The Clock is Ticking on Maxing Out Your 2014 Retirement Plan Contributions

With the end of 2014 fast approaching, now is the time to take a look at your year-to-date retirement plan contributions to see where yours stand when compared with the 2014 contribution limits.

Summary of 2014 Retirement Plan Contributions Limits:

Depending on how much you’ve already contributed, you may be able to contribute more to your retirement plan for 2014.

To help you determine whether you need to make some additional contributions, here is a summary of the 2014 retirement plan contributions limits. Please remember that some types of accounts require contributions before December 31, whereas other types of accounts allow contributions up to the April deadline for filing your tax return. Contact us now so we can offer you specific guidance about your account.

• The contribution limit for employees under age 50 who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan) is $17,500. These plans generally require contributions to be made on or before December 31.

• The contribution limit for employees age 50 and over who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan) is $23,000. These plans generally require contributions to be made on or before December 31.

• The contribution limit for employees under age 50 who participate in a Savings Incentive Match Planfor Employees of Small Employers (known as a SIMPLE plan) is $12,000.  These plans generally require “employee” contributions to be made on or before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for employees age 50 and over who participate in a Savings Incentive Match Plan for Employees of Small Employers (known as a SIMPLE plan) is $14,500. These plans generally require “employee” contributions to be made before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for a Simplified Employee Pension Individual Retirement Account (i.e., SEP IRA) or Solo 401(k) is the lesser of (a) $52,000, or (b) 25% of the employee’s salary, and the compensation limit used in the savings calculation is $260,000. These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals under age 50 to a traditional or Roth Individual Retirement Account (IRA) is $5,500.  These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals age 50 and over to a traditional or Roth Individual Retirement Account (IRA) is $6,500.  These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• While contributions to IRAs that apply to the 2014 tax year can be made up until April 15, 2015, the time is now to make contributions so that you can maximize your earnings inside the account.

• Before you make any contributions to a Roth IRA, make sure you’re not subject to the adjusted gross income (AGI) phase-out. If your income is greater than AGI phase-out amount for your filing status, then you’re not eligible to make contributions to a Roth IRA. The AGI phase-out amounts for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married taxpayers filing jointly; $114,000 to $129,000 for single taxpayers and head of household taxpayers; and for a married taxpayer filing a separate return, the phase-out is not subject to an annual cost-of-living adjustment and is therefore $0 to $10,000. We can help you determine which phase-out, if any, applies to your situation.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Time is Running Out for Certain Estates to Make the Federal Portability Election

As a result of a 2010 tax law, a surviving spouse can receive his or her deceased spouse’s unused estate tax exemption. This is called a “portability” election. You may have seen it called the “deceased spousal exclusion amount” or “DSUE amount.” 

In essence, a portability election allows a surviving spouse to apply the DSUE amount to his or her own taxable transfers during life and after death. Using the portability election can save a significant amount of estate tax and income tax, depending on your circumstances and assets.

Portability under the 2010 law was originally only a temporary option, available for estates of people dying during 2011 and 2012. But as a result of a 2012 tax law, the portability election became “permanent.” But, as you’ll see below, this change and other legal developments have created a great deal of confusion about portability.

In summary, a portability election is available for estates of people who died after January 1, 2011, and who left surviving spouses. Making a portability election can save you a significant amount of estate tax and income tax, depending on your circumstances and assets.

How And When is the Portability Election Made?

In order to make an effective portability election, the executor of the estate of the deceased spouse must timely file an estate tax return (Form 706) and include a computation of the DSUE amount.  The due date for Form 706 is the later of (i) 9 months after the deceased person’s date of death, or (ii) the last day of the period covered by an extension if an extension of time for filing has been obtained. Extensions are typically six months. So you usually have, at most, 15 months after a spouse dies to file an estate tax return.

The portability election is not automatic.  Instead, the executor of the estate of the deceased spouse must timely file a federal estate tax return to affirmatively make a portability election.

Decision in Windsor v. United States Adds Confusion to Timely Filing a Portability Election

On June 26, 2013, the United States Supreme Court handed down its landmark decision in Windsor v. United States.  In the Windsor case, the Court held that Section 3 of the Defense of Marriage Act (“DOMA”),  which states that “the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife” is unconstitutional. 

In response to the Windsor decision, Treasury and the IRS issued a ruling in August 2013 which stated that same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes.  This ruling gave the surviving spouse of a same sex marriage the right to make the portability election.

Special Portability Rules for Deaths Occurring Between January 1, 2011 and December 31, 2013

The confusion surrounding the status of federal estate taxes and portability at the end of 2012 coupled with the Windsor decision and related IRS ruling in the summer of 2013 prompted the IRS to issue Rev. Proc. 2014-18 in early 2014.

Under Rev. Proc. 2014-18, the executors of the estates of certain decedents may make a late federal estate tax portability election by filing Form 706 on or before December 31, 2014.

To qualify for making a late portability election, the estate must meet the following criteria:

1.  The deceased person must:

(a)   Have left a surviving spouse; and

(b)  Died after December 31, 2010, and on or before December 31, 2013; and

(c)   Been a citizen or resident of the United States on the date of death.

1. The estate was not otherwise required to file a federal estate tax return (as determined based on the value of the gross estate and adjusted taxable gifts); and

2. The estate, in fact, did not file a federal estate tax return in order to elect portability; and

3. A person permitted to make the election on behalf of a decedent (usually the executor) files a completed and properly-prepared federal estate tax return on or before December 31, 2014; and

4. The person filing the federal estate tax return on behalf of the decedent’s estate must state at the top of the return that it is being “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

What this means for you is that you may be able to file an estate tax return to elect portability, even if it’s outside the normal 9 month window. But, time is running out. A properly made portability election can save hundreds of thousands of dollars of estate and income taxes, depending on your circumstances.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

2015 Changes to State Death Taxes

If you live or own property in one of the 20 jurisdictions listed below, then you may have a state death tax issue that requires planning.

Currently 20 U.S. jurisdictions collect a death tax at the state level: Connecticut, Delaware, the District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington.

Even if you aren’t a resident of these states at your death, you may have state-level death tax issues if you own property in any of those states. Also, you should consider estate tax efficient ways to pass assets to your heirs if they live in one of these states.

In 2015, the following states will see changes to their state death tax laws:

1. The District of Columbia generally announces changes in the 2nd half of November. So, the 2015 update should be available soon. In 2014, the District of Columbia had an exemption of $1,000,000.

2. Delaware’s estate tax exemption matches the federal estate tax exemption which is indexed for inflation on an annual basis.  Therefore, Delaware’s estate tax exemption will increase from $5,340,000 in 2014 to $5,430,000 in 2015.

3. Like Delaware, Hawaii’s estate tax exemption matches the federal exemption, so Hawaii’s estate tax exemption will also increase from $5,340,000 in 2014 to $5,430,000 in 2015. 

4. Maryland’s estate tax exemption will increase from $1,000,000 in 2014 to $1,500,000 in 2015 and will continue to increase annually until it matches the federal exemption in 2019.  In addition, in 2019 Maryland will begin recognizing portability of its state estate tax exemption between married couples, including same-sex married couples.  (Currently Hawaii is the only state that recognizes portability.)

5. Minnesota’s estate tax exemption will increase from $1,200,000 in 2014 to $1,400,000 in 2015 and then will continue to increase annually in $200,000 increments until it reaches $2,000,000 in 2018.  In addition, married couples can now take advantage of “ABC Trust” planning to defer payment of both Minnesota and federal estate taxes until after the death of the surviving spouse.

6. New York’s estate tax exemption increased from $1,000,000 for deaths that occurred prior to April 1, 2014, to $2,062,500 for deaths that occur between April 1, 2014, and March 31, 2015, and then $3,125,000 for deaths that occur between April 1, 2015, and March 31, 2016.  The exemption will then continue to increase until it matches the federal exemption in 2019.   Aside from this, gifts of New York property made between April 1, 2014, and December 31, 2019, will be subject to a three year look-back period.  This means that any gifts made during this time frame will be brought back into the New York taxable estate if the person making the gift dies within three years of making the gift. If you anticipate making gifts of New York property or if you are a New York resident, you should consult with us about how much death tax exposure your estate has.

7. Rhode Island’s estate tax exemption will increase from $921,655 in 2014 to $1,500,000 in 2015 and will then be annually indexed for inflation in 2016 and beyond.  In addition, beginning in 2015 the so-called “cliff tax” will be eliminated so that only the value of an estate that exceeds the exemption will be taxed. 

8. Tennessee’s inheritance tax exemption will increase from $2,000,000 in 2014 to $5,000,000 in 2015.  Tennessee’s inheritance tax is scheduled to be repealed in 2016. 

9. Washington began indexing its estate tax exemption for inflation on an annual basis in 2014.  The 2014 exemption is $2,012,000, but the 2015 inflation-adjusted exemption has not been released yet.

As you can see, the days of easily being able to plan for estate taxes have changed significantly because of portability of the federal estate tax exemption and a myriad of state-level death taxes.  

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third. Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time including:

• Net worth statement, or at the very minimum a broad overview of your wealth; and

• Final wishes – burial or cremation, memorial services.

Estate planning documents that have been created and what purpose they serve:

1. Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures;

2. Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy;

3. Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust;

4. Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash; and

5. Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts; and standalone retirements trusts—which are created to specifically hold your retirement accounts—in order to give you back the asset protection and tax benefits that the U.S. Supreme Court took away with their decision in Clark v. Rameker.

Who will be in charge if you become incapacitated or die—agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will?

Benefits of lifetime discretionary trusts created for your heirs:

1. Fosters educational opportunities

2. Provides asset, divorce, and remarriage protection

3. Protects special needs beneficiaries (if properly drafted)

4. Allows for professional asset management

5. Minimizes estate taxes at each generation

6. Creates a lasting legacy for future generations

Overall goals and intentions for inheritance – what the money is, and is not, to be used for (in other words, education vs. charitable work vs. vacations vs. Ferraris vs. business opportunities vs. retirement), and who will be trustee of lifetime discretionary trusts created for your heirs and why you’ve selected them

Where important documents are located – this should include how to access your “digital” assets

Who your key advisors are and how to contact them

How Can Your Professional Advisors Help You Communicate Your Wealth Transfer Goals?

Your professional advisors are well-positioned to help you discover your wealth priorities, goals, and objectives and then communicate this information to your heirs.  This, in turn, will prepare your heirs to receive your wealth instead of being left to figure it out on their own and, as statistics have shown, lose it all. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

2015 Inflation Adjustments for the Estate Tax Exemption And Trust Income Tax Brackets—What They Mean To You

The Internal Revenue Service has released the official inflation adjustments that will affect 2015 federal reporting for estate taxes, gift taxes, generation-skipping transfer taxes, and estate and trust income taxes.

2015 Federal Estate Tax Exemption:

In 2015 the estate tax exemption will be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that when the value of the gross estate of a person who dies in 2015 exceeds $5,430,000, the estate will be required to file a federal estate tax return (IRS Form 706). Form 706 is due within nine months of the deceased person’s date of death.

The maximum federal estate tax rate remains unchanged at 40%.

2015 Federal Lifetime Gift Tax Exemption: 

In 2015 the lifetime gift tax exemption will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any taxable gifts in 2015 (in general a taxable gift is one that exceeds the annual gift tax exclusion – see more on that below), then they will need to file a federal gift tax return (IRS Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

The maximum federal gift tax rate remains unchanged at 40%.

2015 Federal Generation-Skipping Transfer Tax Exemption:

In 2015 the exemption from generation-skipping transfer taxes (GSTT) will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any transfers that are subject to the GSTT in 2015, then they will need to file a federal gift tax return (Form 709). For generation-skipping transfers made during 2015, Form 709 is due on or before April 15, 2016.

Note that if the generation-skipping transfer does not exceed $5,430,000, then no GSTT will be due; instead, the transferor’s GSTT exemption will be reduced by the amount of the transfer.

For example, if Bob has not made any prior generation-skipping transfers and makes one of $500,000 in 2015, then his GSTT exemption will be reduced to $4,930,000 ($5,430,000 GSTT exemption - $500,000 generation-skipping transfer made in 2015 = $4,930,000 GSTT exemption remaining).

The maximum federal GSTT rate remains unchanged at 40%.

2015 Annual Gift Tax Exclusion:

In 2015 the annual gift tax exclusion will be $14,000. This is the same as the 2014 exclusion.

What this means is that if a person makes any gifts to the same person that exceed $14,000 in 2015, then they will need to file a federal gift tax return (Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

Note that if the taxable gift does not exceed $5,430,000, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift.

For example, if Bob has not made any taxable gifts in prior years and makes a gift of $500,000 to his daughter in 2015, then Bob’s lifetime gift tax exemption will be reduced to $4,944,000 ($500,000 gift - $14,000 annual exclusion = $486,000 taxable gift; $5,430,000 lifetime gift tax exemption - $486,000 taxable gift made in 2015 = $4,944,000 lifetime gift tax exemption remaining).

As mentioned above, the maximum federal gift tax rate remains unchanged at 40%.

2015 Estate and Trust Income Tax Brackets:

Finally, estates and trusts will be subject to the following income tax brackets in 2015:

If Taxable Income Is:                         The Tax Is:

1) Not over $2,500:                              15% of the taxable income

2) Over $2,500 but 

Not over $5,900:                                   $375 plus 25% of the excess over $2,500

3) Over $5,900 but 

Not over $9,050:                                   $1,225 plus 28% of the excess over $5,900

4) Over $9,050 but                                  

Not over $12,300:                                 $2,107 plus 33% of the excess over $9,050

5) Over $12,300:                                  $3,179.50 plus 39.6% of The excess over $12,300                                                    

As you can see, an income of only $12,300 inside a trust could be taxed at a marginal rate of 39.6%. In addition, many trusts paying at the top bracket are also subject to the 3.8% net investment income tax, making the top marginal rate 43.4%. Many states also impose an income tax on trusts. So, depending on which state the trust pays income taxes, the marginal income tax rate could be over 50% for trusts earning just $12,300.

What this means is that Trustees should give careful consideration to the timing of income and deductions and whether distributions of income to beneficiaries should be made to avoid paying excessive trust income taxes. Any income tax planning, of course, has to be balanced against a Trustee’s fiduciary duties to the trust.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #5 – Make Gifts that Your Family Will Love but the IRS Won’t Tax

Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts. Gifting is a great way to take money out of your taxable estate, while simultaneously providing for loved ones.

Make Annual Exclusion Gifts: 

“Annual exclusion” gifts are transfers of money or property in an amount that does not exceed the annual gift tax exclusion.

In 2014, the annual gift tax exclusion is $14,000 per recipient, and it will remain at $14,000 per person in 2015.  Therefore, you can give up to $14,000 to as many individuals you choose on or before December 31, 2014, and then give another $14,000 to the same people on or after January 1, 2015, and you will not have to file a federal gift tax return (IRS Form 709).  In other words, the IRS doesn’t consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all.

Married couples can take double advantage of the annual exclusion and gift $28,000 in 2014 and then another $28,000 in 2015.  But note that in some situations, a couple may still need to file a gift tax return to report any "split gifts" – they'll need to consult with their estate planning attorney or accountant to be sure. Also, you may need to file a gift tax return if you make gifts that exceed the annual exclusion amount or if you make gifts that don’t qualify for the annual exclusion – your attorney or accountant can guide you through this.

Make Payments that Qualify for the Medical Exclusion:

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the medical exclusion.  

Payments that qualify for this exclusion are ones that are made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual.  In general, medical expenses that qualify for this exclusion are the same as those that are deductible for federal income tax purposes. 

Therefore, in 2014 you can pay for your grandchild's emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns. 

One incredibly important detail – in order to qualify for the medical exclusion you must make payment directly to the institution providing the medical care or company providing the medical insurance. If you give the money to the individual receiving the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift.

Make Payments that Qualify for the Educational Exclusion:

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the educational exclusion.  

Payments that qualify for this exclusion are ones that are made directly to a qualifying domestic or foreign institution as tuition for the education of an individual.

For example, in 2014 in addition to paying for your grandchild’s emergency appendectomy (see above), you can pay your grandchild's college tuition in the amount of $25,000, give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns or pay any gift tax. 

Two incredibly important details – in order to qualify for the educational exclusion

(1) You must make payment directly to the institution providing the education, not to the individual receiving the education, and

(2) Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If you fail to follow either of these restrictions, the payment will be considered a gift.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Strategies for Reducing the Income Tax Squeeze on Irrevocable Trusts

Under federal income tax laws, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets. In 2014, the top 39.6% tax rate kicks in at only $12,500 of trust income. In addition, trusts in the top tax bracket are subject to the 20% long term capital gains rate and a 3.8% surtax on the lesser of undistributed net investment income or adjusted gross income over $12,500.

What Can Trustees Do to Lower a Trust’s Taxable Income?

Due to this unfavorable income tax treatment of irrevocable, non-grantor trusts, Trustees of this type of trust must plan carefully to minimize annual income taxes. Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are in a lower income tax bracket and/or not subject to the 3.8% surtax. This, in turn, will lower the income that is taxed inside of the trust. Nonetheless, any distributions aimed at reducing a trust’s income tax liability must be made within the distribution parameters established in the trust agreement and applicable state law.

With these limitations in mind, income-reducing strategies Trustees should consider include:

• Making in-kind distributions of low basis trust property to beneficiaries who are in a lower tax bracket or plan to hold on to the property and not sell it any time soon

• Exploring options to permit capital gains to pass to beneficiaries instead of being taxed inside of the trust, such as reforming or decanting the trust to broaden the Trustee’s discretion to allocate between trust income and principal

• Shifting trust investments to minimize taxable income and gains

• Terminating small, uneconomic trusts under the terms of the trust agreement or applicable state law

Final Considerations for Trustees of Irrevocable, Non-Grantor Trusts:

Planning to minimize trust income taxes is a delicate balancing act. Trustees must carefully weigh the tax benefits of making distributions or changes to the trust’s provisions against the grantor’s intent, the ongoing needs and tax status of the current beneficiaries, and what will be left for the remainder beneficiaries. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs and expenses of the trust beneficiaries will undoubtedly change from year to year.

If you are the Trustee or beneficiary of an irrevocable, non-grantor trust, attorneys from our firm are available to speak with you now about strategies that can be used to reduce your trust’s income tax bill.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #4—Check the Privacy of Your Estate Plan

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area of planning that many people overlook is ensuring that their final wishes remain private.

Will Your Final Wishes Become a Public Court Record?

Let’s face it, planning for what happens if you become mentally incapacitated or die is an extremely personal matter. Why? Because this type of planning deals with all of the intimate details of your life, including any skeletons in the closet, who you consider to be your real family, what you own, and who you owe.

When you’re sitting across the table from your estate planning attorney, you’ll need to “spill the beans” and let your attorney know your true feelings and ultimate goals. And then once you have done this, there it is – all of the intimate details of your life written down in black and white in your estate planning documents, quite possibly for the whole world to see.

The good news is that because of the attorney-client privilege, no one can see your estate planning documents unless you give them permission. But this will only work while you’re alive. After you die and your will is filed for probate, it becomes a public court record that anyone can read (recent celebrity examples include actors James Gandolfini and Philip Seymour Hoffman). It is also possible for your revocable trust to become a public court record that anyone can read (celebrity examples include Farrah Fawcett and Michael Jackson).

Or what happens if you don’t have any estate plan at all? NFL quarterback Steve McNair’s public probate court proceedings are a prime example of how the public can learn the dirty little secrets about a deceased person – two illegitimate children and possibly others, multiple girlfriends – and all about the deceased person’s property and its value – cash, investments, businesses, and multiple homes valued near $20 million. If you don't have a personalized estate plan, your family could be stuck with the state's default plan. We've never had a client who wanted their personal plan to be exactly like the state's default plan, so we strongly advise you to meet with an experienced estate planning attorney now to make sure that doesn't happen to your family.

What Can You Do to Keep Your Estate Plan Private?

If privacy and discretion are important to you, then these goals should be, and certainly can be, carried over into your estate plan.

If you already have an estate plan, check with your estate planning attorney to determine how private your plan will be after you die and make any necessary adjustments.

On the other hand, if you’re currently working on your estate plan, make sure your estate planning attorney is aware of how important privacy and discretion are to you so that these goals can be incorporated into your estate plan from the beginning.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #3—Check Your Mental Disability Plan

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area of planning that many people overlook is making sure their mental disability plan is up to date.

Three Areas of Your Mental Disability Plan That Are Likely Out of Date:

If your estate plan is more than a few years old, then your mental disability plan is likely out of date for the following reasons:

1. Are your health care directives compliant with HIPAA?  While the federal Health Insurance Portability and Accountability Act (known as “HIPAA” for short) was enacted in 1996, the rules governing it were not effective until April 14, 2003.  Thus, if your estate plan was created before then and you have not updated it since, then you will definitely need to sign new health care directives (an Advance Medical Directive and a Living Will – insert the names of these documents in your state) so that they are in compliance with the HIPAA rules.  With that said, it’s possible that health care directives signed in later years lack HIPAA language, so check with your estate planning attorney just to make sure that your estate plan documents reference and take into consideration the HIPAA rules.

2. Is your Power of Attorney stale?  How old is your Power of Attorney?  Banks and other financial institutions are often wary of accepting Powers of Attorney that are more than a couple of years old.  This means that if you become incapacitated, your agent could have to jump through hoops to get your stale Power of Attorney honored, if it can be done at all. This could cost your family valuable time and money.  Aside from this, in the past few years several states (including Florida and Ohio) have enacted new laws governing Powers of Attorney.  If you want to increase the likelihood that your Power of Attorney will work without any hitches if you lose your mental capacity, update and redo your Power of Attorney every few years so that it doesn’t end up becoming a stale and useless piece of paper.

3. Does your estate plan adequately address mental disability?  A will is something that only becomes effective when you die.  With today’s longer life expectancies come increased probabilities that you will be mentally incapacitated before you die.  A fully funded Revocable Living Trust is the best way to provide adequately for mental incapacity, but some older trusts do not.  If you signed your Revocable Living Trust more than 8 to 10 years ago and haven’t updated it since or have assets that are outside your Revocable Living Trust, then it may well lack modern and appropriate provisions for what to do with you and your property if you become mentally incapacitated.  Have your estate plan checked to ensure that it will work effectively and efficiently if you lose your mental capacity.  Otherwise you and your loved ones may end up in front of a judge who will have to sort out your financial matters – at horrendous cost.

What Should You Do?

Estate planning is about much more than having a plan for determining who gets your stuff after you die. Your plan also needs to include instructions as to what happens in case you ever lose mental capacity. If your plan is more than a few years old or does not include a fully funded Revocable Living Trust, then chances are it lacks a good mental disability plan.  Now is the time to meet with an experienced estate planning attorney to ensure that you have a mental disability plan that will work the way you expect it to work if it’s ever needed. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #2—Check Your Beneficiary Designations

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area of planning that many people overlook is their beneficiary designations.

Have You Checked Your Beneficiary Designations Lately?

Do you own any life insurance policies?  If so, have you named both primary and secondary beneficiaries for your policies?

How about retirement accounts – are any of your assets held in an IRA, 401(k), 403(b) or annuity?  Or how about a payable on death (“POD”) or a transfer on death (“TOD”) account?  If so, have you named both primary and secondary beneficiaries for these assets? 

What about your vehicle – do you have it registered with a TOD beneficiary?  And your real estate – is it held under a TOD deed or beneficiary deed? 

If you have gotten married or divorced, had any children or grandchildren, or any of the beneficiaries you have named have died or become incapacitated or seriously ill since you made beneficiary designations, it is time to review them all with your estate planning attorney. 

Beneficiary Designations May Overrule Your Will or Trust

Speaking of estate planning attorneys, has yours been given and reviewed all of your beneficiary designations?

It is critically important for your estate planning attorney to review your beneficiary designations as your life changes because your beneficiary designations may overrule or conflict with the plan you have established in your will or trust (unless your state law provides otherwise, but you should certainly not rely on this).  In addition, naming your trust as a primary or secondary beneficiary can be tricky and should only be completed after consulting with your estate planning attorney.   

What Should You Do?

Whenever you experience a major life change (such as marriage or divorce, or a birth or death in the family) or a major financial change (such as receiving an inheritance or retiring) or are asked to make a beneficiary designation, your beneficiary designations should be reviewed by your estate planning attorney and, if necessary, updated or adjusted to insure that they conform with your estate planning goals. 

If you have gone through any family or monetary changes recently and you’re not sure if you need to update your beneficiary designations, then consult with your estate planning attorney to ensure that all of your bases are covered.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #1—Check Your Estate Tax Planning

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area that married couples should revisit is their estate tax planning.

Do You Still Have “AB Trust” Planning in Your Estate Plan?

If you’re married and you haven’t had your estate plan reviewed since before January 2, 2013, by an experienced estate planning lawyer, then pull your documents out of the drawer, dust them off, and take a closer look at their trust provisions. Do they contain terms such as “Marital Trust,” “QTIP Trust,” “Spousal Trust,” “A Trust,” “Family Trust,” “Credit Shelter Trust,” or “B Trust”?

If so, then your revocable trust contains estate tax planning provisions that were required in most estate plans before January 2, 2013. Now, you may not need this type of planning since the federal estate tax exemption has been fixed at $5 million per person adjusted for inflation (the exemption is $5.34 million in 2014 and expected to increase to $5.42 million in 2015).

Aside from this, the federal estate tax exemption is also “portable” between married couples (including legally married same-sex couples), meaning that when one of a married couple dies, the survivor may be able to get the right to use their deceased spouse’s unused estate tax exemption and so, without any complicated estate tax planning, pass $10 million+ to the deceased spouse’s heirs and the survivor’s heirs federal estate-tax free.

Do You Still Need “AB Trust” Planning in Your Estate Plan?

With that said, do you still need to include “AB Trust” estate tax planning in your estate plan? The answer to this question depends on several factors, including:

• Are the combined estates of you and your spouse under $5 million?

• Does your state still collect a state estate tax? 

• Do you and your spouse have different final beneficiaries of your estates?

• Do you and your spouse want to create a dynasty trust that will continue for many generations?

In addition, there are many other factors and options to consider that an experienced estate planning attorney can explain.

What Should You Do?

If you’re married and your current estate plan includes “AB Trust” planning but you’re not sure if you should keep it in your plan, then make an appointment with an experienced estate planning attorney to discuss all of your options.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

The Trust Protection Myth: Your Revocable Trust Protects Against Lawsuits

WARNING:  Many people believe once they set up a Revocable Living Trust and transfer assets into the Trust, those assets are protected from lawsuits.  This is absolutely not true. 

While Trusts commonly provide asset protection for beneficiaries, few Trusts protect assets owned by the person who created the Trust.

No Immediate Asset Protection?  Why Should You Create a Revocable Living Trust?

Fully funded Revocable Trusts are dynamite tools.  Here’s why: 

What Can You Do to Protect Your Assets?

Comprehensive estate planning has a solid foundation of insurance, including homeowners/renters, umbrella, auto, business, life insurances, disability, and the like.  Business entities such as the Limited Liability Company are commonly used for asset protection and   Domestic Asset Protection Trusts are sometimes used as well.

Your Revocable Living Trust creates a powerful value and can be drafted to provide asset protection for your loved ones.  To protect yourself, use insurance, business entities, and, perhaps, a Domestic Asset Protection Trust.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Discretionary Trusts – How to Protect Your Beneficiaries From Bad Decisions and Outside Influences

Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses.  Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.

What is a Discretionary Trust?

A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary.  This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.

Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made.  You can make the terms and time frames as limited or as broad as you want.  For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age. 

An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”).  In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.

While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice. 

Where Should You Include Discretionary Trusts in Your Estate Plan?

Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:

• Your Revocable Living Trust

• Your Irrevocable Life Insurance Trust

• Your Standalone Retirement Trust

What Should You Do?

If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

If You Die Without a Will, Does Your Spouse Inherit Your Entire Estate?

If you are married and you die without a Last Will and Testament, you may mistakenly believe that your spouse will still inherit your entire estate.  Not so fast.  Who will inherit your estate depends on several different factors:

1.   How is your property titled?  Is your property titled in your name alone, in joint names with your spouse, in joint names with a child or other relative, or does it have a beneficiary designated?  Knowing how all of your property is titled is the real key to understanding who will inherit it after you die.  For example, if your home is titled in joint names with rights of survivorship with your spouse, then your spouse will inherit the home.  However, if it is titled in your name alone, then your spouse may or may not inherit the home as determined by applicable state laws.  These laws are referred to in the U.S. as “intestacy laws” and are discussed below in item #3. 

2.   Did you and your spouse sign a prenuptial or postnuptial agreement?  The right to inherit property from your spouse can be legally waived in a valid agreement signed before you get married (a prenuptial or premarital agreement), or after you get married (a postnuptial agreement).  If you and your spouse entered into such an agreement, then the legal effect of a full waiver of inheritance rights is to treat your spouse as having predeceased you.  You and your spouse may also agree to only waive certain inheritance rights, such as the right to inherit your IRA or 401(k). 

3.   What does your state’s intestacy laws say?  You may be surprised to learn that the intestacy laws of many U.S. states do not require the entire estate of a deceased married person to be distributed to their surviving spouse.  In some states the surviving spouse must divide the estate with the deceased spouse’s children, if any, otherwise with the deceased spouse’s parents or siblings.  When real estate is involved, this may lead to a family feud.  For example, the surviving spouse may want to sell the real estate and the children or parents may want to keep the real estate.  Also, if you own real estate located outside of your home state, then the intestacy laws of the other state will govern who will inherit your real estate located there, while the laws of your home state will govern who will inherit everything else.  This could result in different beneficiaries of your out-of-state real estate and the rest of your estate, leaving your family with quite a mess.

What Should You Do?

If you are married and you want your spouse to inherit all of your property, then the only way to be assured that this will happen is to consult with an attorney who is familiar with the inheritance laws in your state and any other state where you own real estate (yes, you may need to consult with two different attorneys).  The attorney will be able to review how all of your assets are titled and then help you determine the options for making sure that your spouse will be the only beneficiary of your estate.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Does Your Revocable Living Trust Reduce Your Estate Tax Bill?

Many people believe that once they set up and fund a revocable living trust, property held in the trust will avoid estate taxes after they die.  In reality, this may or may not be true depending on your choice of beneficiaries and the terms written into your trust agreement.

Single Trustmakers and Estate Taxes: 

If you’re single and you create and fund a revocable living trust, all of your assets held in the trust will be subject to estate taxes after you die if your beneficiaries are individuals.  In other words, if your beneficiaries are your children, your brothers and sisters, or your nieces and nephews, then the property they inherit through the trust will be included in your taxable estate.

On the other hand, if you’re single and you create and fund a revocable living trust and name one or more charitable organizations and no individuals as the beneficiaries, then the property distributed to the charities through the trust will pass free from estate taxes.

What if you’re single and you name both individuals and charities as beneficiaries of your trust after you die?  The portion of the trust property passing to the individual beneficiaries will be subject to estate taxes and the portion passing to the charities will be distributed free from estate taxes. 

Married Trustmakers and Estate Taxes: 

If you’re married and you create and fund a revocable living trust and all of the assets held in your trust pass to your spouse after you die, then the property passing to your spouse through the trust will not be subject to estate taxes.  This is true if the assets pass outright to your spouse or through the traditional “AB Trust” estate tax planning since the AB Trust strategy is designed to delay estate taxes until after both you and your spouse are gone.

On the other hand, if you’re married and you create and fund a revocable living trust and you name both your spouse and your children as the beneficiaries after you die, the portion of the trust passing to your spouse will be exempt from estate taxes and the portion passing to your children will be subject to estate taxes.  If you include one or more charitable organizations as beneficiaries, then the portion passing to the charities will be distributed free from estate taxes.

Do You Need a Revocable Living Trust?

If a revocable living trust in and of itself does nothing to reduce your estate tax bill, then why should you consider setting one up?  For three reasons:

1. To avoid probate – Assets held in your revocable living trust at the time of your death will avoid probate. Depending on your state of residence at the time of your death, this could save thousands of dollars in legal fees and court costs.

2. To plan for mental incapacity – If you become incapacitated, the disability trustee you name in your revocable living trust will be able to manage the trust assets for your benefit without the need for a court-supervised guardianship. Like avoiding probate, removing the need for a court-supervised guardianship could save thousands of dollars in legal fees and court costs, depending on your state of residence.

3. To keep your final wishes private – A revocable living trust is a private agreement that remains private after you die.

Final Thoughts on Revocable Living Trusts and Estate Taxes:

For many people a revocable living trust is the ideal way to organize their final affairs.  For married couples, aside from offering the benefits listed above, their revocable living trusts can be drafted to include AB Trust planning, which will delay the payment of estate taxes until after both spouses die.  For single people, while a revocable living trust will provide them with the benefits listed above, they will need to take additional steps such as gifting strategies and charitable planning to minimize their estate tax bill.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.