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By WilsonPrice, August 3, 2010

It is a common misconception that trusts are only for the wealthy.  If you have children, particularly minor children, a trust is one of the best ways you can provide for them if something were to happen to you…no matter the size of your estate.

Trusts are effective tools that can put you in control of who will manage the assets (including life insurance) for the benefit of your children and when your children will receive their inheritance.

Here are a few examples of how a trust can be beneficial:

Blended Families:  A bypass trust can be used to provide for children from a prior marriage.

Jeff and Jane are married and each has a child from a previous marriage.  Jane inherited the farm from her family and wants to pass it on to her daughter.  A bypass trust can be used to make sure that Jeff could still enjoy the income from and use of the farm if Jane dies first, but then upon Jeff’s death, the trustee would distribute the assets to Jane’s daughter. If the farm was left to Jane’s daughter directly in the will, it would leave Jeff in the uncomfortable position to ask if he could remain there or he could not stop her if she decided to sell the property.  Or, if Jane left the property directly to Jeff in the will, his son could ultimately end up with all or part of it.

Special Needs: A Special Needs Trust can provide for disabled children

Stephen and Sarah have a 7 year old daughter with Down syndrome.  They want to provide for her needs if they were to pass away or become disabled, but don’t want to disqualify her from receiving Social Security disability benefits.  She cannot have more than $2,000 in her own name without losing the benefits.  Using whole life insurance policies, they fund a special needs trust, where the trust is the owner of the policy.  Additionally, Sarah’s mother wants to name the grandchild as beneficiary of assets in her will, but will name the trust instead.

Asset Protection: A Spendthrift trust can provide for children who might not be able to manage money

Ryan and Rachel don’t have any children, but want to leave their assets to their only relative, a 20 year old nephew.  They create a spendthrift trust to provide asset protection for him.  As beneficiary, he receives the benefit of the trust, but cannot demand benefits from the trust.  The trustee has the power to provide for the beneficiary by paying his living and educational expenses directly to the provider and the nephew doesn’t have control over the benefits.  Provisions can be drafted so that control can change as he gets older, or can never have control if he cannot be trusted with the money.

Motivation:  An Incentive trust can provide motivation for children to make worthwhile decisions

George and Gale have three teenage children.  They worry their children will do nothing with their lives because they are anticipating a large inheritance.  They also want their children to understand the value of work and believe that earning your way through life is better than living off an inheritance.  They set up an incentive trust for each of their children with provisions to address these concerns.  The trustee is given guidance to reward each child for graduating from college then matching each child’s personally earned income in every calendar year not to exceed $100,000.  When the child reaches age 30, other incentives are specified. 

Life Insurance: A life insurance trust can ensure the money is used to benefit your children

Dean and Dianne name Dianne’s sister guardian of their two minor children if something were to happen to both of them.  Since the children are minors, they cannot be named directly as beneficiaries of their life insurance policies.  Dianne’s sister is great with children, but they are worried about her managing the life insurance proceeds.  They set up a life insurance trust and name the trust as the owner and beneficiary of the policy.  They then name the children as beneficiaries of the trust.  They name Dean’s brother, as trustee of the trust.  Trusts must be followed as they are written. If the money is ever abused, family members will have more legal leverage to get the situation corrected with a judge than if the proceeds were left out of trust. 

Trusts can be designed to fit any family’s particular situation or needs. Some trusts may provide for broad, liberal distributions over a short number of years, where others may provide strict requirements, assuring that the trust will last for the child’s lifetime and beyond.  Parents should be involved in the design of the trust to ensure the right fit.  If thoughtfully structured, you can have the peace of mind that you have provided for your children financially and how you see best fits them individually.

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By WilsonPrice, August 3, 2010

As your parents age, pay close attention to their mental health, as well as their physical health. Advanced age or illness can impair their intellectual ability to manage day-to-day activities, making the need for an incapacity determination a possibility.

The issue of incapacity can bring about gut-wrenching decisions that are worthy of some advanced planning and thought.

If you observe a parent’s declining mental condition, you may have to make the difficult decision to have him declared incompetent. A guardian or conservator will then be appointed by a judge to manage his affairs.

What is “capacity?”

“Capacity,” generally means the mental ability to adequately function and live in the manner to which one is accustomed, but the legal definition can vary from state to state. If a person is unable to adequately care for their own health or financial needs, an adjudication process to determine their competency may be necessary.

What is a guardian or conservator?

If incapacity has been determined by a judge and a guardian or conservator has been appointed, the guardianship or conservatorship will specify the extent of duties.  They may be responsible for managing all aspects of your parent’s life or a narrower scope, such as financial matters.  They will owe a duty of care to your parents and will be held accountable by the court to demonstrate appropriate actions. The guardian or conservator is often a child or adult grandchild, but doesn’t have to be a family member.

Asking for assistance

Ideally, an elderly parent knows he needs assistance and asks for help.  In this circumstance, the expense and emotional charge of a guardianship proceeding can be avoided. There are various ways to assist your parents, such as:

Power of attorney

Your parents may still be legally competent to make decisions, but consent to give you or another trusted individual the legal right to act on his behalf for financial and health care matters.  This is similar to a guardianship or conservatorship.

Paying bills

If you are unable to write checks and pay your parent’s bills, you can hire a professional firm to provide the service.  Delegating the work could free up time and energy for you to focus on other things, while still maintaining a sense of control.

If you face decisions involving the capacity of your parents, understanding the roles of a guardian or conservator makes it somewhat easier.  Advance communication with your parents and family members is also key.

Contact Wilson Price Family Office  for more information about how to plan for a parent’s incapacity, guardianship or conservatorship.

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By WilsonPrice, August 3, 2010

You can typically name beneficiaries for a variety of assets, including retirement plans, annuities and life insurance policies.  But naming a beneficiary is not as simple as putting a name on a form; it should involve careful consideration, as the repercussions for your loved ones could be significant.

Out-of-date

If you haven’t reviewed your beneficiary designations recently, it’s possible the designations are no longer appropriate.  Review your designations on a regular basis, ideally annually, and when major life events occur, such as marriage, divorce, birth or death.  The assets are passed outside of legal proceedings and the designation is absolutely binding.  The assignment of assets cannot be superseded, not even by a Will. 

Be Specific

Most beneficiary designation forms allow you to name more than one primary and contingent beneficiary with specified percentage of assets.  Be specific and name each versus naming one trusted relative or friend to distribute the assets for you.  If no beneficiary is named, the assets will be distributed through the probate process, which in the case of a retirement plan, can create adverse tax consequences.

Tax Consequences

With life insurance, the goal is to keep the proceeds out of your estate.  If your spouse doesn’t need the money after you are gone, policies (existing or new) can be structured in various ways to keep life insurance from increasing the value of your estate.  This will be even more apparent next year if the estate tax exemption falls to $1 million.  Life insurance may play a major role in creating taxable estates for those who wouldn’t normally have the issue. This estate tax issue can be avoided in many cases if structured properly. 

Regardless of the beneficiary designation, retirement plans, however, will be includable in the value of the estate.  It is important, though, to make sure the designation is not left blank or that “the estate” is not named as the beneficiary.  In these cases, the retirement assets must be distributed within 5 years or at least as fast as the decedent was receiving required minimum distributions (RMDs), thus triggering a quicker income taxability of the assets in addition to the estate taxability. If your family does not need the funds for living expenses, the goal here is to defer distributions as long as possible, “stretching” the assets over longer life expectancies.  This can be accomplished by naming an individual as beneficiary.

Other considerations

To avoid taxable distributions altogether, you could donate your retirement plan to a charity if other assets are available to provide for your family.  Not only will the organization receive the assets tax-free, but your estate will also be eligible for a charitable deduction.

You can name almost anyone as your beneficiary, including individuals, charities and trusts, but minor children, however, cannot be named beneficiaries of life insurance policies, retirement plans or annuities. Additionally, if you are considering designating a special-needs person as your beneficiary, it may hinder the individual’s eligibility for government provided benefits.

There are various ways to still provide for those you want to benefit after you are gone, but with careful planning with an accredited estate planner.

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By WilsonPrice, August 3, 2010

As we all face five more months of 2010 with our hands still in the air on the issue of estate tax repeal, you might be wondering, “What’s the deal?”

Though we don’t profess to have all the answers, we do have some insight on where things currently stand. 

Both the House and Senate will adjourn this Friday, August 6, for a five week recess, reconvening on September 13, 2010.  The first estate tax return (Form 706) for a 2010 decedent would potentially be due October 1, 2010 if retroactive legislation were to reinstate the estate tax this year. However, “there is no agreement on the estate tax either in substance or process. None whatsoever,” said Max Baucus (D-MT), Senate Finance Committee Chairman, in May 2010. 

Baucus abandoned efforts to temporarily extend the estate tax in December 2009 due to republican opposition despite the successful passing of H.R. 4154 in the House a week earlier, permanently extending 2009 estate tax levels.  The House bill was read for a second time on January 20, 2010, making it available for consideration by the Senate at any time.

A few new bills have been introduced this year addressing the repeal. Most notably, S. 3533, introduced on June 24, 2010, a bill sponsored by Vermont Independent, Bernard Sanders, retroactively reinstating the estate and GST taxes for 2010 with exemptions starting at $750,000 to $3.5 million and ranging rates from 39% to 45%.  The bill also introduces additional bracket levels of $10 million, $50 million and $500 million taxed at 50%, 55% and 65%, respectively.  California Representative, Linda Sanchez (D-CA) introduced an identical bill in the House on July 15, 2010, H.R. 5764: The Responsible Estate Tax Act.

Republicans, however, have taken a different approach and attempted to attach an amendment to the Small business lending bill or Jobs bill, setting the exemption at $5 million and 35%. There would be an option for each estate to choose whether to apply retroactively or not.  The bill passed the House in June 2010, but without the amendment so far. The Senate has their own version of this bill and there has been some commentary that the issue of the estate tax could be used to gain republican support of the bill.  Yet, on July 29, 2010, all 41 Senate Republicans filibustered the bill, wanting the opportunity to add a few amendments (the estate tax being one of them). 

Though permanent repeal of the estate tax is an unlikely option, Senator DeMint (R-SC) made such a motion on July 22, 2010, but was defeated by a 39-59 roll call vote. 

As we approach a mid-term election in November, it seems politically impractical to grant the wealthy an estate tax break by increasing the exemption to $5 million or higher with a lower rate of 35%.  However, if Congress doesn’t take action, the exemption will fall to $1 million with a top rate of 55% come January 1, 2011.  Perhaps this is Congress’ desire, as these levels could generate revenue of over $400 billion over the next 10 years. Additionally, revenue will be seen from the sale of assets inherited this year, potentially more revenue than would have been collected if we were at $3.5 million this year instead of repeal. The new surge of gift tax revenue this year (because of the lower 35% gift tax rate) is estimated to generate more than $14 billion.

Lack of consensus on reform in 2010 has left estate planning analogous to strategies in a chess game – only everyone is keeping their hands on the pieces.

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By WilsonPrice, May 4, 2010

Though there is no shortage of possible “fixes” presented in Congress to resolve current estate tax uncertainty, the issue of carryover basis still remains for 2010. The reality of which will apply to so many more Americans than a resurrected estate tax, begging the question: Are you prepared?

How do the new carryover basis rules affect the beneficiaries of an estate’s assets?

First and foremost, determining the decedent’s carryover basis for many assets will be a difficult (and perhaps impossible) task.  But once established and the beneficiary sells the asset, they will have to pay a capital gains tax on the appreciation in value.  Whereas previously, a beneficiary received a “step-up” in basis to the fair market value at the decedent’s death and upon sale there would be no gain. The House Ways and Means Committee estimates that while extending the 2009 estate tax law to 2010 would have affected about 6,000 estates, 71,200 estate could face new capital gains taxes if the repeal and carryover basis rules remain.

Here are five steps you can take to be prepared

1. Make a list: Determine the basis of existing property to the extent possible and maintain records of future acquisitions and additions.  Keep your “bucket list” with the rest of your estate planning documents and communicate that you have done so to your attorney and executor.
2. Protect executors: To reduce accusations of conflict of interest and to protect against liability of asset allocation, provisions to protect your executors should be drafted in estate planning documents.
3. Update planning documents: Though it requires a greater investment of time and money, more complex planning documents that anticipate a greater array of situations may be necessary.  Even if estate tax repeal and carryover basis rules are “fixed”, many documents already need a more comprehensive use of investment advisors, trust protectors and/or specialized fiduciaries to coordinate specific issues and situations.
4. Dispose of assets while alive: For assets without basis records, an individual who will likely be affected by the carryover basis rules might consider estimating the basis and selling the asset while still alive or donating the asset to charity. The taxpayer could eliminate costly difficulties and uncertainty to their executor and beneficiaries.
5. Coordinate advisors: Make sure all of your advisors (certified public accountants, attorneys and financial advisors) are coordinating and taking steps with a common estate plan in mind.

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By WilsonPrice, May 4, 2010

Together, the new Healthcare Act, FY 2011 Budget proposals and the looming sunset of Bush’s 2001-2003 tax cuts have spawned a terrifying trifecta of tax increases for high income earners (a label defined by chronic threshold levels of $250,000 for joint filers, $125,000 for married filing separately and $200,000 for single filers).  

Increasing Federal Income Tax Rates 

As part of the relief offered by the Bush 2001 tax cuts, the highest marginal income tax rate was reduced to 35% from 39.6% and the lowest to 10% from 15%.  These provisions expire (or sunset) in 2011 unless Congress takes action to extend them.  In his fiscal year 2011 budget proposal, President Obama supports the extension of reduced rates for lower and middle income earners whose adjusted gross income is less than the thresholds mention earlier.  High income earners will likely see their marginal tax rates increase next year to pre-2001 rates. 

New Medicare Taxes 

As part of the recently passed Health Care and Education Reconciliation Act of 2010 and effective in 2013, employee contributions to the Medicare hospital insurance tax will increase by an additional 0.9% on earned income exceeding the thresholds.  The Act also creates a new 3.8% “Medicare Tax” on passive investment income, such as capital gains, interest, dividend, annuity and rental income.  This tax will be applied to the lesser of net investment income or the taxpayers modified adjusted gross income exceeding the same threshold levels. 

Higher Taxes on Capital Gains and Dividends 

The latest budget resolution passed by the Senate Budget Committee on April 22, 2010 has left little room for qualified dividend tax rates to continue to be tied to long term capital gains rates after 2010.  The Jobs and Growth Tax Relief Reconciliation Act of 2003 linked these rates together at 15%, but is scheduled to sunset in 2011.  Coupled with the 3.8% Medicare tax and expected ordinary income tax rates of up to 39.6%, the effective top tax rate on dividends could rise to 43.4% in 2013. 

Some Final Thoughts 

Though not all of the above has passed into law, there is a noticeable trend in legislation to target high income taxpayers as a revenue source.  Additionally, under the statutory pay-as-you-go budgeting law (Pub. L. No. 111-139) signed in February of this year, any tax cuts for individuals earning more than $200,000 must be fully offset.  Extending any of the provisions that are scheduled to expire in 2011 are deemed future tax cuts and revenue offsets are necessary, making the possibility of the above triple threat a harsh likelihood.  In light of such, work with your investment advisor to make sure your investment approach takes into consideration the above environment.