ESTATE PLANNING

Published on: March 19, 2011

A GRAT Can Help Children Pass Money to Their Parents

In estate planning, we are usually talking about how an individual can create an estate plan that will pass on their assets to their beneficiaries, usually their children. With seniors living longer, many parents may need help from their children to pay for medical bills, caregivers, mortgage payments, etc. There are ways for a financially secure adult child to give financial aid to a parent free of gift taxes.

A GRAT, or grantor retained annuity trust, allows children to pass investment gains to their parents or grandparents without using their $ 5 million lifetime gift tax exemption. Under current law a child can set up a GRAT with a 2 year term. The trust pays the interest back to the child as if it were an annuity, based on an interest rate set by the IRS. The trust is usually set up with stock or other investment. Any appreciation in the underlying investment above the IRS interest rate passes to the GRAT beneficiary without being considered a gift. If the investment does not do well and returns less than the interest rate set by the IRS for GRATs, the beneficiaries get nothing.

President Obama is recommending imposing a 10 year minimum term on GRATs which would make them less attractive. If that happens, children, even without a GRAT, can still benefit their parents or grandparents in other ways, such as giving them a gift of cash. For example, in 2011, a gift up to $13,000 to any one individual is not taxed and will not dip into an individual’s lifetime gift exemption. Children can also pay their parents’ medical expenses if they pay the health care providers directly.

Published on: February 26, 2011

When to Discuss Estate Planning With Your Ex

by Scott C. Soady

Estate planning is important whether you are single, married, divorced or separated. For the sake of your minor children, there are a number of issues that warrant discussing with your ex. Here are some of the issues to consider when doing estate planning after a divorce:

Guardianship. If you pass away, your ex, the other parent, will get custody of your minor child, even if you had full custody and your ex just had visitation. The only circumstance that would change this is if your ex is an unfit parent or unavailable such as in prison. Even though this is the case, if you and your ex can agree together on alternate guardians, it could make life easier for your child and the potential guardian should an alternate become necessary.

Inheritance. This issue concerns who should be the person to manage your children’s inheritance should something happen to you. Some couples do not have any problem with their ex-spouse handling their child’s inheritance if something happens to them. Others do not want their ex-spouse handling the finances for their children. If you create a revocable living trust, you can specify who you want to manage the trust funds for your children. If you don’t want your ex to be the trustee, you can choose a relative as trustee or even a family friend of private professional fiduciary who will manage the assets for your children and make distributions according to the trust provisions. Either way, it is a good idea to discuss this with your former spouse. You also may want to put provisions in your respective trusts insuring that your child has visitation with other family members such as grandparents.

Published on: February 16, 2011

Choosing a Private Professional Fiduciary as Your Successor Trustee

by Scott C. Soady

Acting as a trustee is a very important job and choosing your trustee can be a difficult decision. In addition to this person handling your estate upon your death, you also have to think about the possibility that this individual may have to take over the management of your affairs if you become incapacitated.

Many people choose an adult child or other family member to be the successor trustee of their trust. But there may be some valid reasons to choose an independent third party to act as your trustee during your lifetime or after your death. Some people do not have children or close relatives or friends they can name to serve as the trustee of their trust. Some people have children or relatives but they do not want to burden their family members with the job. Maybe their children live in another state or have busy lives with their jobs and family. Some people may not want to name any of their children for fear it will jeopardize the relationship between siblings. So what are some other options for your choice of a trustee?

1. Corporate Fiduciaries. Corporate fiduciaries can be banks, trust companies, or trust departments. They are insured and closely monitored by federal and state regulators. The down side may be that some of these corporate fiduciaries have a minimum value of an estate which they will accept. Their fees may be higher than other types of fiduciaries and some beneficiaries feel the service is impersonal.

Published on: February 8, 2011

Why a Trust is so Important for Your Kids

by Scott C. Soady

A revocable living trust is an important part of your estate plan when you have children. Children under the age of 18 cannot inherit large sums of money. If you have assets in your estate which would go to your minor children and you have no trust, the Probate Court will have to appoint a guardian for your child’s estate. The ability to choose how and when you want your children to be given their inheritance is thus lost.

A revocable living trust is a better alternative so that you can specify how the money will be spent and at what intervals. Many parents are concerned about their child’s ability to handle money when they are 18 or even 21. As an example, a couple who create a trust for their children can provide that if something happens to them, the children will receive one-third of their inheritance at age 25, one-third at 30, and the balance at age 35. In the meantime, the trustee has the discretion to make distributions for support, health, and education. You can also give your trustee the discretion to make distributions to start a business, obtain an advanced degree, or make a down payment on a home. Such dispersals would then be deducted from their next scheduled distribution.

When you create your revocable trust, choosing a trustee is very important since that individual may be handling your child’s money for a period of time. Your trustee should be trustworthy, honest, good with money, and have the ability to get along with the beneficiaries. You can choose an older sibling however many parents feel a family friend may be better suited to deal with the children and make unbiased decisions. You can also choose a private professional fiduciary although these individuals will charge a fee to manage your children’s money.

Published on: January 31, 2011

FAQs about Powers of Attorneys

by Scott C. Soady

A Power of Attorney is a document that lets you appoint someone to either handle a specific task or act with general powers to handle your finances if you become incapacitated. Here are the answers to some frequently asked questions about the second type of power of attorney:

1. What things can my agent do under a power of attorney? Some of the things your agent can do acting under a power of attorney are make deposits and withdrawals from your bank accounts, pay your bills, buy or sell property, enter into contracts on your behalf, file your tax returns, and re-arrange your assets. If you want to limit the kinds of tasks your agent can do, you can place such limitations in the document.

2. How do I choose an agent under a power of attorney? The primary trait your agent should have is trustworthiness. An agent has broad powers so you want to be sure the individual you choose will act with the utmost of honesty and integrity. Choose a trusted family member or friend or in some cases, perhaps a private professional fiduciary may be your choice.

Published on: January 28, 2011

The New Tax Law – Part II

by Scott C. Soady

The new federal estate tax system signed into law by President Obama last December has an interesting and advantageous break for married couples. Starting this year, widows and widowers can add to their own estate tax exemption the unused exemption of their spouse. This “portability”provision together with an increase in the exemption to $5 million per person allows married couples together to transfer as much as $10 million tax free to their children or other heirs either through gifts or their estate plan.

As an example, suppose a couple named Ann and John have an estate worth $6 million with all of their assets titled jointly in their name, with right of survivorship. When John dies first, Ann owns the entire estate of $6 million. Under the old tax law, John’s exemption is wasted, since the outright bequest to Ann is not taxed regardless of what the federal estate tax is. With the new tax law, Ann can use her husband’s entire exemption if her executor makes the appropriate election and unless her assets exceed $10 million, there will be no federal estate tax due. In essence the “portability” aspect of the estate tax exemption between spouses allows a couple to do what an A/B trust will do, without the trust.

Interestingly, there are some states that continue to impose state estate taxes. New York and New Jersey are two states which have the estate tax. California and Florida do not.

Published on: January 24, 2011

The New Estate Tax Legislation-Part I

by Scott C. Soady

The new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by President Obama on December 17, 2010. Part of this new law sets the federal estate exemption amount at $5 million. This change is set to stay in effect until the end of 2012 unless an extension is enacted by Congress to continue such changes.

What are some of the estate planning issues we face under this new Act? The new law imposes a federal estate, gift, and generation skipping tax at a rate of 35% with a $5 million exemption ($10 million for a married couple under the “portability rule” which we will discuss in Part II of this blog. It also increases the exemption for lifetime gifts from, $1 million to $5 million. This increases the ability to pass substantial assets, its income and appreciation, to others free of federal estate and gift taxes. If you are considering making non-charitable gifts this year, consult us about how to structure your gifts to maximize tax savings.

The new law may also affect the type of trust that married couples need. In the past, A/B trusts, also called marital deduction trusts, or bypass trusts were estate planning tools that were necessary in order to maximize a federal estate tax exemption for each spouse. For couples with estates under $10 million, this may no longer be necessary. The new law is only in effect for two years however, so that may be a reason to still utilize these trusts. In addition there may be other reasons to use these types of trusts, depending on your net worth, family structure, and investment outlook.

Published on: January 20, 2011

The Most Common Estate Planning Mistakes

by Scott C. Soady

At Scott C. Soady, A Professional Corporation, we frequently see clients who have made estate planning mistakes. Sometimes we are able to correct those and sometimes, unfortunately, it is too late. Here are some of the most common estate planning mistakes:

1. Not having an estate plan at all. Probably the biggest mistake you can make is not creating either a will or a trust. Not having a will, or preferably a trust, causes your heirs to have to probate your estate and distribute your assets according to the laws of intestacy set forth in the California Probate Code. This means that if you were intending to leave something to someone not your heir such as a friend, charity, or domestic partner, that will not occur. Also the process of probate is time consuming and can be expensive as attorneys fees are statutory.

2. Creating a revocable living trust but failing to put all your assets in the name of the trust. Another common mistake is not titling all your trust assets in the name of the trust. People go to the trouble to create a trust but then open a new bank account, buy a new property, acquire a timeshare, or another new asset and fail to title that asset in the name of the trust.

Published on: January 8, 2011

Nike Founder Creates a GRAT

by Scott C. Soady

A Grantor Retained Trust (“GRAT”) is an advanced estate planning technique used by the wealthy to gift rapidly appreciating assets to another individual or charity without having to pay estate or gift tax. It is a special type of irrevocable trust that allows the creator of the trust, the “Trustor”, to put specific assets into the trust while retaining the right to receive an annual annuity payment for a certain number of years. When the term of the GRAT ends, the balance is distributed to the trust beneficiaries, usually children or other beneficiaries chosen by the Trustor. The Trustor is betting on the fact that the assets transferred into the GRAT will increase in value at a rate substantially higher than the interest rate used by the IRS (called the 7520 interest rate.

Recently Nike chairman Phil Knight contributed 2 million shares of Nike stock to the Phillip H. Knight 2010 Annuity Trust. This was the fourth trust that Knight has set up. The Securities and Exchange Commission said the filing by Knight on December 30, 2010 names Pat Kilkenny as trustee. Kilkenny served as the University of Oregon’s top athletic official when Knight donated $100 million to the University of Oregon. As a result of this transfer Knight, the co-founder of Nike, has 67.7 million Class B shares of stock in Nike. Obviously, Knight has faith that stock in the company he founded will continue to appreciate in value.

At Scott C. Soady, A Professional Corporation, we help families and individuals with a wide range of wealth and assets. Our estate planning is tailored to meet your needs. Contact us to schedule a complimentary appointment.

Published on: December 19, 2010

Communication Techniques for Alzheimers Patients

by Scott C. Soady

Scientists are studying how caregivers deal with people who have dementia, focusing on what they can do rather than what they’ve lost. A study by a speech professor at Ohio State University, who is studying communication with dementia patients, showed that making memory flashcards helps Alzheimer patients remember. A caregiver can put photographs of family members on flash cards with the name of the person in the photograph written underneath the picture. This professor, Michelle S. Bourgeois, developed some of the first memory books using picture and sentences to help people with memory problems recall past events.

Alzheimer’s disease affects the hippocampus, the part of the brain that is critical for learning and memory processes. Less affected are long term memory and skills like reading. Even when dementia causes patients to lose their ability to speak, they can read the flashcards and smile or nod when they recognize the concept on the flashcard. The technique has also been used to deal with anger and anxiety in dementia patients. Bourgeois has taught thousands of caregivers her methods and says it seems to help them feel happier and content.

It is so important when you have a family member or loved one that you suspect has a form of dementia, to not only have them physically evaluated but also see that they create an estate plan before they become unable to execute such documents. If a conservator has to be appointed through the court system, it is costly, time-consuming, and may not result in a distribution of assets after death that the individual would have choosen. As an example, Ann is a single woman who has no children, and wants her niece to receive her asset after she dies. She can provide for her niece in her trust as long as she still has capacity. If she fails to create a trust before she becomes incapacitated, the conservator who is appointed by the Probate Court, can petition the court under what is called a petition for substituted judgment (Probate Code sections 2580-2586)and execute a trust on behalf of the conservatee. However, the conservator can only execute a trust which will leave the assets to the conservatee’s heirs at law. Since Ann was survived by 2 siblings, her estate would be distributed to them and nothing to the niece.