Make an Achievable 2015 New Year’s Resolution – Get an Estate Plan Checkup!

With 2015 right around the corner, it’s time to start thinking about your new year’s resolutions.  

It doesn’t matter whether you have an estate plan or don’t, one important item to add to your list is getting an estate plan checkup.

Don’t Have an Estate Plan?  

If you don’t already have an estate plan, then getting one in place should be at the top of your 2015 new year’s resolutions.  

Why?  Because without an estate plan, you and your property may end up in a court-supervised guardianship if you become incapacitated, and your property and your loved ones may end up in probate court after you die.  

Worse yet, if you don’t take the time to make your own will, then the state where you live at the time of your death will essentially write one for you, and it most likely won’t divvy up your property the way you would have.  

A common misconception is that estate planning is only necessary for wealthy people. But this simply isn’t true – anyone with a bank or a retirement account, a home, or a family needs to make a plan for what happens if they become incapacitated or when they die. Of course the complexity of a plan will vary depending on your circumstances, but all estate plans should be put together with the help of an attorney who is experienced with the legal formalities required to create a valid will, trust, health care directive, and power of attorney in your state.

How Old is Your Estate Plan?

Do you already have an estate plan?

If you do, then please pull your documents out of the drawer, dust them off, and look at the date you signed them.  

Were your documents signed in the 80s or 90s, or, worse yet, before 1980?  Then please run, don’t walk, to an estate planning attorney, because your documents are terribly out of date and need to be brought into the new millennium as soon as possible.  

Did you sign your documents between 2000 and 2009?  Aside from the federal estate tax exemption jumping from $675,000 to $3,500,000 during that time period, state estate taxes disappeared in many states. Because of the significant changes in federal and state estate taxes, documents from this time period can be out of date and need to be tweaked in some shape or form.  

Did you sign your documents during 2010, 2011, or 2012?  Federal estate taxes, gift taxes, and generation-skipping transfer taxes went through major changes during these years, and “portability” of the federal estate tax exemption between married couples was introduced.  Unfortunately, while your estate planning documents may only be a few years old, they very likely do not take advantage of the opportunities made available from recent changes in federal tax laws.  And, it’s not just tax laws that are changing – modifications to state laws governing wills, trusts, health care directives, and powers of attorney may warrant some revisions to your estate planning documents as well.

And last but not least, regardless of what year you signed your estate planning documents, think about all of the changes in your life since you signed them.  Did you get married or divorced, have a child or two or a grandchild or two, or move to a new state?  Did you sell your business, retire, have a significant change in assets, or win the lottery?  Any major changes in your family or financial situation will certainly have an affect on your estate plan.

Estate Planning is Not a One Shot Deal:

Estate planning is not a static event that you grudgingly do once and then forget about it.  On the contrary, estate planning is a continuing process, because life is a moving target that is full of constant change, so your estate plan needs to change as your life changes.  

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 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.