share of the assets in excess of the remaining exemption equivalent is put in the C Trust. The surviving spouse’s share of the assets stays in the A Trust. The C Trust really offers protection from the surviving spouse redirecting where assets go if the deceased spouse’s share of the trust assets exceeds what would go into the Bypass Trust free of estate taxes. While this might have made sense in a $2,000,000 community property estate when the exemption was $600,000, meaning the C or marital trust might be funded with $400,000 of assets and the bypass trust with $600,000, it might not make sense if the exemption is $3,500,000 in a $8,000,000 joint estate which would be a C or Marital trust for $500,000 if the first spouse died if the new larger exemption (per spouse) was $3,500,000 (in 2009). If this is a first marriage with the same heirs, the first spouse to die may not mind if the surviving spouse has only two trusts over which they can change assets only over 1/2, (but not the $3,500,000 bypass trust) vs. requiring a third trust(the Marital Trust or C Trust ) for $500,000 which the surviving spouse cannot redirect, but will require its own separate income tax return and accounting of the assets to the remainder beneficiaries after the spouse with the corresponding complexities. On the other hand in a second marriage with children from previous marriages, use of a C or Marital Trust may still remain important to protect the deceased spouse heirs after the second spouse dies.
Increase in Generation Skipping Transfer Tax Exemption Can Result in Unintentionally Benefiting Grandchildren at expense of Children.
The Generation Skipping Transfer Tax Exemption jumped to $3,500,000 in 2009 and with it many estate plans designed to maximize full use of the generation skipping transfer tax exemption suddenly are giving more assets to grandchildren with larger limitation on its use in the interim by their children. (If all of your assets go outright to your children at the second death this issue will probably not apply to your estate plan). Many of these plans were formula driven and put into trusts assets that qualified for the generation skipping transfer tax exemption which was originally $1,000,000 and was slowly increasing based upon inflation. However, for a married couple with a $7,000,000 estate or even a $4,000,000 this change could be significant. The original plan in 1999 would have basically given had put $650,000 in a bypass trust, $1,350,000 in Marital Trusts and $2,000,000 in a Survivor’s trust at the first death making $3,350,000 subject to estate taxes of $1,240,000 leaving a net to the children of roughly $1,240,500 outright and a generation skipping trust of $1,559,364 that gave the children the net income and limited use of the principal for their health support and maintenance for their lifetime, but after the children’s lifetime going to the grandchildren. This was not so bad as it gave some money the children could spend anyway they wanted and income and support for the balance of their lifetimes but any part of those assets were to be distributed to that child’s children (grandchildren of the grantors).
With the change in the law this distribution for a $7,000,000 estate changes significantly to no estate taxes and would give not give the children any assets outright and $7,000,000 in a generation skipping trust which could pay them the net income but distributions of principal would be limited for their health, support, education and maintenance for their lifetime (which if they are making a good income may not very much beyond the income stream), but then to the grandchildren (usually at appropriate ages and uses). While this may be desirable in some cases, this change in permitted use of the money by the children due to a change in the estate tax laws may have a very significant undesired distribution result in many cases which would require updating the trust.
Where this can be significant is if the middle generation wants to use some of the money to move into a bigger house or use some money to invest in a business which would not qualify under the basic health support and maintenance standards used in many generation skipping trusts .
Large Inheritance or Significant Increase in Net Worth May Create the Need for an A-B-C Trust
If you receive a significant inheritance or your net worth changes significantly, you may want to add a marital or C trust to an existing A-B Trust set up. This would be true where you might be concerned that your surviving spouse might change where your share of the estate may be directed. This only applies where a bypass trust does not adequately protect the assets of first spouse to die which would be ½ of the community property in the joint trust and all of that spouse’s separate property (which is inherited property or property acquired prior to the current marriage which you have kept titled in you name alone.) For example if you died in 2009 and you had $2,000,000 of Community property assets and $3,000,000 of your separate property and the exemption was $3,500,000 at your death, your share of the assets would be $3,500,000. At that time $3,500,000 would fund the bypass (B) trust (assuming no lifetime taxable gifts) and an additional $500,000 would fund a marital or (C) Trust. The survivor’s trust would be $1,500,000 which would be the ½ community property interest the surviving spouse had. To create the extra paperwork for a third trust for the $500,000 it may not be worth keeping with the increase in the estate tax exemption.
In previous years if the estate exemption was $2,000,000, the Bypass (B) trust would be $2,000,000 and the C or marital trust would be $1,500,000). The use of the third trust called the C trust would protect some of the inheritance for your eventual heir but not necessarily offer significant estate taxes as both the survivor’s trust and the marital trust would be taxable in the surviving spouse’s estate at his or her death. However, your surviving spouse is entitled to at least receive the net income from a marital trust during his or her lifetime (in order to qualify for the unlimited marital deduction). However, the Surviving spouse cannot redirect where those assets go after his or her death in both the bypass trust and the marital trust. This is important if you are concerned with any new spouse or children from previous or future marriages or if you and your spouse have different ideas of where the assets should go after you both die.
If the Estate Tax Exemption Does Not Change my Estate Plan, Why Else Do You Need to Update Your Trust Document
People often ponder when and if they need to change their existing trust document. Changes in the trust or tax law is a starting point, but personal changes in your family relationships or beneficiaries, including new contingent beneficiaries like grandchildren are important. The relationship with or health of successor trustees, and significant changes in your new worth are all external issues that can change the usefulness of your existing will and/or trust document. Internally, questions arise whether the document(s) you have originally addressed all the issues it should have when it was created. Finally if you get a divorce and/or a new spouse it is important that you get new estate planning documents to remove or add that spouse in your estate plan, even if it does not change what that spouse or ex spouse was to receive.
Change of Beneficiaries
Clients often have trust documents that deal only with beneficiaries in existence at that time the document is created. Unfortunately your feelings about a particular beneficiary may change, importance of new beneficiaries like grandchildren may change your priorities of where you want your money to go, or the irresponsibility of a particular beneficiary may cause you to change how you want to distribute your estate. Your trust may deal with the ages of children, but fail to deal with immature grandchildren, either directly or indirectly might receive assets if the middle generation dies before you do. Assets may stay in trust to 18 or 21, but that can be very young when the assets are significant. Sometimes particular charities become important beneficiaries to leave your assets, often as contingent beneficiaries or a specific percentage of your estate.
Change in Marital Status
You should always update your documents if you get divorced or if you get married. Your documents may provide for an ex-spouse or not provide for your new spouse. The probate law allows a new spouse to elect against the community property and get both their share and your share of the community property if you did not update your documents but requires a court hearing to do so. In addition a spouse can get between 100%, 50% or 1/3 of your separate property if you have not updated your document to acknowledge you have been married since the latest version of your estate planning documents.
However, you have full ability to leave all of your separate property and your 50% share in the community property to anyone you desire provided your documents acknowledge the current spouse to whom you are married. Do know there are special rules relating to Qualified Retirement plans and IRAs regarding the beneficiaries that may override these rules. You should also update the beneficiaries on the IRAs and qualified plans.
Dealing with Lack of Maturity for Beneficiaries
Most people do not think an eighteen-year-old is mature enough to receive all of their assets. Yet, if there is no children’s (or contingent grandchildren’s trust), your children or grandchildren could receive your assets outright at age 18 should you and your spouse happen to pass away before your children were more mature. Many clients want to make sure assets are used for college education, health and basic support before assets are distributed outright to a young adult. Distribution of principal is often delayed until a more mature age and often made in stages. Distribution ages at ages 25, 30 and 35 are often ages many individuals feel more comfortable. Allowing use of the money for good uses like a down payment on a home if a beneficiary can qualify for the loan or matching money for a business start up that the beneficiary can justify with a well thought out business plan can be great. However, there is no magic to ages; or selected uses of the money you need to pick distribution ages and or use of the money that you feel your intended heirs can handle their inheritance. Increase in Family Wealth
Clients may put together their estate plan at a time they do not have as much wealth. Many people have seen their home double in value over the past five to ten years. Key benchmarks in net worth exist for estate tax purposes. If a married couple has a net worth of over 3,500,000 dollars, they should look at setting up an A-B Trust or Disclaimer Trust which is an optional bypass trust to make sure each spouse can use all or a part of their exemption equivalent of 3,500,000 dollars each. Married couples can save a few dollars up to 1,575,000 dollars (for estates in excess of 7,000,000 dollars) alone by using a bypass trust at the death of the first spouse. For a married couple with more than 7,000,000 dollars in assets combined in their taxable estate (or a single person with over 3,500,000 dollars in their own assets), there are additional estate taxes that the bypass trust cannot currently protect. Additional gift planning from simple annual exclusion gifts of 13,000 dollars per donor per donee as of January 1, 2009, (previously $12,000 for 2008 and even $11,000 annually in 2005) to advanced irrevocable trusts should be reviewed. A past issue of Legal Insights entitled, "Leveraging Lifetime Gifts to Reduce Estate Taxes" provides an introduction into some of these advanced gifting options.
Did You Pick the Right Successor Trustees and Enough Contingent Ones
Often you have picked contemporaries as successor trustees or family members that are nearby. Trustees can get older, pass away or your reasons for choosing them, as successor trustees may no longer be valid. One of the children after several years can become mature enough to handle the family assets. It works best if a trustee has some reasonable proximity to your ultimate beneficiaries as well as yourself. Key for trustees is ability to deal with distributions to your chosen beneficiaries, reasonable money sense or enough sense to seek good financial advice and to follow it, willingness to serve as trustee (it does involve significant work), ability based on current condition, ability to serve fairly between the various beneficiaries. In some cases you may want to designate an investment advisor in your trust that the trustee may rely for financial investments or seriously consider a corporate or independent professional trustee. Consider the current age and health of successor trustees and what their individual capabilities are.
Did you Pick the Right Guardian and Alternate Guardians for your Minor Children
Often you name guardians at one time such as parents, siblings or neighbors who have moved away or from whom you have moved away from. Often parents get too old to take care of young children (under 18) or your contact with your chosen guardians has diminished over the years and a better choice is available. Many people want to name a married couple to make sure there is enough support rather than a single parent to insure they have enough time to take care of your children if the unthinkable happens. All that may suggest you change the nominated guardians for your children that may current appear in your will. Finally, it is important that the trust allow reimbursement from the guardians for the extra burden of taking care of your children. Often it makes sense to allow the guardians to set up a budget for the extra cost of raising your child and directing the trustee (in your trust document) to provide that money on a regular basis, particularly if the guardian is not the same as the successor trustee in your trust document. Finally consideration should be given where the children live. If you want the guardian to live in your current community with your children, your trust should allow your chosen guardian to live with your children in your home while the children are minors. If you children are all 18 or over this would not apply.
Does the Trust Clearly Define Incapacity
A key benefit of a trust should be ability to deal with the trustee’s physical or mental incapacity. Usually the grantor or the creator of a revocable trust is also the trustee. With today’s advancing medical technology many people become incapacitated and are unable to manage their own money. A revocable trust can allow for a successor trustee to manage your money for your benefit but provides restrictions on how they may manage your money. Without clearly defined definition for incapacity in your trust, a probate court has to define incapacity often in a Conservatorship court proceeding. Usually a good trust document will have incapacity of a trustee determined by two or more licensed physicians in writing who are unrelated by blood or marriage to the trustee or any of the beneficiaries. If the trust refers to legally defined incapacity only, it may require the probate court determine you are incapacitated. With the passage of HIPAA, it is important that your trust and your advance health care directive authorize your successor trustees (or Health Care Agent) to get information from your physicians to disclose your private medical records for purposes of determining if you are incapacitated.
Is the Trust Properly and Completely Funded?
A trust avoids probate since the Trustee of the trust is the legal owner of the assets. Creating the trust and listing it on the Schedule A or B does not fund the trust. Transfer documents need to transfer ownership to something like Joe Smith and Mary Smith, Co-Trustees of the Smith Family Trust created 1/25/95. There are variations of that titling, but it should show a trustee is the registered owner of real estate, stocks, brokerage accounts, etc. Be aware that Beneficiary designations for IRAs and Pension plans ARE DIFFERENT from life insurance. However it is important there are enough contingent beneficiaries named in those forms. Avoid owning assets as joint tenants with right of survivorship as outlined below. What often gets taken out of a trust is a piece of real property that is refinanced and then it is not put back into the trust after the refinancing of the property is complete.
Are Any Assets Owned as Joint Tenants with Right of Survivorship
One alternative to probate is using joint tenancy with right of survivorship. This may have significant consequences that will affect distribution and possible income tax effects. Joint tenancy will override your trust provisions and no offset will be made for a gift made through joint tenancy. This could significantly affect the desired allocation of your estate to various beneficiaries. Joint tenancy property will not avoid estate taxes for spouses; half of the property is subject to the estate tax calculation. For non-spouses, the percentage is based on the amount of contribution. The biggest problem is ownership by spouses of assets that appreciate like stocks or real estate. If the asset is held as community property inside the trust the asset will get a full step up in basis at the death of each spouse. If a married couple holds property as joint tenants, only half the property will get a step up in tax basis at the death of the first spouse. California does allow you to own real property assets as community property with right of survivorship to avoid the step up in tax basis issue, but it does not deal with who gets the asset if both spouses die.
Moving into a Community Property State Like California
Often married couples originally living outside California set up two separate trusts to control their assets. If one client has significant separate property from assets prior to marriage or assets they inherited, there may be a good reason for separate trusts. However, a married couple who obtained most of their assets while married would like to get the benefit of a full step up in tax basis on community property assets at the death of the first spouse up to the fair market value on the first spouse’s date of death. Usually the best way to do this is to combine all the non-separate property assets as community property. For California, married couples usually have one revocable trust (particularly for community property), which divides at the death of the first spouse. However, if one spouse has significant property acquired prior to marriage that he or she inherited, they can always keep it as separate property in his or her own separate property trust.
Need for Liquidity Assets to Pay Estate Taxes
Many clients have created a trust that divides into two or three trusts at the death of the first spouse. The trust may create a B or bypass trust at the death of the first spouse that will hold assets that will avoid estate taxes at the death of the second spouse. However, that plan may still leave a survivor’s trust (or A Trust) (combined with the Marital or QTIP Trust). IRAs and Life insurance proceeds of over $3,500,000 (for 2009) and an estate tax at the death of the second spouse. Alternatively, the surviving spouse or single person may not be able to utilize the bypass trust and be faced with an estate tax problem. The problem is estate taxes are due within nine months of death. For married couples this usually will be after the second spouse dies. If assets that the surviving spouse owns (excluding the assets in a bypass trust) are $4,000,000, and the second spouse died in 2009 the estate tax would be $225,000. That may not be a problem if you have assets that be sold for full value immediately, but may be a problem for assets such as real estate and a closely held business which need to if sold quickly may have to sold at a significant discount.
Failure to Review How Life Insurance is Owned
Many people fail to realize that life insurance proceeds can be taxable in your estate if the decedent owned the policy even though the policy names a third party as the beneficiary. A married couple may have an A-B Trust and (after 2009) $7,000,000 in net assets, but in addition a life insurance policy in the amount of $1,000,000 in death benefit, payable to your spouse or to your revocable trust to benefit your children. Your children may be shocked to find that the life insurance if payable at the second death would combine with the surviving spouse’s 1/2 of the estate which is $3,500,000 and convert the surviving spouse’s $3,500,000 estate which could avoid estate taxes in 2009 into a $4,500,000 taxable estate with an estate tax bill of $900,000. (While the changes in the exemption can change this, this would be the result in 2009 based on the current law.) However, if the life insurance was owned by a separate irrevocable trust for the benefit of your children, it could create the assets needed to pay your estate taxes by trading the proceeds with your revocable trust for illiquid assets and if done properly, make sure the life insurance proceeds were not included when figuring out your taxable estate. This is discussed more in more detail a previous issue of Legal Insights published by this office entitled "Special Use of Life Insurance in Estate Planning."
Receipt of Inheritance Changes Estate Plan
Your original estate plan may work with your existing assets, but an inheritance may change the value of the estate. Suddenly, you may need to set up an A-B Trust to use each spouse’s exemption equivalent where the total estate was previously under $3,500,000. If you are old enough and already have plenty of assets to use for the balance of your life, it may pay to look at a disclaimer to allow assets to go to your heirs directly and avoid a chance to be subject to estate taxes in your estate. Timing of a disclaimer is important and the assets must go to the individuals whom would receive them if you died before the person from whom you are otherwise inheriting assets. The other issue is the titling of inherited assets. You may want your inherited assets to go down the family blood line and possible a separate property trust may be in order depending on what you want to do with the assets or if you want to keep those assets as your separate property.
Do Married Couples Need More Tax Planning Beyond a Revocable A-B Trust
Many families have set up a revocable living trust that will divide into two or more trusts at the death of the first spouse. However, this can still leave the surviving spouse with more than $3,500,000 in taxable assets even after the bypass trust is funded after the first death. The easiest way to reduce your taxable estate is to use the 13,000-dollar (previously 12,000 and 11,000-dollar) annual gift tax exclusion to your ultimate beneficiaries. The problem is immature family members may end up with these assets and you cannot put strings on the gifts. The other problem for married couples over $7,500,000 is despite the recent increase in the estate exemption may have solved part of your estate tax problem. For individuals and married couples who are fortunate enough to have an estate tax problem, there are several advanced gifting procedures available. A previous issue of Legal Insights entitled "Leveraging Lifetime Gifts To Reduce Estate Taxes" discusses Qualified Personal Residence Trusts. This allows a gift tax discount for gifting your home or vacation home away now but retains its use for a fixed number of years. It also discusses Grantor Retained Annuity Trusts (GRATs) which can provides you with a fixed income stream for a term of years, but discounts the gift tax value of the assets your chosen heirs ultimately receive. Another issue of Legal Insights published by this office discusses Family Limited Partnerships is particularly useful for clients with significant investment real estate that will be exposed to high estate taxes. Finally a previous issue of Legal Insights entitled "Using Charitable Remainder Trust as an Alternative to a §1031 Tax Deferred Exchange" is useful where clients want to sell appreciated stock or real estate without realizing capital gains taxes and would like to get a fixed income stream for the balance of their life. All of this becomes more important as the extra assets the A-B Trust cannot protect from the estate tax exemption are taxed in the 45% estate tax rate.
Are your Qualified Plan and IRA Beneficiary Forms Correctly Set Up?
Often one of the largest assets is the Qualified Plan/401K or IRA. The problems with that asset are it has both estate tax and income tax consequences. If the designated beneficiary (who is the primary beneficiary) is not correct by the designation date; it may require a lump sum distribution. Usually the spouse is the primary beneficiary, but that may not fully fund the bypass trust at the first death. If a Trust is the beneficiary, the language in most trusts is not qualified to be a beneficiary who can defer the distribution from the Qualified Plan/IRA. Very special language needs to be in the trust and the trust document should be delivered to the IRA Custodian or Plan Administrator along with a special beneficiary form that identifies the subtrust but also the names and birth dates of the individual beneficiaries of that trust. If your trust was not updated in the past two years regarding a "Designated Beneficiary Trust" the trust may be forced to accelerate all the income taxes from the Qualified Plan or IRA at you or your spouse's death. An upcoming issue of Legal Insights addresses this issue in more detail. In particular this prevents your children from taking a lump sum distribution and can utilize the life expectancy of the oldest child when making distributions to the trust after your death. A twenty year old may have life expectancy of 65 or more years with minimum distributions starting at 1/65 of the account each year, but the account can continue to grow at a much higher average tax deferred rate depending on your investment choices.
Underfunding of the Bypass Trust when Estate is Large and Large Portion of Estate is in Retirement Plan Assets
The other issue is funding of a bypass trust when there are insufficient assets inside the revocable trust to fully fund the bypass trust at the death of the first (based on the then current exemption Equivalent) and the surviving spouse is left with a potentially taxable estate. The may be the case where a significant portion of the total assets are in the retirement plan assets. In those cases, use of an aggregate theory community property agreement which says to treat assets in the trust and outside the trust (like IRA and qualified retirement plan assets) all as community property when also adding relevant changes to the revocable trust can allow more than half of the revocable trust to fund the bypass trust if there are sufficient IRA assets of the deceased spouse outside the trust. As this is complicated including conflict between federal law and California community property law it should be used only in larger estates where a large portion of the estate will remain in retirement assets after both spouse pass away and the surviving spouse is likely to have estate tax exposure.
On the other hand some estates where this was a problem in a $675,000 exemption per spouse world may not have this problem with the current $3,500,000 (previously $2,000,000) exemption even if this means the bulk of the retirement assets go to the surviving spouse. The key is what will be in the taxable estate for the surviving spouse and the current $3,500,000 as of 2009 (or the previous amount of $2,000,000 as of in 2006-08) exemption per spouse may make this an issue that no longer is a concern.
Updating Health Care Powers of Attorney and Living Wills
In 2000, California updated its Basic Durable Power of attorney for Health Care and Declaration under Natural Death Act (commonly called living wills) which set forth individual heath care instructions and incorporated them into an Advance Health Care Directive. It provides the agent has the power to make health care decisions, provides access to the principals health care records. It also set forth decisions regarding being kept on or off of life support in case of comma, donation of organs if desired, how to dispose of your remains after you died, and instructions on using long term care at home or outside the home as allowed by financial circumstances. It can also allow your health care agent to withdraw or withhold artificial nutrition or hydration if you want to give them that authority. Key is putting your desires down in a clear document so others can follow it when you are incapacitated.
With the Health Insurance Portability, Privacy and Accounting Act of 1996 many physicians are reluctant to release your private medical information to others. It is important to update the advance health care directive and certainly any durable power of attorney for health care to indicate the health care agent is personal representative within the meaning of and shall have all of the same rights as I would have under the Health Insurance Portability and Accountability Act of 1996. This has only recently become an issue with many physicians. In addition that authorization should not be a springing power that is given only on the incapacity of the principal which information would require access to the principal’s records. In addition, the health care agent should be given the power to release information regarding the principal’s physical or mental condition as it relates to their incapacity as trustee including to financial institutions for purposes of a successor trustee taking over based on the incapacity of the original settlor/trustee. The other key is that you want the Health Care Power to be immediate and not springing as you may have to determine that the individual is incapacitated before the health care agent is given any power to make decision or get access to the medical records which could make this a chicken and the egg proposition preventing the agent access to the medical records needed to determine incapacity of the principal.
Durable powers of attorneys for health care executed prior to January 1, 1992, had a seven year time limitation and are currently invalid and sometimes others had inserted a 5 year time limits from the date of execution.
It is important to determine if the agent and alternate agents are still capable and are named in the order desired. Often done depending on proximity of agents, a move to a particular loved one, a divorce or maturing of children or may be a reason to change the selection of the health care agent and alternate agents. In addition, it is important that the right person be given the power that will follow your desires regarding being kept on life support and other items you have outlined in your advanced health care directive. Recent cases in the news have show that different family members can have very different wishes that may or may not be your own.
Disclaimer
This newsletter is an introduction to some of the estate tax, personal and marital issues involved planning a family’s estate. Fact patterns can vary significantly and change the appropriate application of the law. Each individual needs to get their own independent legal and tax advice before setting up their own estate plan and/or gifting program. Readers are cautioned to consult a legal and tax advisor of their own choice with respect to any particular situation and who are conversant with the law in their own state. This is written for the State of California, which is a community property state.
CIRCULAR 230 DISCLAIMER
Please note that federal tax regulations (Circular 230) impose certain requirements on written tax advice. This material is not intended to be a “reliance opinion” with the meaning of Circular 230. Accordingly, this material (including attachments and enclosures) and any tax advice given herein is not intended or written to be used, and cannot be used, as a “reliance opinion” for the purpose of avoiding tax penalties that may be imposed under applicable tax laws. This material was prepared to support the promotion or marketing of the transactions or matters addressed herein. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
Copyright 2009 Paul Cheverton
No reproduction of this outline is permitted with the express permission of Paul Cheverton.
Profile on Paul Cheverton, Attorney at Law
Paul Cheverton is an estate planning attorney who has twenty five years of legal experience with law firms and his own legal practice. He is a Certified Specialist in Estate Planning Trust and Probate Law, The State Bar of California Board of Legal Specialization. Besides his law degree from U.S.C., he also has a Masters of Law in Taxation from the University of San Diego and a B.A. from Stanford University. He is also a member of the Estate Planning, Trust and Probate Section of the California Bar and the San Diego Estate Planning Council. He is also on the Trusts and Estates Committee of the Children’s Hospital Foundation and previously has served also on the Professional Advisors Committee of the San Diego Foundation and the University of California San Diego Planned Giving Committee.
For More Information Contact:
Paul Cheverton
Law Office of Paul Cheverton
12760 High Bluff Drive, Suite 300
San Diego, CA 92130
(858) 793-3562
Facsimile (858) 793-0972
E-Mail: paulchev@sbcglobal.net