It’s Not Just About Death and Taxes—The Essential Legal Documents You Need for Incapacity Planning

Comprehensive estate planning is about more than your legacy after death, avoiding probate, and saving on taxes. It must also be about having a plan in place to manage your affairs if you become mentally incapacitated during your life.

What Happens Without an Incapacity Plan?

Without a comprehensive incapacity plan in place, a judge can appoint a guardian or conservator to take control of your assets and health care decisions.  This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship.  Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship or conservatorship proceeding.

What Happens to Your Finances During Incapacity?

If you are legally incapacitated, you are legally unable to make financial, investment, or tax decisions for yourself. Of course, bills still need to be paid, tax returns still need to be filed, and an investment strategy still needs to be managed.

So, you must have these two essential legal documents for managing finances in place prior to becoming incapacitated:

1.  Financial Power of Attorney: 

This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document.  

Financial Powers of Attorney come in two forms:  “Durable” and “Springing.”  A Durable Power of Attorney goes into effect as soon as it is signed, while a Springing Power of Attorney only goes into effect after you have been declared mentally incapacitated.

2.  Revocable Living Trust:

This legal document has three parties to it:  The person who creates the trust (you might see this written as “Trustmaker” or “Grantor” or “Settlor” – they all mean the same thing); the person who manages the assets transferred into the trust (the “Trustee”); and the person who benefits from the assets transferred into the trust (the “Beneficiary”).  In the typical situation you will be the Trustmaker, the Trustee, and the Beneficiary of your own revocable living trust, but if you ever become incapacitated, then your designated Successor Trustee will step in to manage the trust assets for your benefit.

Health Care Decisions Must Also Be Made:

If you become legally incapacitated, you won’t be able to make health care decisions for yourself. Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis situation and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years). 

So, you should have these three essential legal documents for making health care decisions in place prior to becoming incapacitated:

1.  Durable Power of Attorney: 

This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives your agent the authority to make health care decisions if you become incapacitated.

2.  Living Will: 

This legal document gives your agent the authority to make life sustaining or life ending decisions if you become incapacitated.

3.  HIPAA Authorization:

Federal and state laws dictate who can receive medical information without the written consent of the patient.  This legal document gives your doctor authority to disclose medical information to an agent selected by you.

Is Your Incapacity Plan Up to Date?

Once you get all of these legal documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them.  Instead, your incapacity plan must be reviewed and updated periodically and if certain life events occur - such as moving to a new state or going through a divorce. If you keep your incapacity plan up to date, it should work the way you expect it to 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.

Four Questions For Choosing the Proper Agent for Your Incapacity Plan

A common misconception is that estate planning equates solely to planning for death. However, planning for what happens after you pass away is only one piece of the estate planning process.  It is just as important to make a plan for what happens if you become mentally incapacitated.

What Happens Without an Incapacity Plan?                                                                                              

Without a comprehensive incapacity plan, a judge can appoint an agent (known as a guardian or a conservator) to take control of your assets and make all personal and medical decisions for you under a court-supervised guardianship or conservatorship.   The guardian or conservator must report all financial transactions to the court either on an annual basis or at least every few years.  The guardian or conservator is also typically required to obtain court permission before entering into certain types of financial transactions (such as mortgaging or selling your real estate) or making life-sustaining or life-ending medical decisions.  The court-supervised guardianship or conservatorship will then continue until you either regain capacity or die. 

Who Should You Choose as Your Financial Agent and Health Care Agent?

As you can see from the above discussion, a guardian or conservator has an important and involved role if you become incapacitated.

Creating an incapacity plan can help you order to avoid a court-supervised guardianship or conservatorship. 

Rather than having a judge decide, your incapacity plan will have you appoint one or more agents to carry out your wishes. There are two very important decisions you must make when putting together your plan:

• Who will be in charge of managing your finances if you become incapacitated? (Known as your “Attorney in Fact”); and

• Who will be in charge of making medical decisions on your behalf if you become incapacitated? (Referred to as your “Health Care Agent”.)

Factors to consider when deciding who to name as your financial agent and health care agent (who do not have to be the same people) include:

1. Where does the agent live?  With modern technology, the distance between you and your agent should not matter.  Nonetheless, someone who lives nearby may be a better choice than someone who lives in another state or country.

2. How organized is the agent?  The agent will need to be well organized to manage your health care needs, keep track of your assets, pay your bills, and balance your checkbook, in addition to being able to manage their own finances and family obligations.

3. How busy is the agent?  If the agent has a demanding job or travels frequently for work, then the agent may not have the time required to take care of your finances and medical needs.

4. Does the agent have expertise in managing finances or the health care field?  An agent with work experience in finances or medicine may be a better choice than an agent without it.

What Should You Do?

If you choose the wrong person to serve as your financial agent or health care agent, your incapacity plan is likely to fail and land you and your assets in a court-supervised guardianship or conservatorship. 

In order to create an incapacity plan that will work the way you expect it to work, you need to carefully consider who to choose as your agent and then discuss your decision with that person to confirm that they will in fact be willing and able to serve. 

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.  

Five Things You Need to Know About the Recently Enacted ABLE Act

On December 19, 2014, President Obama signed the Achieving a Better Life Experience Act (ABLE Act) into law.  The ABLE Act will allow certain individuals with disabilities to establish tax-free savings accounts that can be used to cover expenses not otherwise covered by government sponsored programs. These accounts can be a great alternative or supplement to special needs or supplemental needs trusts.

Here are five important things you need to know about the ABLE Act.

1. What is an ABLE account?  An ABLE account is similar to a 529 education savings account that helps families save for college.  It is a tax-free, state-based private savings account that can be used to pay for the care of people with disabilities.  Although income earned in the account will not be taxed, contributions to the account will not be tax deductible.

2. Who is eligible for an ABLE account?  Eligibility will be limited to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. If an individual meets these criteria and is also receiving benefits under SSI and/or SSDI, they are automatically eligible to establish an ABLE account.  If the individual is not a recipient of SSI and/or SSDI but still meets the age of onset disability requirement, they will still be eligible to open an ABLE account if the SSI criteria regarding significant functional limitations are met.  In addition, the disabled individual may be over the age of 26 and establish an account if the individual has documentation of their disability that shows the age of onset occurred before the age of 26.

3. What are the limits for contributions to an ABLE account?  Each individual state will determine the total limit that can be contributed to an ABLE account over time.  Although we’ll need to wait for regulations to know the exact amount that can be contributed, the Act states that any individual can make annual contributions to an ABLE account up to the gift tax exemption limit (which is $14,000 in 2015).  If the disabled individual is receiving SSI and Medicaid, the first $100,000 held in an ABLE account will be exempted from the SSI $2,000 individual resource limit.  If an ABLE account exceeds $100,000, the account beneficiary will be suspended from eligibility for SSI benefits but will continue to be eligible for Medicaid.  Upon the death of the account beneficiary, assets remaining in the ABLE account will be reimbursed to any state Medicaid plan that provided assistance from the day the ABLE account was established.

4. What types of expenses can be paid from an ABLE account?  An ABLE account may be used to pay for a “qualified disability expense,” which means any expense related to the beneficiary as a result of living with their disability.  These expenses may include medical and dental care, education, employment training, housing, assistive technology, personal support services, health care expenses, financial management, and administrative services. 

5. When will able accounts be available?  Although the ABLE Act was signed into law in December 2014, regulations will need to be established by the Department of Treasury before states can begin to set up procedures for managing ABLE accounts.  Once these regulations are issued (which is anticipated to occur later in 2015), each state will be responsible for establishing and operating their own ABLE program.

Since the money in an ABLE account can grow tax free and be accessed on a tax-free basis for qualifying expenses, these accounts could be a valuable resource for certain disabled individuals and their families. Although we’re waiting on regulations to be adopted, now is the time to begin thinking about whether an ABLE account is a good fit for your family’s 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. 

3 Powers to Consider Giving to a Trust Protector

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they include a trust protector who will have the ability to adjust the trust provisions as circumstances, beneficiaries, and governing laws change.

What is a Trust Protector?

A trust protector is an individual or group of individuals who are given the power to insure that the purposes and goals of the creator of an irrevocable trust are ultimately fulfilled.  Generally the trust protector may be a family member or friend (typically someone who is not a beneficiary or trustee of the trust), an unrelated trusted advisor, or a group of these individuals acting by majority or unanimous agreement.  The choice of who to name as the trust protector will depend on the trust creator’s wishes and the intended duration of the trust.

What Powers Should a Trust Protector Hold?

A trust protector can be given as few or as many powers as the trust creator desires.  While it may be tempting to give a trust protector a wide array of powers to deal with every possible future circumstance, the trust creator should carefully consider the specific purposes and goals for their trust and only give the trust protector powers that will further those purposes and goals. 

Regardless of a trust creator’s intent, below are three powers that all trust creators should consider giving their trust protectors:

1. Power to Amend Trust Provisions.  Some irrevocable trusts that are intended to continue for multiple generations begin as revocable trusts that only become irrevocable after the trust creator dies or at some other time in the future.  If the trust creator fails to update the trust due to changes in circumstances, beneficiaries, or governing laws while the trust is still revocable, a trust protector can fix these issues after the trust becomes irrevocable.

2. Power to Add, Remove and Replace Trustees.  Giving this power to the trust beneficiaries may defeat the trust creator’s intent since the beneficiaries may be inclined to hastily remove a trustee who does not give in to their each and every request. Instead, a trust protector can take an objective look at the trustee’s actions or inactions and determine if the trust creator’s intent is being fulfilled or derailed. 

3. Power to Change Trust Situs and Governing Law.  Since it is impossible to predict where the beneficiaries and trustees of an irrevocable trust will live in the future, this power is critical to insure that the trust will continue for as long as the trust creator intended and with minimum tax consequences.  Giving this power to the trust protector will allow an objective party to determine if the change will be beneficial or is necessary.

Final Thoughts on Trust Protectors:

Including a trust protector in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust.  Nonetheless, the trust protector should only be given powers that will insure the purposes and goals of the trust creator are ultimately fulfilled.

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.

5 Good Reasons to Decant a Trust

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws.

What is Trust Decanting?

When a bottle of wine is decanted, it is poured from one container into another.  When a trust is “decanted,” the funds from an existing trust are removed and distributed into a new trust that has different and more favorable terms. 

When Should a Trust Be Decanted?

Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting allows the following to be addressed:

Clarifying ambiguities or drafting errors in the trust agreement. 

As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent.  Decanting can be used to correct these problems.

1. Providing for a special needs beneficiary. A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits.  Decanting can be used to turn a support trust into a full supplementary needs trust.

2. Protecting the trust assets from the beneficiary’s creditors. A trust that is not designed to protect the trust assets from being snatched by the beneficiary’s creditors can be rapidly depleted if the beneficiary is sued.  Decanting can be used to convert a support trust into a full discretionary trust that the beneficiary’s creditors will not be able to reach.

3. Merging similar trusts into a single trust or creating separate trusts from a single trust. An individual may be the beneficiary of multiple trusts that have similar terms.  Decanting can be used to combine these trusts into one trust which will reduce administrative costs and oversight.  On the other hand, a single trust that has multiple beneficiaries who have differing needs can be decanted into separate trusts tailored to each individual beneficiary.

4. Changing the governing law or situs to a different state. Changes in state and federal laws can adversely affect the administration and taxation of a multi-generational trust.  Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.   

Final Thoughts on Trust Decanting:

Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust.  This will help to insure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense. 

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.

Who’s Going to Get It: Do You Really Know the Beneficiaries of Your Dynasty Trust?

Today many estate plans contain irrevocable dynasty trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they clearly define who will be included as trust beneficiaries at each generation.

Who Are Your Descendants?

In the past the definition of “descendant” was straightforward:  A person who can be traced back to a specific ancestor through the same blood lines.  But the modern family now encompasses much more than just blood heirs:

1. Adopted beneficiaries.  In your trust, should the definition of “descendant” include a minor child who is legally adopted by your child, grandchild, or great grandchild?  What about an adult who is legally adopted by your child, grandchild, or great grandchild?  What happens if your child, grandchild or great grandchild gives up their naturally born child for adoption, should your blood heir who has been adopted away from your family be included as your descendant?  You should consider specifically including or excluding adopted minor and adult beneficiaries in the definition of “descendant” used in your trust agreement.

2. Stepchildren.  In your trust, should the definition of “descendant” include a stepchild of your child, grandchild, or great grandchild who is never legally adopted by your heir but otherwise treated like one of his or her own?  While you may have the opportunity to get to know your stepchildren (and even your step grandchildren) and choose to specifically include them or exclude them in the definition of your descendants (in fact, you may want to include some and exclude others), it will be important to decide and communicate whether stepchildren in later generations should be included or excluded as beneficiaries of your trust.

3. Beneficiaries conceived using “assisted reproductive technology.”  In your trust, should the definition of “descendant” include a child, grandchild or great grandchild conceived using artificial insemination?  What about a child, grandchild or great grandchild conceived using a surrogate mother?  What about a child, grandchild or great grandchild conceived using an anonymous sperm or egg donor?  While no one knows what the future definition of “assisted reproductive technology” will encompass, the definition of “descendant” in your trust agreement should specifically include or exclude heirs conceived using assisted reproductive technology.

Carefully Defining Your Trust Beneficiaries Will Keep Your Heirs Out of Court:

Who may be your “descendant” twenty, thirty, or even fifty years into the future should be carefully considered when creating a trust that is intended to last for multiple generations.  Clearly defining the class of beneficiaries who will be entitled to receive distributions from your trust will allow for a smooth transition between generations and keep your heirs and trustees out of court.  

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.

How Powers of Appointment Can Improve Your Trust

Today many estate plans contain trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important for the trust creator to consider including powers of appointment in the trust agreement to allow trust beneficiaries to be added or excluded at each generation.

What is a Power of Appointment?

In broad terms a power of appointment is the right granted to an individual under the terms of a trust to change the provisions of that trust.

Powers of appointment can be given to the current beneficiaries or trustees of a trust or to an outside third party such as a trust protector.  They also come in many different forms and include powers that can be exercised while the individual is living (a “lifetime” power of appointment), or after the individual dies (such as a power of appointment exercised in the individual’s own will or trust, which is a “testamentary” power of appointment).

Powers of appointment can be as broad or limited as the trust creator desires.  In other words, the trust creator can give the power holder the ability to make broad changes to the trust or to make very limited changes under limited circumstances.

Examples of Powers of Appointment in Action:

Below are some examples of how a power of appointment can be used to change the beneficiaries of a trust:

1. The trust creator’s spouse can be given the power to include or exclude children, grandchildren, and other heirs as trust beneficiaries after the spouse dies.

2. The trust creator’s child can be given the power to include or exclude the child’s own heirs or the child’s spouse, siblings (brothers and sisters), or heirs of the child’s siblings (nieces and nephews) as trust beneficiaries after the child dies.

3. If the trust creator is married but doesn’t have any children, the trust creator’s spouse can be given the power to include or exclude the trust creator’s extended family members and one or more charities as trust beneficiaries after the spouse dies. 

These are of course only a few examples; the possibilities are truly endless for how powers of appointment can be used to change the terms of a trust.

Do Not Attempt to Draft Your Own Powers of Appointment:

If you are concerned about how your children, grandchildren, or even great grandchildren will eventually grow up, you can build flexibility into your trust by giving your spouse or other beneficiaries the ability to include or exclude heirs through the use of powers of appointment. 

But beware:  Poorly drafted powers of appointment can create all sorts of gift tax and/or estate tax problems for your trust beneficiaries and trustees. 

Therefore, powers of appointment should only be drafted or included in a trust with the assistance of an experienced estate planning attorney. 

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 Wrong Successor Trustee Can Derail Your Final Wishes

Today many estate plans contain irrevocable trusts that will continue for the benefit of a surviving spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is crucial to choose the right succession of trustees.

Should You Name Family Members as Your Successor Trustees?

Choosing the right succession of trustees for your irrevocable trust that is intended to continue for years is critical to its longevity and ultimate success. 

Initially you may think that a family member, such as your spouse, a sibling, or an adult child, will be the best person to serve as your successor trustee. You may think family members will better understand the varying needs of your beneficiaries and keep the costs of administering the trust down.  

But in reality family members will not be able to fulfill all of their fiduciary obligations without hiring legal, investment, and tax advisors.  The expense of all these outside advisors will add up and can ultimately cost more than a corporate trustee, such as a bank or trust company. One advantage of a bank or trust company is that they can often meet all fiduciary obligations under one roof for one fee.  In addition, a corporate trustee will act in an unbiased manner in making distributions and investments which will benefit both the current and remainder beneficiaries, and a corporate trustee will not get sick or too busy to oversee the day-to-day administration of the trust. 

Should You Give Your Beneficiaries the Power to Remove and Replace Trustees?

Forcing your trust beneficiaries to be stuck with the wrong trustee without a reasonable means for removing and replacing the trustees may cause an expensive visit to the courthouse.

It is necessary to build provisions into your trust agreement which will allow your beneficiaries or an independent third party, such as a trusted advisor or a trust protector, to remove and replace the trustees without court intervention.  The fact that the trustee can be removed and replaced without going to court is often an incentive for the trustee to work out any differences with the beneficiaries.

What Should You Do? 

1. Selecting a successor trustee is one of the most important decisions you will make when creating an irrevocable trust or a dynasty trust.  While family members may be your initial choice, you should give serious consideration to designating a corporate trustee, either alone or as a co-trustee with a family member or trusted advisor. 

2. A corporate trustee will act as a neutral party to oversee discretionary distributions and investment strategies that benefit both current and remainder beneficiaries.  To create flexibility, specific beneficiaries (such as current income beneficiaries) or a trust protector should be given the right to remove the corporate trustee and replace it with another corporate trustee.

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.

4 Tips for Avoiding a Will or Trust Contest

A will or trust contest can derail your final wishes, rapidly deplete your estate, and tear your loved ones apart.  But with proper planning, you can help your family avoid a potentially disastrous will or trust contest.  

If you are concerned about challenges to your estate plan, consider the following:

1. Do not attempt “do it yourself” solutions.  If you are concerned about an heir contesting your estate plan, the last thing you want to do is attempt to write or update your will or trust on your own.  Only an experienced estate planning attorney can help you put together and maintain an estate plan that will discourage lawsuits. 

2. Let family members know about your estate plan.  When it comes to estate planning, secrecy breeds contempt.  While it is not necessary to let your family members know all of the intimate details of your estate plan, you should let them know that you have taken the time to create a plan that spells out your final wishes and who they should contact if you become incapacitated or die.

3. Use discretionary trusts for problem beneficiaries.  You may feel that you have to completely disinherit a beneficiary because of concerns that a potential beneficiary will squander their inheritance or use it in a manner that is against your beliefs.  However, there are other options than completely disinheriting someone. For example, you can require that the problem beneficiary’s share be held in a lifetime discretionary trust and name a third party, such as a bank or trust company, as trustee.  This will insure that the beneficiary will only be entitled to receive trust distributions under terms and conditions you have dictated.  You will also be able to control who will inherit the balance of the trust if the beneficiary dies before the funds are completely distributed.

4. Keep your estate plan up to date.  Estate planning is not a one-time transaction – it is an ongoing process.  Therefore, as your circumstances change, you should update your estate plan.  An up to date estate plan shows that you have taken the time to review and revise your plan as your family and financial situations change.  This, in turn, will discourage challenges since your plan will encompass your current estate planning goals.

By following these four tips, your heirs will be less likely to challenge your estate planning decisions and will be more inclined to fulfill your final wishes. If you are concerned about heirs contesting your will or trust, you should seek the professional advice now. 

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.

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.