Author Archives: Robert Mondo

Settling an estate after a death can be expensive. However, many people aren’t always aware of the costs that will need to be paid by their estate after their death. These costs include settling a variety of debts incurred during the client’s lifetime, as well as costs and taxes incurred due to the client’s death.

Costs and taxes that need to be accounted for include the following:

• Funeral costs. Modest funerals can run between $5,000 and $10,000.
• Any remaining medical bills or long-term care costs incurred during the decedent’s lifetime. End-of-life medical expenses, whether hospital bills or long-term care costs.
• Credit card bills and other debts incurred by the decedent. This can also include mortgages, student loans, and other debts.
• Federal estate taxes and state death taxes. Twenty states have a state estate tax or a state inheritance tax.
• Federal and state income taxes. The decedent’s estate will be responsible for paying the taxes for the final year of the decedent’s life. Further, the estate and/or trust will owe income taxes during any period of administration.
•  Probate and administrative costs. These include such items as legal fees, appraisal fees, and executor or trustee fees.  Having a living trust avoids these expenses
• Payment of cash bequests whether to family, friends, or to fulfill planned giving promises made to non-profits.

Without taking these costs into account during the estate planning process, the executor of the estate (or trustee of the trust) may be forced to sell precious property, possessions, or the family business in order to cover theses costs.

Bob

Elder financial abuse is running rampant, and identity theft is part of the problem. You may assume that the vast majority of identity theft cases involve hackers and online scams. In fact, a lost or stolen wallet or purse is at the core of around half of the cases that have a known cause.

If you take the right steps, you can foil identity thieves who may walk away with your wallet or purse.

Don’t Carry Sensitive Information

There is no reason to carry around sensitive information that an identity thief could use. For example, it is very likely that you know your Social Security number by heart. There is no reason to carry your Social Security card around with you in your purse or wallet.

Committing other types of information to memory can help prevent identity theft. Some people jot down important information like Internet account passwords and bank account PINs. Don’t keep written records in your wallet. Memorize these numbers instead.

There are those who carry checkbooks around with them. In the era of the ATM card, this is really not necessary. Keep your checkbook at home and out of your purse, and don’t keep blank checks in your wallet.

These are some specific suggestions. In general, inventory the things that you are carrying in your wallet or purse. Are you carrying anything that would be of value to an identity thief? If the answer is yes, stop carrying it around with you. It’s as simple as that.

Make Copies

Make copies of the things that you are carrying in your wallet and store them in a secure place. These would include your driver’s license, your credit cards, insurance cards, etc. If you take this step you will know exactly what has fallen into the wrong hands if you lose possession of your wallet or purse.

Notify Appropriate Parties

As soon as you recognize that you are no longer in possession of your wallet or purse, notify all interested parties. This can include credit card companies, banks, the DMV, and insurance providers.

File a police report so that the authorities are aware of the fact that your wallet or purse is out there.

You should also contact the three major credit reporting agencies and request a security freeze on your files.

This Can Happen To You

Common sense can go a long way toward limiting the damage that can be done if your wallet or purse is lost or stolen. This is not something that only happens to other people. It could happen to you, and you should make sure that you take all the right steps to protect yourself.

Bob

There are many milestones on the way to adulthood. Almost every American remembers those rites of passage, like getting a driver’s license. The age of majority is 18 (in every state of which I am aware) and is one of these milestones. It is the age at which an individual may make decisions for themselves concerning a wide range of issues, such as contracts, health care, and disposition of assets upon death. It is the age at which every child should have their own estate plan, even if they do not have much in the way of assets. Encourage your clients to have their children see you to do the child’s own estate planning as soon as they reach 18.

While there may be the rare affluent 18-year-old (such as Justin Bieber), for most people, that age assets are not the primary issue. The primary concerns relate to health care. Who is allowed to make health care decisions for the new adult? Who has access to their health information? What would happen in the unthinkable event of a situation requiring end-of-life decisions? These questions can be answered simply and elegantly by a simple estate plan.

The typical package for a newly-minted adult would be:

A Health Care Power of Attorney. This document is also called a Health Care Proxy in some states. It is a document which designates who can make decisions for the person if they are unable to make decisions for themselves. Such a document will enable the power holder to be more readily recognized as the decision-maker, even if state law might allow them to make decisions.

A Living Will. In many states, this is combined with a Health Care Power Of Attorney. As you know, it expresses the individual’s preferences regarding end-of-life decisions. Unfortunately, young adults can face these issues, too.

A Property Power of Attorney. Of course, this allows the agent to make decisions over the property of the newly-minted adult. This Power Of Attorney can be a convenience when the principal is away at school or traveling abroad. Otherwise, who would be able to sell their car or sublet their apartment? Of course, if the principal is more concerned about independence than about these conveniences, the POA may be drafted as “springing” (in most states), i.e., only effective upon the principal’s incapacity.

Of course, if the young adult has a child of their own, a will is necessary for them to nominate who would be guardian of that child in the event of their death. If the young adult has substantial property, a more robust estate plan may be in order.

Planning is the adult thing to do. It makes life easier for everyone involved.

Lifetime gifts of between $1 million and $5 million during 2012 escape gift tax. But the way the Tax Code is now written, if the donor dies in 2013 or later, the applicable exclusion amount reverts to $1 million. As a result, lifetime gifts of over $1 million are “clawed back” into the transfer tax system without the protection of a $5 million applicable exclusion amount, and presto, there’s an estate tax on what had been free of gift tax. Congress could fix this, and even seems to want to, but ongoing legislative dysfunction will darken the chances.  I’ve run some numbers on this. Here’s what I found.

Worst Case Scenario

The worst that happens is that a transfer tax on a lifetime gift is paid at death instead of at the time of the gift. So, at first blush, the specter of clawback is really, at worst, neutral.

The Upside

In the time between the date of the gift and the donor’s death, post-gift appreciation is removed from the taxable estate.

Lifetime gifts, including those subject to clawback, can reduce estate taxes in other ways. For example:

• If the gift is to a grantor trust, the donor could be paying the income taxes, without being treated as making additional gifts.
• If the gift is of a fractional interest in property, that might create valuation discounts.
• Gifts to grantor trusts can pave the way for a later sale of property to that trust.

The Downside

But there’s more to the story that we should be aware of. Clawback gifts can have a downside that’s easy to miss.

Estate tax apportionment might get skewed in a clawback situation. The recipients of the lifetime gifts won’t suffer the cost of a gift tax, and they might not suffer any of the clawback estate tax, either, under state tax apportionment statutes. If those receiving the lifetime gift aren’t the estate’s beneficiaries in the same proportions, then someone else picks up the estate tax bill.

The estate’s beneficiaries won’t be happy. Therefore, it may be wise for the donor to enter into an agreement with the donees whereby they agree to pay over to the estate an appropriate share of the estate tax in the event of clawback.

Possibly, such an agreement also decreases the taxable value of the gift by the actuarial present value of the increase in estate tax caused by clawback. In Succession of McCord v. Commissioner, No. 03-60700, CA-5 (Aug. 22, 2006), the U.S. Court of Appeals for the Fifth Circuit held that the contingent estate tax payable under Internal Revenue Code Section 2035 reduced the value of the gift in the net gift computation. The court rejected the IRS’ argument that the contingent estate tax liability was speculative. Thus, it’s possible for an estate tax to reduce the value of a taxable gift. And while the estate tax in McCord was contingent on death occurring within three years of the date of gift, the clawback effect isn’t contingent under the law as it’s now written. Taking possible Congressional action into account would require speculation.

Without such an agreement, the estate tax bite on the estate might be so great as to bankrupt it.

In addition to a potential negative effect on estate beneficiaries, states could also suffer a revenue loss. States that would have a pickup tax if the pre-Economic Growth and Tax Relief Reconciliation Act estate tax system comes roaring back (as it’s scheduled to do after 2012) would get less with a lifetime gift. That’s because the state death tax credit is based on the taxable estate without regard to lifetime gifts.

Let’s hope Congress fixes the problem. In the meantime, don’t let clawback stop the gifts; just be aware of what you should do differently.

Often, one of the most difficult choices for a client to make is the selection of people to make decisions for them. These fiduciaries may have great control over the client’s affairs, typically at times when the client would be most vulnerable or already gone.

Let’s take a look at the various fiduciaries a client might name:

• Successor Trustee. This person manages assets in the trust. The Trustee might manage the assets during the client’s incapacity and after the client has died. A Trustee might also manage assets being left for a child, whether a minor or even an adult child.
• Agent under Financial Power of Attorney. A Financial Power of Attorney allows the Agent to make decisions and actions for the client, who is the Principal. The power may be “immediate,” which would allow the Agent to act for the Principal even when the Principal is well. Conversely, the power may be “springing,” or only effective upon the incapacity of the Principal.
• Successor Owner. A 529 plan might have a Successor Owner in addition to a Beneficiary. The Successor Owner could take the funds and use them however they want and does not have to use them for the benefit of the Beneficiary. A Trust could be the Owner of the 529 plan, in which case the Trustee would have an obligation to use the plan for the Beneficiary.
• Personal Representative. A client may have assets outside of a Trust which may need to be managed after their death. The person who would manage these assets prior to distribution under the Will is the Personal Representative.
• Agent under a Health Care Power of Attorney. A Health Care Power of Attorney allows the Agent to make health decisions for the Principal when the Principal is unable to make them.
• Guardian. If the client has young children or others for whom they have caregiving responsibility, their Will can nominate a person to become the new Guardian.

Clients should be advised to take care in choosing people for these roles who are appropriate and up to the task. For example, the financial management roles, such as the Trustee, Personal Representative, Agent under the financial power of attorney, etc., ideally should be organized and able to manage complicated tasks. On the other hand, the Agent under the Health Care Power of Attorney and the Guardian have different primary duties. Their personal caretaking ability may be more important than their financial ability.

There are many instances in which these decision-makers may have to work together. For example, the Guardian of a minor child will have to work with the Trustee of a Trust for the child’s benefit.

The choice of any fiduciary is of utmost importance and, perhaps most importantly, the client should trust the person and their judgement.

When a revocable living trust is created, you as the grantor will generally serve as both the trustee and the beneficiary while you are alive and well. If you become unable to make sound financial decisions late in your life, the successor trustee that you name in the trust agreement will be empowered to administer the trust. This raises an interesting question: Can the successor trustee purchase property that has been conveyed into the trust?

Envision a hypothetical scenario. Let’s say that Ann can no longer make her own financial decisions. Her daughter, Jill, is the successor trustee of Ann’s revocable living trust. Ann is residing in a long-term care facility and it is quite expensive. Ann’s home is titled in the revocable living trust. This asset must be sold so the proceeds can be used to pay for the long-term care that Ann is receiving. Jill doesn’t want to sell the home to a third-party. She would like to purchase the home herself, but she is not sure she is allowed to do so, since she is the trustee. She is concerned about “self-dealing.” The trustee may be prevented from purchasing property that has been conveyed into the trust because it may not be in the best interests of current and future beneficiaries. Family members who have a financial interest in the trust would certainly scrutinize any purchase of trust property by the successor trustee.

The answer to the question of “self-dealing” depends upon the terms of the trust. There is a section in the trust agreement titled “Trustee Powers.” This section could possibly grant the trustee the power to purchase trust property as long as she is paying fair market value.

The trust may have a “Trust Protector,” who is an unrelated person who is given extraordinary powers over the trust to remove conflicts and resolve situations like this. It may be possible for the Trust Protector to amend the terms of the trust to allow the purchase of the home. This will all depend on the way the original trust agreement was drafted.

What do you do if you are a successor trustee who is in a situation such as this one? The wise course of action would be to put the purchase on hold until you discuss the matter with me.

Bob

In an effort to make things easier for their loved ones, people sometimes enter into prepaid funeral contracts. The idea is that you pay for all of your own funeral and burial or cremation expenses in advance. When you pass away, your family notifies the service and the service handles everything.

When you enter into the contract you will have the opportunity to make specific choices with regard to the details of your funeral and burial or cremation. The service is legally compelled to deliver in accordance with the terms of the contract.

A Closer Look

This may sound like a simple solution on the surface. However, there are significant problems with these prepaid funeral contracts. For one thing, there are companies with unscrupulous intentions. These services are required by law to place payments into trusts or insurance policies. This doesn’t always happen. When the assets remain in hand, the people behind the service can abscond when the time is right.

Short of flat-out robbery, prepaid funeral services can take advantage of clients in other ways. Shortchanging would be one of them. For example, you could pay for a casket of a certain quality in advance. A far inferior product could ultimately be delivered. Or, you may pay for a certain number of limousines of a particular size. An entirely different assemblage of vehicles may arrive. Floral arrangements may come up short of the mark, and other shortcuts may be taken.

If you were to enter into a prepaid funeral contract in one area of the country and die elsewhere, you may ultimately receive nothing for your money. The contract could be tied to services provided by specific local entities.

Avoid the Middle Man

When you enter into a prepaid funeral contract you are paying someone to make arrangements that could be made directly. As a result, you are paying more for the actual products and services because the intermediary must make a profit. This is why prepaid funeral services exist. Because of the middle man you are overpaying from the start. You are also surrendering the opportunity to earn interest on the money that you have set aside for your final arrangements.

Viable Alternative

Instead of entering into a prepaid funeral contract, you could place adequate resources into a payable-on-death account. You name a trusted heir as the beneficiary. All of your heirs should be aware of this arrangement. After you pass away, the beneficiary assumes ownership of the resources in the account. Probate is not a factor, so the assets are immediately available to cover your final expenses. If you discuss your preferences with your beneficiary in advance, he or she will carry out your specific wishes when the time comes.

If you go this route there will be no surprises. Everything will go according to plan as you leave behind a turnkey, risk-free postmortem situation.

Bob

Benjamin Franklin is well known for his quote, “In this world nothing can be said to be certain, except death and taxes.” Franklin wrote and spoke many witty sayings relating to mortality issues, some humorous, some serious.

His many roles in life, besides being one of the U.S. Founding Fathers, an inventor and scientist, included newspaper editor, printer, and book publisher. In 1728, aged 22, Franklin wrote what he hoped would be his own epitaph:

The Body of B. Franklin Printer; Like the Cover of an old Book, Its Contents torn out, And stript of its Lettering and Gilding, Lies here, Food for Worms. But the Work shall not be wholly lost: For it will, as he believ’d, appear once more, In a new & more perfect Edition, Corrected and Amended By the Author.

Franklin’s actual grave, however, as he specified in his final will, simply reads “Benjamin and Deborah Franklin.” Yes, he was married, although the common-law Mrs. Franklin did not make the historical mark of Mrs. Martha Washington or Mrs. Abigail Adams.”

In celebration of his birthday on January 17, 1706, here are some of Franklin’s choice morsels of wisdom on life and death:

“I wake up every morning at nine and grab for the morning paper. Then I look at the obituary page. If my name is not on it, I get up.”

“If you would not be forgotten as soon as you are dead, either write something worth reading or do things worth writing.”

“Some people die at 25 and aren’t buried until 75.”

“Life’s Tragedy is that we get old too soon and wise too late.”

“I guess I don’t so much mind being old, as I mind being fat and old.”

“When you’re finished changing, you’re finished.”

“I look upon death to be as necessary to our constitution as sleep. We shall rise refreshed in the morning.”

“He that raises a large family, does, indeed, while he lives to observe them, stand a broader mark for sorrow; but then he stands a broader mark for pleasure too.”

“For having lived long, I have experienced many instances of being obliged, by better information or fuller consideration, to change opinions, even on important subjects, which I once thought right but found to be otherwise.”

Lastly, these moving words were spoken by Benjamin Franklin at the funeral of a friend:

“We are spirits. That bodies should be lent us, while they can afford us pleasure, assist us in acquiring knowledge, or in doing good to our fellow creatures, is a kind and benevolent act of God.

When they [our bodies] become unfit for these purposes and afford us pain instead of pleasure, instead of an aid become an encumbrance, and answer none of the intentions for which they were given, it is equally kind and benevolent, that a way is provided by which we may get rid of them. Death is that way.

Our friend and we were invited abroad on a party of pleasure, which is to last forever. His chair was ready first and he has gone before us. We could not all conveniently start together; and why should you and I be grieved at this, since we are soon to follow, and know where to find him.”

Pretty interesting stuff.

Bob

When considering different estate planning strategies and which direction to take, it’s important to consider the impact on basis. “Basis” is the benchmark used for income taxation.

What does income tax basis have to do with estate planning? Lots! Property included in your taxable estate at your death gets a “step-up” in basis to its value at your death. (Certain property like IRAs don’t get this step-up.) This article will lay the groundwork on basis. What is it? When is it adjusted? Etc.

Let’s say you purchase an asset. The amount you pay for the asset is your basis in the asset. That cost basis may be adjusted by real estate commissions or other expenses in the acquisition process. Let’s take an example. Bob negotiates to buy an apartment building for $1 million. He spends $100,000 on legal fees, surveys, title insurance, and commissions in the purchase of the building. His basis in the building is $1.1 million.

Let’s assume ¾ of the value of the purchase is the building and ¼ is the land. That means that Bob’s starting basis in the building is $825,000. Bob spends $137,500 on a new roof and other capital improvements, increasing the basis in the building to $962,500 and in the whole property to $1,237,500.

Over the course of time, Bob takes depreciation deductions. These deductions reduce his basis in the building. Bob’s starting basis in the building was $825,000, to which he added $137,500, for a total of $962,500. Bob’s depreciation is $35,000 per year because the building is depreciated over 27.5 years. So, each year the building is in service, Bob’s basis will decrease by $35,000, assuming he makes no other improvements or other adjustments to basis. After ten years, Bob’s basis is decreased by $350,000 due to the depreciation. So, his basis in the property in ten years will be $1,237,500 less $350,000, or $887,500.

If Bob sells the property, he’ll recognize gain to the extent the purchase price is over his basis of $887,500. Any gain will be taxed as ordinary income to the extent of the depreciation he took of $350,000. This is the downside of depreciation. It’s great when you’re taking the income tax deductions, but it’s painful to have your basis lowered and the gain recaptured as ordinary income. Let’s assume the value of the property after ten years is $2 million. Bob would recognize gain of $1,112,500, of which $350,000 would be recaptured as ordinary income and the remainder would be long-term capital gain. Let’s assume Bob would pay a combined state and federal income tax of 40% on ordinary income and 25% on capital gain income. That means Bob would pay tax of $140,000 on the $350,000 ordinary income portion and $190,625 on the $762,500 taxed at long-term capital gain rates. Thus, Bob’s total income tax if he sold the property would be $330,625, leaving $1,669,375 after income tax.

Before he can sell the property, Bob dies and leaves everything to his daughter, Emily in a Living Trust. Emily receives the property with a basis of $2 million, its value at the date of Bob’s death. The depreciation Bob took is wiped away. If Emily wishes to sell the property for $2 million, she’d pay no income tax. If she wishes to continue holding it, she’d get to start depreciating from a new, higher baseline.

More to follow.

Bob

Recently, Brittany Manyard, who had advocated for the right to “death with dignity” committed suicide by taking medication prescribed by a physician and designed to hasten her death. Manyard had lived in California and was diagnosed with brain cancer. Manyard chose to move to Portland, Oregon, because Oregon allows assisted suicide while California does not. Here is the link to CNN’s story.

Assisted Suicide, otherwise known as “Death with Dignity,” is legal in four U.S. states. In three of those states, Oregon, Vermont, and Washington, there are state statutes which allow for the assisted suicide, such as the Death with Dignity Act in Oregon. In the fourth state, Montana, the state Supreme Court found that there was a right consistent with the right a patient is afforded by statute in the other states. Death with Dignity is also permitted in several foreign countries, such as Luxembourg, the Netherlands, and Switzerland.

Oregon had the first statute (and the other states followed with substantially similar legislation).  In Oregon, a person must be diagnosed as terminal (expected to die within 6 months) by two physicians, must have mental capacity, and must have repeatedly expressed the desire to end their lives. The physician then may prescribe the patient with the medication designed to hasten their death. Patients often choose to take this course of action because it gives them a sense of control over their own destiny. In 2013, 122 people were prescribed medication under the Oregon Death With Dignity Act while 71 people took their lives with the prescriptions.

The four U.S. states which allow Death with Dignity require that a patient be a resident of the state. However, as with Manyard, someone from another state could relocate to one of those four states. While taxes might be the last thing on a terminal patient’s mind, it should be noted that three of the four states which allow Death with Dignity have a state estate or inheritance tax. Montana is the only state which allows assisted suicide and does not have a separate inheritance tax. So, if your terminally ill client wishes to relocate in order to have advantage of Death with Dignity laws in another state, Montana may be the best choice, at least from a tax perspective.