Back At It!

I'm back in the office after spending a week in Orlando at the National Network of Estate Planning Attorneys fall conference.  I always look forward to these conferences for a number of reasons--catching up with friends and colleagues from around the country, re-engergizing myself for all that comes with being a small firm practitioner, and LEARNING!  Lots and lots of learning!

I'm always amazed at how much there is to know about estate planning--and the field is constantly changing.  One of the things that I love about NNEPA is the collective philosophy regarding the importance of educating clients on the ins and outs of estate planning and the importance of personalized counseling for every client family to make sure that together we design a plan that will truly work for their unique family.

As part of this philosophy, I believe there is much more to estate planning than a client's financial net worth.  Each of us has a legacy that we can pass on to those we love.  We have stories to share that explain how we became who we are; we have our own thoughts and ideas and opinions about money, charity, legacy, family, faith; we have hopes and dreams for those we love.  As an estate planner, I believe it is important to help my clients capture these non-tangible assets because it is all a part of their true wealth.

For clients enrolled in the Empowered Legacy Planning program, as a result of the SunBridge Legacy Builder Retreat I attended while in Orlando, I will soon be offering Priceless Conversations as part of your membership.  To learn more about Priceless Conversations and the SunBridge Legacy Builder Network, please visit www.SunBridgeLegacy.com.

If you are interested in learning more about membership in our Empowered Legacy Planning program, please give us a call at 480.855.8383.

Do I Have to Pay Income Tax on My Trust Distributions?*

That is one of the most common questions about the administration of trusts and estates.  The answer is, "It depends." The beneficiaries, and perhaps the trusts themselves, are subject to the income tax.  Distributions of principal are not subject to income tax.  Distributions of income are subject to income tax.  The trust has to pay income tax on any income that is not distributed.

Some trustmakers have so much control over the trusts they have created that the IRS ignores the trusts completely.  These are called Grantor Trusts and any income earned by the trust is simply part of the trustmaker's personal income tax return.

If a trust or estate has over $600 of income during the year, the trustee (or executor) musts file an income tax form called a Form 1041.  The biggest difference between a 1041 and a 1040 is that trusts gets a bigger deduction for distributions of income to beneficiaries.  This results in ensuring that either the trust or the beneficiary, but not both, pays income tax on every dollar of income.  The trustee files an informational return, a K-1, if there were any distributions.  This lets the beneficiaries know how much of the distributions they received are taxable to them.  If there is any tax due by the trust, the trustee is responsible for making sure the income tax is paid.

A rule that is sometimes hard to grasp is that trust income and the taxable income of trusts are not the same thing!  For example, most states' laws regard capital gains distributions as principal, not income, for trust accounting.  For income tax, these are income.  It is important to keep this in mind while working with trust income.

The income tax on the amount of trust income that is distributed to beneficiaries is paid by the beneficiaries as part of the beneficiaries' tax returns.  The income keeps the same character as it had for the trust; for example, if the trust had long-term capital gains and distributes them, the beneficiary has long-term capital gains.  This amount is a deduction on the trust's income tax return.  So, somebody's going to pay income taxes on any income earned by the trust.  It could be the trustmaker (in a Grantor Trust), the beneficiary (if there were distributions), or the trust itself.  The trustee does not decide which distributions are income and which are principal; we calculate the Distributable Net Income ("DNI") and apply the DNI rules to determine who pays what.  The results are sometimes surprising, especially when the trust receives tax-free income.

Keep in mind that the tax rates for trusts are the same as for individuals, but the brackets are smaller so the trust marginal tax rates are usually higher.  Trusts reach the 35% income tax bracket at the $11,200 of taxable income.

It is important that trustees review their income and distributions with their tax advisors at the end of the year.  Fortunately, the IRS grants trustees (and executors) the option to treat distributions during the first 65 days of a tax year as made in the prior year; so, the trustee and his tax advisors do have a couple of months to get this done.  During that review, they can figure out what the best results would be and structure the distributions to achieve them.

*Adapted from Planning Partners Press

Still Stuck in Estate Tax "Purgatory"!*

Here's an oxymoron for you--as an advisor, I want to be able to share an "update" with my clients and readers regarding the estate tax "repeal" situation, and there's really no solid update to report!  So, instead, I'll share a little bit of what has been going on behind the scenes...

There have at least been some meetings that have taken place.  There have been a number of different bills introduced, but nothing has really gotten very far.  The three most likely scenarios at this point are as follows:

1) A reinstatement of the estate tax with an exemption of $3.5 Million and a tax rate of 45%.

2) A reinstatement of the estate tax with an exemption of $5 Million and a tax rate of 35%.

3) Congress does nothing, and the estate tax comes back with an exemption of $1 Million and a tax rate of 55%.

Generally, Republicans favor the highest exemption and lowest tax rate, while Democrats generally favor reinstatement at the middle numbers (2009 levels).

Two developments have taken place seemingly make it less and less likely that there will be any action taken soon, however.

First, although Democratic leaders seemed willing to agree to Republican demands in recent talks, they still broke down.  It seems that there are many rank and file Democrats who are now willing to let the tax issue take care of itself, preferring to not take the political risk of appearing to pass legislation favoring the richest Americans--especially so soon before the November elections.

The Democratic leadership appears to be unwilling to bring legislation forward that does not have the support of the majority of the party.  One Senator is quoted as saying more than 80% may be opposed to the increased exemption and lower tax rate discussed by party leaders.  Thus, it may be that nothing is addressed prior to November and that any action taken would be rushed, as was the case with the failed effort to address the situation at the end of 2009.

The second issue that originally looked promising in terms of pushing early action was that of retroactive application of any reinstatement.  Retroactive application was "iffy" during the best of times.  Now, it seems like a long shot.

In late March, Texas billionaire Dan Duncan died.  With an estate estimated at $9 Billion dollars, Duncan was listed on Forbes as the world's 74th wealthiest person.  A lawsuit was a certainty if retroactivity was pursued by Congress at any point.  Now there are significant resources that would obviously be available to oppose any attempt to apply taxes retroactively.  Thus, the compelling urgency originally felt by those who want to reinstate the tax retroactively, already losing steam with each passing day, has now been undercut severely--and probably completely.

So, these are just a few key tidbits--I definitely haven't covered everything that's going on right now--but it doesn't appear that we'll be leaving estate tax "purgatory" quite yet.

*Adapted from the Planning Partners Press.

What Do Hurricanes and Estate Planning Have in Common?

Hurricane season officially begins in June.  And despite the best efforts and intentions of meteorologists, the precise path, time of arrival and strength of these potentially devastating storms cannot always be predicted with complete accuracy.  Local governments do their best to convince people residing in or visiting vulnerable areas to prepare for the worst.  Many heed the warnings.  Sadly, others do not, and often suffer tragic consequences.

We think the onset of hurricane season serves as an apt metaphor about the importance of estate planning.  Like meteorologists, whose host of sophisticated scientific tools and resources do not necessarily enable them to predict a hurricane's path and strength, neither we nor you can predict exactly what the future holds.  

Fortunately, like emergency response planners, we can plan for the future's possibilities by helping our clients prepare an estate plan customized to their unique families and goals.  Your plan can protect your financial well-being today and tomorrow, provide for your loved ones after you are gone, and enable you to leave a lasting legacy for family and society alike.  

Your plan can also help prepare you and your spouse or other loved ones for changes to your physical well-being, through incapacity planning, healthcare directives, durable powers of attorney and more.  Access to the DocuBank Healthcare Directives Registry, which we provide to our clients free of charge, can prove invaluable in this regard.  It ensures that your healthcare directives are immediately available to hospitals and family members in the event of an emergency.  It also provides vital information to doctors, such as medical conditions, allergies and emergency contacts, to name a few.  

One aspect of effective estate planning that some families overlook, at their peril, is the importance of keeping their plan up-to-date.  The fact is, an outdated plan can actually be worse than having no plan at all.  We recommend that families review their estate plan at least once every two years, and whenever a significant change has taken place in their situation or that of a family member.  We can also help our clients update their DocuBank account to reflect any changes to their health or wishes concerning whom they would like to make decisions for them, or the care they would like to receive if they cannot speak for themselves.  

By keeping your estate plan up-to-date, you can truly prepare for the unexpected.  And, help ensure that everyone you love, and everything you own, will be protected--today, tomorrow and beyond.  

Things to Do When a Loved One Dies*

Do you have a revocable living trust?  If so, your Successor Trustees might appreciate the practical suggestions contained in this article.  These are some things to consider in the first few weeks of the administration of a Living Trust after death.

If a residence will be vacant for an extended time, your Successor Trustees should:

• Consider changing locks
• Remove valuables from the residence and store them safely
• Install an inexpensive security system with a motion detector which will dial out if there is motion
• Arrange for mail to be forwarded
• Discontinue phone, cable, and internet service, etc.
• Advise the property and casualty insurance agent that the residence will be vacant and make appropriate arrangements for insurance
• If title to the property is in trust, name the trust as the insured on the property and casualty insurance policy.

Successor Trustees should determine the immediate cash needs for any beneficiary and identify accounts where cash is available.  They should also determine if any immediate expense must be paid, but should be advised to not make payments without first discussing it with the attorney.  

Successor Trustees should cancel charge accounts, credit cards, and magazine subscriptions and ask for refunds, if applicable.

They should make certain that property and casualty insurance coverage continues on personal effects, automobiles, real estate and any goods in storage.  If any of these items are titled in the name of the Trust, the Trust should be the named insured.  

Trustees or beneficiaries of a safe deposit box should not remove the contents, but rather the box should be inventoried in the presence of a bank officer and only then should contents be removed. 

Personal and financial records, including: checkbooks, statements, tax returns, and insurance policies should be collected.  Individuals who owe money to the deceased should be contacted and arrangements made for continued collection.

The Social Security and Veterans Administration (if applicable) should be contacted and advised of the death.

Social Security or Pension checks received after the date of death should be held.  If direct deposit to an account is used, the deposit should be noted and the attorney informed.

The successors or trustees will want to decide about the employment of domestic help, security guards, or any other type of assistance that might be required for a dependent beneficiary.

Your successor must be prepared to demonstrate to third parties that they are in fact authorized to act on behalf of the Trust or Estate.  The attorney will be able to provide documentation.

As I mentioned before, these are just a few of the things that need to be done after a loved one dies.  It is important for your successors to hire and work with an experienced estates attorney to efficiently and properly administer your estate in order to make sure all your wishes are followed.

I hope you find these little details helpful and that you share them with your successors and loved ones.

*Adapted from The Planning Partners Press

The Pitfalls of Joint Ownership (Part 3 of 3)*

In Part 1 of this article, we explained how Joint Tenancy with Right of Survivorship ("JTWROS") works.  We noted that it is a form of asset ownership where each owner is deemed to own 100% of the asset, and whoever lives the longest gets the whole thing!  We also introduced some of the pitfalls of owning things in this way, and began to explore the details of each pitfall in Part 2.  In this final installment, we'll explore two more potential pitfalls of joint ownership, and offer a possible solution.

In Part 2, we discussed these two pitfalls of joint ownership:

(1) There is no control, and property may pass to unintended heirs.


(2) There are no planning opportunities.

There are two more problems of which you should be aware:

(3) Probate is at best delayed, not totally avoided.

In spite of the concerns already discussed, some advisors continue to recommend joint tenancy!  Why?  The major reason given is because joint tenancy property bypasses the entire probate process.  But this is not entirely true.

With married couples, joint tenancy does not avoid probate -- it only delays it.  Because joint tenancy passes outside all will or trust planning, it does avoid probate -- on the death of the first spouse.  When the second spouse dies, however, there will be a probate.  In situations where both spouses die together, there will be at least one probate and perhaps two.

(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.

When non-spouses create joint tenancy, they often create a gift tax as well.  Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property.  The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if valued above $13,000 (in 2010) it will have to be reported to the IRS.  In some cases, a gift tax may be immediately due.

When a non-spouse joint tenant dies, the surviving tenant gets the property.  If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent's will or trust says.  The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax.  Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.

For many clients, the solution to all of these concerns is the creation of revocable living trusts, and the transfer of title to trust ownership rather than joint tenancy.

*Adapted from The Planning Partners Press

The Pitfalls of Joint Ownership (Part 2 of 3)*

In Part 1 of this article, we introduced the mechanics and the danger of owning assets as Joint Tenants with Right of Survivorship.  In this installment, we'll begin to take a look at each of the potential pitfalls in more detail.

(1) There is no control, and property may pass to unintended heirs.  Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do.  If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you.

Joint tenancy provides no means of ensuring that your property will pass to whom you want.  For example, if your spouse remarries, your children may inadvertently be disinherited.  Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death.  If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your property.

While joint tenants are living, they can sell their interest in the joint property, and they can give their interest away.  In this respect, joint tenancy is similar to other forms of ownership.  It is only on the death of a joint tenant that its unique features come into play.

In some states, joint tenancy between a husband and a wife is called tenancy by the entirety.  It works exactly like joint tenancy with right of survivorship, except that it is more restrictive.  While both spouses are alive, the approval of both is necessary before the property can be transferred.

A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property.  This "control" can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint tenancy property.

Even though property is titled in joint tenancy, the joint tenant who dies is presumed to own 100% of the property.  As a result, the deceased tenant's family not only loses the property, which passes to the surviving joint tenant), but also must pay all of the death taxes.  Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn't even own.

(2) There are no planning opportunities.  What if your spouse or your children need assistance in managing the property you left them?  Joint tenancy cannot help.  What if you want to leave instructions for your loved ones as to how, when and why your property is to be used?  Joint tenancy offers no opportunity for instructions of any kind.

If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own and your loved ones' care.  If your spouse is disabled when you die, the probate court will "inherit" the joint tenancy property and determine how and when it is to be used for your spouse's benefit.

More pitfalls and possible solutions next time in the final installment of this article.

*Adapted from the Planning Partners Press.