CA Estate Planning

HOW DO YOU PLAN YOUR ESTATE AS "TAXMAGEDDON" APPROACHES?

If you’ve been planning your estate, then you’re no stranger to the ominous feeling of waiting for Congress to act on the tax front. The clock is ticking.

Returning readers are probably already familiar with the uniquely ominous circumstances surrounding the end of 2012. Still, some things bear repeating early and often. This is one of them.

As noted in a recent SmartMoney article titled “Preparing for ‘Taxmageddon,’” the Bush tax cuts were set to end in 2010. Then, in a grand, last minute gesture, a “compromise” was struck to extend similarly generous provisions until the eve of 2013. In reality, this compromise was just a way of buying time and kicking the can down the road.

While the resulting tax benefits, although fleeting, have been truly great for some estate planners, the country is evermore divided and stuck in an election mindset. Nevertheless, the clock continues to tick away toward December 31, 2012, and, well, “Taxmageddon.”

Regardless of which party takes the executive and legislative branches in November, it is far from clear that the “lame duck” Congress will be able to do the work in time. In fact, the likelihood of increasing taxes will simply default because the executive and legislative branches simply will not hammer something out.

So, how could this scenario ruin estate plans, if it comes to pass? I recommend reading the original article in SmartMoney and while you are at it, journey over to an older article in The Wall Street Journal here, titled “Preparing for the End of the Bush Tax Cuts.”

Teaching point: everything tax-wise is on the line these days. Since it is nearly impossible to say which way things will tip, plan accordingly.

Reference: SmartMoney (May 23, 2012) “Preparing for ‘Taxmageddon’ ”

 

 

 

Gore-Tex Heiress Unable to Avoid Soaking!

F. Scott Fitzgerald observed that the rich are different, but that does not mean an heiress can adopt her 65-year-old ex-husband to increase her family's claim to a billion dollar inheritance.

You can pick your husband and, if you adopt, you can even pick your kids. However, according to at least one court, you can’t adopt your ex-husband to be your adopted child in order to cut your death tax exposure.

Just when you think you have seen it all in the exciting world of estate planning, along comes a gem. Enter a recent case concerning the Gore-Tex fortune.

As Reuters reported in an article titled “Court: Gore-Tex heiress can't adopt ex-husband,” the Gore-Tex fortune was set to pass through a family trust amongst the children and grandchildren of the aging founders. All of the first generation down – the children of the founders – had four children themselves, except for Susan Gore. Susan had three children with her husband Nathan Otto before they split in a divorce.

Once Susan did the math, she discovered her side of the family equation was getting stiffed an entire person’s share. Why? Because she was short an heir. Solution? Her ex-husband agreed to be adopted by Susan as her fourth child by way of a secret adoption.

When it came time to distribute the first trust to the beneficiaries, the trustee balked at the secret contrivance to seek out more shares. The court agreed.

While Susan should receive high marks for her creativity, it really was a bald-faced attempt to grab at the family fortune. Then again, it’s not uncommon for bickering heirs to do this sort of math and resort to just this type of contrivance.

As the old tax maxim goes, however, pigs live and hogs get slaughtered.

 

Reference: Reuters (May 23, 2012) “Court: Gore-Tex heiress can't adopt ex-husband”

 

 

CAPACITY TO MAKE A WILL CAN DIMINISH RAPIDLY AS YOU AGE!

As medical advances extend human life expectancy, the likelihood that an individual will become incapacitated before dying increases. For wealth planning and conservation purposes, it is critical to assess whether a person has the necessary capacity to execute estate planning documents.  

Making this assessment can be an extremely complex exercise. The standard of mental competence to make a will is, by itself, fairly low: Does the person understand he or she is making a will regarding property he or she recollects owning, and understands that provisions of the will affect her family members who she or he recollects. 

But in addition it must be clear that, despite passing the standard to make a will, it must be determined whether the person is of "unsound mind" or suffers from a "mental deficit" that deprives him or her of the capacity to execute estate planning documents.

Determining whether a person suffers from a "mental deficit" or is of "unsound mind" can be extremely difficult to determine.  This issue was addressed in a recent article in the Journal of Financial Planning titled “Defining Incapacity in the Modern Estate Plan.” The article is based on California law, but if you are caring for an elderly loved one, the message is the same: defining legal capacity can be incredibly difficult.

Much ink has been spilled by lawyers, judges, and family members over the years defining it, too. The biggest teaching point from the article (and my own experience with clients) is to “ink” your own estate plans sooner rather than later. You likely will never again be as sharp as you are today.

Procrastination is the death bed of proper estate planning.

 For more information regarding estate planning, visit my website http://www.grainlaw.com/CaliforniaEstatePlanning.php 

Reference: The Journal of Financial Planning (May 2012) “Defining Incapacity in the Modern Estate Plan”

 

DO YOU REALLY WANT TO DISINHERIT THAT NEPHEW?

The motives for cutting a relative out of an estate range from the most primal — hate, abandonment, regret — to the most rational.

Planning what to leave behind to loved ones can be a difficult matter since, even with taxes out of the picture, it means explaining your choices and your hopes. On the other hand, planning to specifically disinherit can be all the more difficult.

Inheritance and disinheritance are emotionally charged concepts. The motivations that go into disinheritance are especially complex, as discussed in a recent article in The Trust Advisor titled Why Are Family Members Disinherited?.

Teaching point: If you are considering disinheritance, then it is also important to think about what that means, both for yourself and the excluded heir. There are many reasons to disinherit, some more reasonable than others and some worth abandoning upon meditative reflection.

Still, if you must disinherit, then consider explaining your basis for that decision. While it is your choice and right, your legal documents must be clear and withstand (oftentimes) inevitable legal challenge by the affected heir.  

Reference: The Trust Advisor (April 15, 2012) “Why Are Family Members Disinherited?”

 

 

 

 

The Separation of Church … And Estate

For many people, estate planning isn't just about financial assets and other practical concerns. It's also about honoring their religious beliefs and passing those values on to family members. That can be very tricky ground.

Planning your estate may seem like a simple matter of deciding who gets your stuff when you’re gone. What if you are a person of great faith and religious conviction? How does a person of faith plan for his or her estate when life (and especially life beyond) is so much more than mere “stuff”?

The problem of mixing religion and estate planning – that is, the problem of doing it well – is a issue taken up by the Wall Street Journal in an article titled Joining Church and Estate.

If your decisions during life are guided by your faith, then likely your estate decisions will be too. For example, end-of-life, disposition of remains and even charitable giving decisions are oftentimes determined by ones religious beliefs. These are personal decisions that directly impact you and collaterally impact others.

However, an entirely different matter, and one that can be the source of much trouble, are the religiously motivated decisions you may make in regards to others.

Given the numerous alternative planning strategies and tools available to plan your estate, it is possible to make (or attempt to make) religious decisions for your heirs. This is where problems can arise.

In the extreme, you can move beyond encouraging to requiring the observance of certain religious principles, rituals, or lifelong membership in the given religion to secure any inheritance. As the Wall Street Journal article illustrates, this is where problems can arise. In short, requiring heirs to uphold religious principles they do not share can work to undermine them.

The article discusses some particularly poignant examples, and real life court battles, but as a general principle it may be worth avoiding this type of planning.

Reference: The Wall Street Journal (April 30, 2012) “Joining Church and Estate”

 

 

 

Death &Taxes: Don't Forget the Decedent's Final Income Tax Return!

Death and taxes may be equally inevitable, but the taxman demands the last grim word. Death does not excuse a final accounting with the IRS.  Most people think about estate and gift taxes when it comes to the final IRS Tax Return; but, most people don't have to pay either.  What is frequently forgotten is filing the final income tax return for the decedent.  

I recommend reading a recent article in Kiplinger titled Death and Taxes. The burden of filing this final income tax return falls on the executor of the deceased's Will, or the Successor Trustee if the deceased had a trust; usually, they are one and the same person.  Do not neglect that duty if you occupy one of those roles.

Why? If you fail to file that last (postmortem) tax return, you will be on the hook for any sins of commission or omission. Even if an estate is not subject to extra taxation, this last rite to the IRS has to be observed.

Reference:http://www.kiplinger.com/features/archives/2007/01/deathinfamily.html 

 

Alzheimer’s Miracle Cure on the Horizon?

In a clinical trial that could lead to treatments that prevent Alzheimer’s, people who are genetically guaranteed to develop the disease — but who do not yet have any symptoms — will, for the first time, be given a drug intended to stop it, federal officials announced Tuesday.

In today’s world, planning for old age can be a challenge- both financially and legally. Additionally, supporting an elderly loved one who is almost certain to be diagnosed with Alzheimer’s becomes even more troubling.

Are you or someone you love at risk for Alzheimer’s in the future? What if the disease could be “cured” before it struck? There may be hope on the horizon, as reported in a New York Times article titled, “New Drug Trial Seeks to Stop Alzheimer’s Before It Starts.”

While nearly two years away from having even preliminary data, researchers have isolated the genetic family bearing the Alzheimer’s blueprint and are working on a new experimental drug that could cure the problem before it strikes millions bearing the offending gene. These breakthroughs take time.

In the meantime, it’s necessary to make financial and legal plans as if the miracle drug won’t come to pass. Accordingly, long-term care financing (e.g., long-term care insurance and/or elder law planning) ought to be considered, along with implementing (or refreshing) your most fundamental legal instruments (e.g., powers of attorney and advance health directives).

As always, consult competent financial and legal counsel before proceeding. This is not a DIY (do-it-yourself) exercise. Too much is at stake.

Reference: The New York Times (May 15, 2012) “New Drug Trial Seeks to Stop Alzheimer’s Before It Starts”

 

 

Using Easements to Preserve Posterity Property

If you have property that you would like preserve in its present form, there is nothing so close to a free lunch as the donation of an easement. Out in the country, you will call it a conservation easement. In the big city it is a facade easement. In either case, the principle is the same.

Sometimes one of the greatest charitable gifts you can bestow is the mere promise not to do anything with, or to, what you own. Of course, this common conundrum occurs most frequently when you happen to be sitting on a piece of history.

Whether the property is in the country or in the city, the challenge is the same: how to protect the property from development in perpetuity. Sometimes, however, the key is convincing the IRS of the charitable value of the property itself. If you have an asset worth this kind of consideration, and the hope to preserve it, then an “easement” may be necessary.

In the city there are “façade” easements, and in the country there are “conservation” easements. Both are worthwhile means to a charitable end.

Consider Peter Reilly’s recent post in Forbes, titled “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers,” about an illustrative case in TriBeCa, Manhattan. The story highlights some possible, practical complications that may arise when the situation seems too good to be true. After all, an easement is a unique way of giving to charity and your neighborhood, but only when the IRS agrees.

A practical concern, if successful in obtaining the easement with IRS approval, is in finding a charity to enforce your charitable gift and the easement of your property.

Ultimately, the end result may be worth the work if you preserve your posterity property in perpetuity from development in the hands of an inevitable McDonalds or Starbucks franchisee. The charitable tax deduction can come in handy, to boot. 

Reference: Forbes (May 7, 2012 “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers”

 

 

Involving the next generation of heirs in the management of family wealth, and its eventual transfer to them, is often overlooked. Survey shows majority of heirs want to be included and learn how to be good future stewards.

Planning the transfer of your family's wealth can be complicated, usually involving many professional advisors occupied with minimizing transfer taxes. However, it is ironic that planners often overlook the most important element is ensuring the successful transfer: the beneficiaries.

Financial Planning magazine recently weighed in on this issue with an article titled, “Younger Inheritors, Women Concerned About Pitfalls of Wealth.” The article featured the results of a new survey by Campden Wealth and Morgan Stanley Private Wealth Management that studied the opinions of the next generation of high-net worth families regarding their roles in planning for the future transfer of wealth to multiple generations.

The results are telling. 79% of next-generation heirs responded that they wanted to be good stewards of the family wealth. In fact, they wanted more involvement in the finances.  It’s clear that families planning for wealth transfers should consider bringing the inheritors to the table sooner rather than later. The educational opportunity is profound when an interest is present.

Interestingly, 79% of the women in the study indicated concern over how the impact might affect them, and their lack of control over potential mismanagement of wealth. Education is certainly essential regardless of gender, but it would seem that women may have a different approach to the management of great wealth.

The biggest take-away from the original article is this: today’s inheritors are eager for information and inclusion. Whether your estate is large or modest, involving the heirs in the management and future transfer will go a long way toward ensuring the preservation of the family fortune for future generations.

Reference: Financial Planning (May 8, 2012) “Younger Inheritors, Women Concerned About Pitfalls of Wealth” 

DO YOU REALLY WANT TO DISINHERIT THAT NEPHEW?

The motives clients give for cutting a relative out of their estates are endless; ranging from the rational ("My daughter never visits me even though she lives only one mile away") to the hopelessly irrational (My son has been abducted by aliens and replaced by one of "them.")

But one person's rationale for disinheriting an heir may actually be irrational after careful thought.

Consider the following: Parents have three children, their elder son is a highly successful surgeon and does not need for anything; the younger son is gainfully employed and unambitious; and, the youngest, their daughter is a struggling artist. Their decision is to leave the bulk of their estate to their daughter "because she needs it most."  Is that rational?  Maybe?  

But is it right?  You could say the successful son  is being penalized for his success and might very well be confused, hurt and angry when he finds out what his parents have done. He will never know the real reason for his disinheritance.  Fortunately, the estate-planning attorney suggested the parents sit down with their children and explain their proposed estate plan.  They did, at Thanksgiving.  The reaction from the successful son?  

He didn't need the money, that was true, and all he wanted was Grandma's Meissen dinner service.  But had his parents not consulted him, he said he would have felt grievously offended and hurt by their planned distribution.  

Fortunately, the parents in that case were willing to discuss their plans with their heirs.  But often that is not the case.  Inheritance and disinheritance are emotionally charged concepts. The motivations that go into disinheritance are especially complex, as was discussed in a recent article in The Trust Advisor titled Why Are Family Members Disinherited?.

To disinherit is your choice and right, but make sure it is for legitimate reasons.  And, make sure your legal documents can withstand legal challenge by the disaffected heir although contesting a will is increasingly difficult in California where I practice estate planning.  

Reference: The Trust Advisor (April 15, 2012) “Why Are Family Members Disinherited?”