Updating Your Estate Plan

Many years ago, you finally fulfilled your long-time resolution and had your Estate Planning completed by signing a Living Trust, a Will, a Power of Attorney, an Advance Health Care Directive, and other related documents.  It was so long ago that you don’t remember the exact choices you made with respect to the plan.  When you look at it, you’re not sure what it says because of the complex “legalese” that lawyers like to use.  How do you know if it needs to be updated?

If it has been several years since you completed your Estate Plan, it is a good idea to have an attorney review it to makes sure that it is up-to-date.  One of the first issues I address when clients bring in existing Estate Plans is whether or not their Trusts are fully funded.  A Trust will only control those assets that are titled to it.  Your Trust can have the most beautiful, detailed language possible but if your assets are not properly titled to your Trust, it’s as if you never did Estate Planning in the first place.

Another key factor in reviewing existing Estate Plans is to make sure that you are still happy with your nominations for Successor Trustees, Power of Attorney Agents, and Advance Health Care Directive Agents.  What seemed like a good nomination years ago might not be a good nomination today.

You also want to think about whether your family circumstances have changed.  Has there been a birth or a death in the family?  Have any of your beneficiaries developed special needs?  Do any of your beneficiaries have creditor problems or are they facing a divorce?  Amended provisions can address these issues.

Tax laws – such as the 2010 Estate Tax and Capital Gains Tax laws – and other laws may have altered since you signed your Estate Plan.

If your changes are relatively small, you can update your Trust by executing an Amendment, a 1-3 page document changing only specific paragraphs.  This is analogous to changing spark plugs in a car.  If more than a few paragraphs need to be changed or if you already have several Amendments, then a “full body restoration” might be in order and you might want to sign a Restatement.  A Restatement amends your Trust in its entirety but keeps the same name and date so that your existing funding doesn’t have to change.

Now What?

In my last blog, I discussed the fact that the federal Estate Tax under current law has expired for one year only in 2010.  I outlined how your Estate Planning might be affected in light of these changes.  These new rules that took effect on January 1, 2010 also impact Trust Administration and Probate.

Many married couple’s Estate Plans divide the estate into a Bypass Trust and a QTIP Trust upon the death of the first spouse.  It is common for an Estate Plan to include a mathematical formula based on the Estate Tax in order to allocate part of the estate to the Bypass Trust and part of the estate to the QTIP Trust.  In a year such as 2010 where there is no Estate Tax, Successor Trustees will not be sure how to properly interpret such a formula. 

The 2010 rules also abolish old reporting requirements for Trustees/Executors and introduce new reporting requirements.  For estates of decedents dying before and after 2010, the law requires the Trustees/Executors to obtain date of death values for all assets.  If the value of the decedent’s estate exceeds the Estate Tax exemption, there is a requirement to file an Estate Tax Return (IRS Form 706).  Under the current rules for decedents dying in 2010, there is no need to file a 706.  However, Trustees/Executors are required to report transfers at death of noncash assets in excess of $1.3 million and certain appreciated property that the decedent had acquired within three years of death. 

Adding to the confusion is the strong belief among many commentators that Congress will pass a new law within the next few weeks or months that will return the pre-2010 Estate Tax rules and have it apply to decedents dying in 2010.  As a result, Trustees/Executors do not know whether to conduct Trust Administrations and Probates based upon the "old" rules or the "new" rules and may not know for some time.   

Because there is so much confusion in this area and we are experiencing an unprecedented uncertainty, I am holding a Free Seminar on February 18, 2010 from 6 to 7:15 pm at 700 Jewell Avenue, Pacific Grove, California.  Please call 831-920-0205 to RSVP.

Did the Death Tax Really Die?

The Estate Tax, or “Death Tax,” is a federal tax on inheritance.  Over the last ten years, the Death Tax rate has ranged from 45% to 55%.  However, there is also a “Death Tax Exemption,” meaning that if the total value of your Estate at death is below the Exemption, your heirs do not have to pay any Death Tax; if the total value of your Estate at death is above the Exemption, your heirs only have to pay Death Tax on the amount over the Exemption.  In 2009 the Exemption was $3.5M.  In 2010, the Death Tax – under current rules – is completely eliminated: Bill Gates could die in 2010 and there would be no Estate Tax.  But in 2011, the Estate Tax returns with only a $1M Exemption and a top tax rate of 55%.

Although it sounds like good news that the Death Tax vanishes in 2010, along with the elimination of the Death Tax is a dramatic limitation of the “Step-Up” in Basis which prevented many heirs from having to pay Capital Gains Taxes on the sale of certain inherited assets.  While the Death Tax applied to roughly 6,000 taxpayers per year, the limitation on the “Step-Up” in Basis is estimated to affect approximately 70,000 taxpayers per year.

You may wonder whether these changes will affect your Estate Plan as currently written.  Married couples should check to see whether their Trusts divide the estate of the first spouse to die into a Bypass Trust (sometimes called a “Family Trust,” an “Exemption Trust,” a “Credit Shelter Trust,” or a “B Trust”) and a QTIP Trust (sometimes called a “Marital Trust,” or a “C Trust).  If the terms of the Bypass Trust and QTIP Trust differ – such as different beneficiaries, different trustees, or different distribution standards – it would be a good idea to have an attorney review your Trust as the elimination of the Death Tax in 2010 might affect the allocation of assets to such Trusts and thus adversely affect your intent.

Furthermore, if you have highly appreciated assets, you may want to discuss with an attorney the possible need to amend the formula that allocates assets between the Bypass Trust and the QTIP Trust to take advantage of a limited additional “Step-Up” in Basis for spousal property.

In addition, the 2010 law brings new reporting requirements for estates of individuals dying in 2010.  Whereas in the past you only needed to file an Estate Tax return if the decedent’s estate exceeded the Estate Tax Exemption, now you need to report non-cash transfers at death of assets in excess of $1.3 million and certain appreciated assets received by the decedent within three years of death. 

Although this 2010 elimination of the Estate Tax combined with the limitation in the “Step-Up” in Basis was written into the Internal Revenue Code in 2002, no observer believed that Congress would actually let this happen.  Over the years, Congress has attempted to make a permanent change to the Estate Tax law but never was able to get enough votes to do so.  In December 2009, the House passed a law to keep the Estate Tax Exemption permanent at $3.5 million but the Senate never even got it out of committee.  When Congress went on holiday break, most observers fully expected Congress to “repeal the repeal” in January by reinstating the Death Tax with a $3.5M Exemption and having in retroactively apply to January 1, 2010.  However, it is already the end of January and there has been no sign that Congress is even thinking about the Estate Tax issue.  As a result, there are three likely possibilities: (1) Congress “repeals the repeal” by passing a temporary or permanent Exemption of $3.5 million and applying it retroactively to January 1, 2010; (2) Congress “repeals the repeal” by passing a temporary or permanent Exemption of $3.5 million and applying to prospectively to the date the bill passes; (3) Congress doesn’t do anything, allowing these unique rules for 2010 and returning to the old rules with a $1 million Exemption in 2011.

As a result of this uncertainty, it may be wise to amend your Estate Plan to make it flexible.  Furthermore, for decedents dying in 2010, it is not clear whether Trustees and Executors should follow the reporting requirements under the old rules or follow the reporting requirements under the new rules, making Trust Administration and Probate very tricky this year.

This is a messy situation that nobody thought would actually happen and makes planning difficult for clients, attorneys, and accountants.  Hopefully, Congress will give us some guidance soon though hope is diminishing with every passing day.  

Sentimental Value

As the credits roll in the Clint Eastwood film, Gran Torino, the young man who befriended Clint’s character is seen driving the beloved Ford down a coastal road with the deceased protagonist’s dog by his side.  Because the car symbolized an unspoken love and respect, the scene is emotive – even for this Chevy guy (though I think the movie would have been even better if it had been entitled, "Bel Air").

Items of tangible personal property, such as a Ford Gran Torino, a Chevy Bel Air, or smaller things such as jewelry and knickknacks, can have extreme significance for loved ones.  Many clients often want to include specific gifts of tangible personal property to specific persons in their Estate Planning.  However, clients often are not ready to finalize their wishes with regard to tangible personal property when it is time to sign their Estate Plans.  Furthermore, clients frequently change their minds about such sentimental items and thus are hesitant to include specific provisions in their Wills or Trusts, thinking that it would require additional expense and effort to update such provisions.

To accommodate a frequent change-of-heart with regard to tangible personal property, many people create lists after signing their Wills or Trusts designating who receives what tangible item.  This practice was outlawed in California for many years for fear of fraud.  However, the practice was so popular that a few years ago the legislature enacted Probate Code  §6132 which allows the enforcement of designations of tangible personal property in lists created after a Will under limited circumstances.  First, the item must be tangible personal property, not cash or real estate.  Second, each item must have a value of $5,000 or less.  Third, the total value of all assets transferred in this manner must not exceed $25,000.

Although a similar Probate Code section does not exist for Trusts, many Trusts will include a paragraph allowing the distribution of tangible personal property by a separate writing.  I always include a provision in the Trusts that I draft that states if such a list cannot be incorporated by reference, the list shall act as an amendment.  California law allows the amendment or modification of a Revocable Trust by a writing signed by the Trust creator and thus such a list should suffice as a proper Trust amendment under the Probate Code.

By legalizing this method, clients can change their minds about distributions of personal property without having to amend their Wills or Trusts.  However, because of these strict conditions and because values of items can change over time, it is important to be cautious when applying this method as the strict, stagnant rules can inadvertently invalidate constantly updated lists of items with values in flux.  Even if a separate writing designating beneficiaries of tangible personal property violates the strict rules of California Probate Code §6132, the fact that a client took the time and effort to create such a list carries strong moral weight.

Because of the fact that such strict rules can be easily accidentally violated, I normally advise my clients to reserve this method only for small items of sentimental value and to be mindful that if they believe there may be a disagreement over who receives a specific item, it might nevertheless be best to include such a designation in the body of the Will or Trust itself.  Case in point: it appears that Clint Eastwood’s character included the gift of the Gran Torino in the body of his Will rather than in a separate writing created after the Will. 

Organizing Your Estate Plan

Most people understand the need to “get their affairs in order” by executing Estate Planning documents which often include a Revocable Living Trust, a Will, a Property Power of Attorney, an Advanced Health Care Directive, and a HIPAA Waiver as well as other documents.  However, simply executing such documents is not necessarily enough to make sure your loved ones have everything they need in order to administer your Estate.

First you want to make sure that all of your Estate Planning documents are organized and easy to find in the case of an emergency.  Often, clients have their Trust in one location, their Health Care documents in another location, and may not be sure if they even have a Power of Attorney.  If you can’t locate all of your own Estate Planning documents, it will be even more difficult for your loved ones to find sort everything out.  I always provide an Estate Planning binder for all of my clients where all Estate Planning documents can be organized into one portfolio that acts as an “owner’s manual.”

If you have executed one or more Amendments to your Trust or Will, be sure that your Amendments are easy to find and located in the same area as your Trust or Will.  A common problem is for your loved ones to find your Trust or Will but fail to locate your Amendment – or your most recent Amendment – and therefore accidentally follow outdated instructions.  I often recommend that my clients keep their Amendments on top of their Trust or Will.  In the case where there are several amendments, it might be wise to simply restate your Trust in its entirety so that your updated instructions are all in one document and easier to follow.

It is also a good idea to keep an accurate inventory of your assets so that your loved ones know the totality of your Estate in the event of your incapacity or death.  There is nothing worse than a beneficiary not collecting on an insurance policy or taking control of a bank account simply because the beneficiary was not aware of the existence of the asset. 

Finally, you want to make sure that your Estate Plan is up-to-date and complete so that the Estate Plan your loved ones find is not only organized but relevant and effective.

House Passes Bill to Make 2009 Estate Tax Exemption Amount Permanent

Today, the U.S. House of Representatives voted 225-200 in favor of H.R. 4154.  

H.R. 4154 would make the 2009 Estate Tax Level Permanent.

The Senate has not ratified this bill yet but is considering similiar legislation.

For calendar year 2009, the estate tax exemption amount is $3.5 million ($7 million total for a married couple) and the maximum tax rate on estates is 45%. H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, introduced by Congressman Pomeroy, would permanently extend this estate tax exemption amount and tax rate. Absent this change, the estate tax is scheduled to enter one year of full repeal in 2010 followed by a return of the estate tax in 2011 with much lower exemption amount ($1 million) and a much higher maximum tax rate (55%).


1st Session
H. R. 4154

To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.

November 19, 2009
Mr. POMEROY introduced the following bill; which was referred to the Committee on Ways and Means
To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

This Act may be cited as the `Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009′.

(a) In General- Subtitles A and E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001, and the amendments made by such subtitles, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such subtitles, and amendments, had never been enacted.
(b) Sunset Not To Apply- Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to title V of such Act.
(c) Conforming Amendments-
(1) Sections 511(d) and 521(b)(2) of the Economic Growth and Tax Relief Reconciliation Act of 2001, and the amendments made by such sections, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such sections, and amendments, had never been enacted.
(2) Subsection (c) of section 2511 of the Internal Revenue Code of 1986 is hereby repealed.

(a) $3,500,000 Applicable Exclusion Amount- Subsection (c) of section 2010 of the Internal Revenue Code of 1986 (relating to applicable credit amount) is amended by striking all that follows `the applicable exclusion amount’ and inserting `. For purposes of the preceding sentence, the applicable exclusion amount is $3,500,000.’.
(b) Freeze Maximum Estate and Gift Tax Rates at 45 Percent- Subsection (c) of section 2001 of such Code is amended–
(1) by striking paragraph (2),
(2) by striking so much of paragraph (1) as precedes the table contained therein, and
(3) by striking the last 2 items in the table and inserting the following new item:
`Over $1,500,000 $555,800, plus 45 percent of the excess of such amount over $1,500,000.’.
(c) Effective Date- The amendments made by this section shall apply to estates of decedents dying, and gifts made, after December 31, 2009.

Health Care in Your Control

As the debate over Health Care reform continues in Congress, it is a good time to focus upon those Health Care issues over which you have control.  First, you want to think about how to express your wishes should you lack the capacity to make decisions for yourself due to a medical emergency.  If you had an incurable or irreversible condition that would likely result in your death within a short period of time, would you want artificial nutrition and hydration removed?  Do you want treatment for the alleviation of pain even if it may hasten your death?  Would you prefer to be at home if possible?  Would certain music or other ambience make you more comfortable?

Once you have identified your wishes, whom would you trust to ensure that your wishes are carried out?    Will those persons be able to act under pressure?  Will those persons be available during an emergency?  It is a good idea to have a candid conversation with your possible Health Care agents about your wishes to see if they share your same philosophy with regard to Health Care issues.  If they do not share your same philosophy, you need to explore whether they would nevertheless be able to carry out your wishes. 

After you have identified your Health Care wishes and those whom you trust to carry out such wishes, it is a good idea to memorialize those wishes in an Advance Health Care Directive.  In addition, you will want to make sure that your loved ones and your Health Care agents will be able to access your health information in the event of an emergency in order to make informed decisions with regard to your Health Care.  As a result, be sure to execute a document authorizing the disclosure of health information to specified individuals, often referred to as a “HIPAA Waiver” (named after the state and federal medical privacy laws).

Executing an Advance Health Care Directive and a HIPAA Waiver, however, will not inform your health care providers (1) that you have such documents and (2) how to obtain such documents in an emergency.  This could be a major problem, especially if you become ill or injured while you are traveling out of town, out of state, or even out of the country.  I often advise my clients to take advantage of programs such as Docubank, a company that stores your health care documents in an electronic database and gives you a card to put in your wallet with instructions to emergency care providers on how to obtain copies of such documents 24 hours a day, 7 days a week.   

A qualified Estate Planning attorney can help you ensure that your Health Care wishes will be carried out in the event of your incapacity by helping you identify your wishes, helping you articulate your wishes in legally binding documents, and providing a mechanism to inform your health care providers about your wishes.

Today’s Plan, Tomorrow’s Promise

A charitable organization depends upon the generous gifts of its supporters in order to continue its mission in serving the needs of the community.  When most people think about charitable giving, they usually think of a cash gift: writing a check to a favorite charity either on occasion or on a regular basis.  While this kind of giving is the most common, there are additional methods for financially supporting charitable causes which are less known but particularly useful for some supporters.  These additional methods fall under the category of "Planned Giving."

The simplest form of Planned Giving is to remember a charity in your Estate Plan by making a gift of cash or property in your Will or Trust.  You may leave a specific dollar amount, a specific percentage of your Estate, or a specific gift of real estate or securities to a specific charity.

You may have a life insurance policy or a retirement plan such as an IRA, a 401(k), or a 403(b).  Life insurance policies and retirement plans have documents commonly known as "Designated Beneficiary Forms" that allow you to designate who will receive such assets upon your death.  You may name a charity as one beneficiary among many or as the sole beneficiary of such an asset.  Many donors receive nominal life insurance policies through their employers which can serve as a valuable vehicle for making gifts to a charity.

Finally, there are other more sophisticated forms of Planned Giving such as Charitable Remainder Trusts and Charitable Lead Trusts.  Regardless of the size of one’s Estate, there is an appropriate Planned Giving option for everyone.  Many donors are reluctant to make lifetime gifts for fear of breaking their budget or outliving their savings.  The beauty of Planned Giving is that you can still make a significant impact on those causes close to your heart while not having to worry about running out of financial resources during life.

A qualified Estate Planning attorney can help you find the right method for charitable giving that fits your circumstances and allows you to pass on your values to the next generation. 

Ensuring the Care of Your Pet

Whether or not you have done your Estate Planning, you most likely have considered who will inherit your material assets.  If you have minor children, you hopefully created a legal plan nominating both immediate and permanent guardians for your children in the case of incapacity or death as discussed in my last blog.  An additional component of any comprehensive Estate Plan is to plan for the care and welfare of your pets.

Approximately 60% of U.S. households have at least one pet.  20% of households have five or more pets.  If you own a pet, you are aware of the companionship, unconditional love, and general happiness pets provide.  But have you ever considered what will happen to your pet if you become incapacitated or pass away?

The most basic Pet Planning option is to create a provision in your Will or Trust that gives your pet to a family member or a friend who is willing to care for your pet when you are no longer able to do so.  However, it is not always possible to find somebody who is willing to take over the responsibility for your pet.

A second option is to create a provision in your Will or Trust that leaves your pet to the custody of an animal care organization.  Many animal care organizations are willing to put your pet into a foster home until a permanent home can be established.  Most animal care organizations request a cash gift in a specific dollar amount to cover expenses in order to undergo this task. 

If you want more control over how your pet will be cared for, you can establish a "Pet Trust."  A "Pet Trust" sets aside a certain amount of money out of your Estate that is dedicated to the care and welfare of your pet.  The "Pet Trust" would name a Trustee to handle the amount of money set aside for the pet and would also either name a pet caregiver or instruct the Trustee to find a suitable caregiver.  Effective January 1, 2009, major changes were made to California "Pet Trust" law.  Among these changes are the ability of "any interested party" to ask the Court to enforce the terms of a "Pet Trust," the creation of a legal system of checks and balances to make sure the Trustee and caregiver are in fact taking care of the pet, and the establishment of a large role for animal care organizations to play in the enforcement of "Pet Trusts."

Other practical issues to consider are how much money should be set aside for the care of your pet and what specific instructions you want to provide to your Trustee or caregiver with regard to the care of your pet.  Part of any comprehensive plan would also include a mechanism for notifying your loved ones of your Pet Plan and a method for providing immediate access to your pet and to information critical to the care of your pet such as the name of your veterinarian, any medications your pet takes, and any special dietary issues.

 A qualified Estate Planning attorney can discuss the pros and cons of each option relative to your specific circumstances to ensure that your pet will be in good hands long after you are no longer to give the love and attention to which your pet has become accustomed and deserves.

Because Minors Matter

In legal lingo, a child under the age of eighteen is considered a “minor.”  A very misleading legal name for a child.  Ask any parent – nothing about a child is minor.

Parents today have a lot to handle.  Beyond the basics like nutrition, health and education, parents also need to juggle extracurricular activities, play dates and doctors appointments.  And when there is more than one child in the family, these stressors multiply.  Juggling everyday life can be a challenge for even the most organized parent. 

Fortunately, most families have help.  Whether it’s grandma or grandpa taking the children for a Saturday, a neighbor watching the kids after school, a babysitter who allows mom and dad to have an actual “date,” or a full time nanny who helps in a variety  of ways, this trusted person (or people) is part of what keeps the family happy and balanced. 

These are the people you trust with your most precious creation.  They watch over your children, protect them and care for them.  Making sure that they are prepared for such a monumental task is your job.  And it’s simple.

There are things you know about your child that are second nature to you.  You know that your daughter has ear tubes.  You remember that peanuts make your son break out in a rash. You know that he needs an inhaler when he runs.  This is all knowledge that you have down pat at this point.  And it’s information that you carefully pass on to your child’s care givers.  Or do you?

Well now you don’t have to worry that you forgot something, or that the new sitter won’t remember the little details that you take for granted.  You can do all this simply by enrolling your child in Minors Matter.

Minors Matter is an emergency access card that provides immediate access to the information and documentation that any of your child’s caregivers would need in an emergency if you are unavailable.  This includes health insurance information, pediatrician information, immunization records and an additional information form that you supply for each child.  Along with the information the card provides access to, it also displays critical allergies and medical condition information.  So health personnel have immediate access to the information they need to provide proper care.

And the Minors Matter service includes an alert sent to you whenever your child’s card is used to obtain their information.  This text and email message includes the phone number of the requestor so that you can call them directly to follow up.

There are legal documents that you can put in place to protect your children in your absence.  Temporary Guardianship forms indicate who will take temporary care of your child until permanent guardians can be contacted, should something happen to you.  Medical Parental Consent forms are used to designate those people you trust to make medical decisions about your child should you be unavailable.  These documents, or some version of these, might be a good idea for your family and can be included in the Minors Matter program. 

For more information about how to create an action plan for the care of your minor children and how to enroll in the Minors Matter program, contact us at 831-920-0205.