Monthly Archives: September 2020

Puerto Rico is a territory of the United States. Those born in Puerto Rico carry U.S. passports. But, from an estate planning perspective, they hold a unique place.

If a Puerto Rican is living in the United States, they are estate taxed just like other U.S. citizens. In other words, their taxable estate includes their worldwide assets, no matter where their assets are located. They also have the same estate tax exclusion as other U.S. citizens and residents, $11.58 million in 2020.

However, if they are living in Puerto Rico and if they only have U.S. citizenship due to their birth in Puerto Rico, then they are taxed as non-resident aliens. In other words, they are taxed only on their U.S.-situs assets, like real estate in the U.S. However, they would have a dramatically lower exclusion of only $60,000. This is the same as those who are non-resident aliens. By comparison, someone born in the United States, even if they live outside the United States, is taxed on their worldwide assets and gets an exclusion of $11.58 million.

Let’s look at an example:

Maria was born in Puerto Rico and it’s only due to this that she has a U.S. passport. Maria lives in Puerto Rico and does well for herself. Maria buys a vacation home in Miami worth $1 million. Maria has assets in Puerto Rico and elsewhere outside the United States worth $4 million, as well. If Maria dies under these circumstances, Maria will owe a federal estate tax on $940,000, the value of her vacation home in Miami, less her $60,000 exclusion.

Maria decides to move to Miami and live in what had been her vacation home. If Maria dies after the move, she would owe federal estate tax on $5 million, the value of all of her property worldwide. However, she would have an exclusion of $11.58 million. So, she’d owe no estate tax.

Puerto Ricans are special. They are estate taxed in a unique way, depending upon whether they are living in the United States or living in Puerto Rico. While living in the United States, they are treated just like any other American citizen. But, while they are living in Puerto Rico, they are treated differently. Puerto Ricans should be mindful of this difference and the estate tax burden they might owe by owning U.S.-situs assets (such as real estate in the U.S.) while they are living in Puerto Rico.

As Autumn arrives, it is not too early to consider end-of-year planning. Fundamental to end-of-year planning is deciding whether to shift income or expenses from this year to the next, to the extent possible.

All other things being equal, typically you would want to defer income (and the taxation on it) until the following year. However, if your income is lower in the current year, you may want to keep extra income in the current year to be taxed in a lower tax bracket and hence a lower marginal tax rate.

Similarly, typically you would want to take expenses in the current year rather than deferring them until the following year. However, with expenses you would need to consider their deductibility in each year. For example, in 2020 a single taxpayer has a standard deduction amount of $12,400 (and a married couple filing jointly has twice that at $24,800). In order for itemized deductions to give you a better result than the standard deduction, they would need to exceed that standard deduction amount of $12,400.

Let us assume that Betty Taxpayer will have the same income in both years. She has no other deductions in the current year. She is considering making a charitable contribution of some stock. Let us say next year Betty will have other itemized deductions in excess of the standard deduction amount. The existence of those other itemized deductions the following year would mean that her charitable deductions would not have to exceed the standard deduction amount of $12,400 to be deductible. She may want to defer gifting the stock until next year. (Note, in 2020 only, Betty may give up to $300 in cash to a public charity as an “above-the-line” deduction that need not be itemized.)

In addition to considering expenses and deductions, Betty should take into consideration whether her employer participated in the optional deferral of payroll taxes. Beginning September 1, 2020, employers can defer withholding the employee’s 6.2% payroll tax for those employees earning less than approximately $100,000 annually. Some employers, such as the military and the federal government are doing so. Many other employers are not doing so due to the complications involved. If Betty’s employer is deferring her payroll tax withholding, she will have larger paychecks than normal in the last four months of 2020. However, Betty’s paychecks in early 2021 will be smaller than normal to pay back the deferred withholding.

Betty should take all this into consideration, and more as she considers her end-of-year tax planning. Of course, if Betty will have more payroll tax withheld next year, she may find it more difficult to put money aside to make IRA contributions. Remember, you have until April 15^th to make your IRA contributions for the prior tax year.

End-of-year tax planning is just part of the planning process. Estate planning includes tax planning but also much more. Estate planning also considers ensuring your assets go to whom you would like them to go and how you would like them to go.

In the United States alone, the pandemic has infected nearly 7 million people and has killed nearly 200,000 of them. In today’s pandemic, it is more important than ever to make sure your estate planning documents are current. It is especially important to ensure your documents relating to your health are up to date. Those documents are the Health Care Power of Attorney, the Advance Directive, and the HIPAA Power.

In the Health Care Power of Attorney you appoint an “Agent” to make health decisions for you when you are not able to make those decisions for yourself. You can also appoint a successor Agent to make decisions if the first Agent is not available or is not able. You can appoint additional successors, too.

An Advance Directive expresses your wishes regarding end-of-life decisions. Without such a clear expression of your wishes, you must be kept alive even if you have no reasonable chance of recovery, even if doing so would prolong your suffering. Sometimes an Advance Directive is called a “Living Will” and often it is combined into the same document as the Health Care Power of Attorney.

The Health Insurance Portability and Accountability Act of 1996 mandates healthcare providers keep your protected health information confidential. While this is primarily a good thing, sometimes you want some people to have access to your protected health information. For example, you want your Health Care Agent to have access to your information so they can make informed decisions regarding your health. Also, you want fiduciaries such as the Agent under a Financial Power of Attorney and the successor Trustee of your Trust to be able to have access so they can know if they need to step in to manage your financial affairs, which is their duty. A HIPAA Power grants access to your protected health information to those whom you designate. In fact, without such a power, your loved ones might not even know you are in the ICU with COVID-19.

It is important to have these three documents, but it is also important to keep them up to date and to name successors in them. All too often in the current pandemic, the illness impacts more than one person in the family or locality. If there is no successor appointed (or that successor is also incapacitated) there can be delays in getting consents for different treatments or implementing end-of-life decisions.

Today’s pandemic is hard on all of us. Precautions like washing your hands, social distancing, and wearing a mask can make all of us safer. Keeping your estate planning documents up-to-date helps ensure that, if the precautions do not work, your loved ones and fiduciaries can help you through the illness and make it easier for you and your loved ones.

Even a little bit of a headstart can be extremely helpful in life. Those who start with little economic wealth, including many minorities and recent immigrants, face obstacles in obtaining a good education and building a business or a solid career. Those who have a headstart in life have an easier path to success and happiness. It doesn’t mean they will have everything handed to them on a silver platter. It just means they won’t start at the bottom of society’s ladder. The biggest factor in the wealth gap between minorities and non-minorities is inheritances, according to a report by the  Brookings Institution. This generational wealth is key to leveling the playing field so your children, grandchildren, and descendants can have a better life. The American dream is to work hard and provide your descendants with a chance for a better life than you had.

How do you provide a headstart in life for your loved ones? First, you can provide them with funds to give them a leg up. These funds could allow:

• A home to provide a solid footing
• A good education to allow a more rapid ascent up the career ladder
• Funds for starting a business
• Economic security

Second, you can leave those assets to them in a manner that protects those assets.

• You can protect those assets from the beneficiary’s mismanagement prior to when they have gained maturity
• You can protect the assets from the beneficiary’s creditors
• You can protect the assets from the beneficiary’s misuse of the assets

You can achieve all of this by using a trust. Let’s look at an example. Jayden and Alyssa have worked hard all their lives. Through their hard work (and a little good fortune) they have been able to build a tidy nest egg. They have two children, Jasmine and Isaiah (Ike). They want all the best for their children, as we all do, and they want them to be able to have an easier start than they did.

Jasmine is level-headed and is a straight-A student. They have greater concerns about Ike, who isn’t as studious as Jasmine. After speaking with their estate planning attorney, Jayden and Alyssa decide upon a plan tailored to their family’s unique needs. Upon the death of the survivor of them, their assets will be split into shares for their two children. Both trusts will have Alyssa’s trusted sister, Janet, as the trustee. Janet will be the trustee of Jasmine’s half until Jasmine is of a suitable age, which they think will be 35. At that age, Jasmine will be the trustee of her own share. Prior to that time, Janet will distribute for Jasmine’s education, support, and other needs. Thus, the assets will provide Jasmine a headstart in life while the assets are protected from misuse and unwise investments in her early adulthood. Then Jasmine can pay it forward to her children when she has them.

Ike is not as studious as Jasmine. In fact, Jayden and Alyssa have some concerns about Ike. Ike has been irresponsible. Ike had an accident while driving under the influence. Luckily, Ike wasn’t hurt, but the passengers in his car and the occupants of the other vehicle involved were injured and received judgments against him. Because of this, they’re giving Janet greater latitude as trustee for Ike’s share. Ike’s share provides distributions to him only in Janet’s discretion. This provides protection from Ike’s creditors. Janet can still make distributions for Ike’s benefit as she sees fit so he can still get a good start in life by getting an education, etc. This ensures the assets will be there for Ike’s benefit and won’t be wasted by Ike or seized by his creditors.

Jayden and Alyssa have worked hard and saved all their lives. They want their children to have an easier start than they did. So, they consulted with an estate planning attorney. After they are gone, they’re leaving their assets for their children in trusts with protection tailored to Jasmine and Ike’s needs. They built their family. They built their nest egg. Now they’ve consulted an estate planning attorney and built a unique plan tailored for their family which will pass on their nest egg to provide a headstart and protections for their family.

The star of multiple films, including the blockbuster superhero film “Black Panther,” died on August 28 of colon cancer. “Black Panther” by Marvel was nominated for 6 Academy Awards, including Best Picture. The film grossed over $1.3 billion worldwide. Chadwick Boseman became a role model for millions by playing Marvel Studio’s first Black superhero. Boseman also starred in films portraying real-life heroes, like Jackie Robinson (“42”), James Brown (“Get On Up”), and Thurgood Marshall (“Marshall”).

Boseman showed us that even those who appear to be young, vibrant, and heroic need planning. Boseman died at age 43. While little is known of Boseman’s estate planning, we do know that he had a wife, Taylor Simone Ledward, whom he met in 2015 and to whom he got engaged to in October 2019. Boseman was the youngest of three sons of his mother, a nurse, and his father, a textile factory worker.

Even those of us who are young need at least a basic estate plan. A basic estate plan includes:

• A Power of Attorney for Property which appoints someone as your Agent to manage your property, particularly when you’re not able to do so yourself.
• A Healthcare Power of Attorney which appoints an Agent for you to make healthcare decisions for you when you’re unable to make those decisions for yourself. This may be combined with a Living Will which expresses your wishes regarding end-of-life decisions.
• A Living Trust often is used to hold your property during lifetime. A Trust avoids the probate process and the cost, delays, and publicity which it might bring.
• A Pourover Will is used to transfer any property in the estate at death to the Trust for disposition according to its terms. The Will is also the document in which you nominate guardians for any minor children.
• A HIPAA (Health Insurance Portability and Accountability Act) Power, which grants access to your protected health information. Without this authority, loved ones and fiduciaries, such as your Agent or Successor Trustee, might not be able to know your health information, including whether you’re even in a hospital or other facility or if you’re no longer able to manage your affairs and your Agent or Successor Trustee needs to step in.

Chadwick Boseman performed his most famous roles after his diagnosis with colon cancer four years before his death. President Barack Obama tweeted: “To be young, gifted, and Black; to use that power to give [Black kids] heroes to look up to; to do it all while in pain – what a use of his years.”

What a use of his years, indeed. Chadwick Boseman demonstrated that one can inspire millions through your words and your deeds.