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As 2020 draws to a close and a new year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2020 held plenty of surprises with coronavirus and an election, it was a relatively quiet year for legislative changes. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning

Applicable Exclusion rises from $11.58 million in 2020 to $11.7 million in 2021.

GST Exemption rises from $11.58 million in 2020 to $11.7 million in 2021.

Annual Exclusion for present interest gifts remains at $15,000.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $159,000 in 2021.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $24,800 in 2020 to $25,100 in 2021

Single, increases from $12,400 in 2020 to $12,550 in 2021

Head of household, increases from $18,650 in 2020 to $18,800 in 2021

State and Local Tax (SALT) deduction cap remains at $10,000 in 2021

The income tax brackets also creep slightly higher, as well.

As you plan for 2021, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $14,000 of charitable contributions to their church or alma mater each year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 of deductions and they’d be better off taking the standard deduction ($25,100 in 2021). Rather than giving $14,000 for each of three years to charity, they could give 3 x $14,000 ($42,000) in one year and they’d get a much better tax result. If they gave $42,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $52,000 of deductions instead of the standard deduction of $25,100. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,100 in 2021). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $52,000 of deductions instead of $25,100, an increase of $26,900. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them nearly $10,000 in taxes.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2021!

A beneficiary designation instructs where the asset goes upon your death. Some important assets which transfer by beneficiary designation are IRAs, 401(k)s, and life insurance. These assets could be a large part of your overall assets, so it’s important to make sure those beneficiary designations complement your overall estate plan. These designations control the disposition of the asset, notwithstanding the fact that your Will or Trust has terms that conflict with it. For example, let’s say your Will or Trust leaves everything to your two children. However, you have an asset, like an IRA, which designates your mother as the beneficiary. Perhaps the designation predates the birth of your children. In that scenario, your IRA would go to your mother and not to your two children. That’s why it’s important to check beneficiary designations on assets that have them.

Many other assets, such as a bank account or a brokerage account could have a “POD” (Pay on Death) or “TOD” (Transfer on Death) designation. Like a beneficiary designation, a POD or TOD designation supersedes the instructions which you’ve laid out in the rest of your estate plan, such as in your Will or Trust.

There’s nothing inherently wrong with TOD, POD, or beneficiary designations. When used properly, they can be a simple, effective part of your overall plan. However, it’s important to coordinate your entire estate plan and consider the impact of each part on the other.

It’s easy for a plan to become inconsistent with your wishes when you use beneficiary designations, TOD, or POD because the designations are fixed even as asset values change. For example, let’s say Mary intends to leave her assets to her three children equally. Mary has a small brokerage account with a POD to one of her children, Betty. Mary doesn’t think anything of this, because there’s language in her Trust which considers what Betty receives from the brokerage account. However, when the brokerage account going to Betty skyrockets in value, Mary’s Trust can no longer make sufficient adjustments because it doesn’t control sufficient assets to balance out the brokerage account going directly to Betty.

However you choose to leave your assets, it’s important you consider changes in your wishes, changes in asset values, etc. If you want your wishes carried out, it’s important to keep your entire plan up-to-date and consider how changes in asset values might have a substantial impact on your plan.

Every state has laws controlling what happens to your assets if you die owning them in your name and don’t leave instructions indicating what you want to happen to those assets. Those laws are called “intestate succession” laws. While they are designed to cover what people will want generally, they often aren’t what you want to happen in your precise situation. For example, state law might leave the assets equally to your children outright. You may prefer unequal shares for your children due to your situation. Also, you may prefer to have the assets held in trust. For example, a beneficiary might have special needs and an outright distribution could deprive them of needs-based benefits. A will is how you leave instructions to override the intestate succession laws. If you have assets in your name at death, they will be subject to probate and will be controlled by your will, if it exists, or intestate succession.

However, you can have your assets owned by a revocable trust. If you do that, your assets won’t be in your name at death and they won’t have to go through the probate process. The probate process may be more or less expensive and time-consuming depending upon the jurisdiction. But, it’s almost always a public process. A revocable trust allows for streamlined management of your assets. While you’re alive and well, typically you’d be the trustee, in other words, the person managing those assets. Upon your incapacity, the person you’ve chosen as your successor trustee would step into that role. This incapacity protection can be invaluable. It’s much easier than if you don’t have a trust holding your assets.

Whether you’ve chosen a will or a trust as the engine of your estate plan, it’s important to re-examine your plan periodically to be sure it’s doing what you want. Are you comfortable with the successor trustees who would take over in the event of your incapacity? Are you comfortable with who would get your money, when, and how?

Many things can happen in the course of a year. This is especially true in a year like this one! It’s good to take a look at your plan and make sure it’s still consistent with your wishes.

This is the first in a two-part series of articles on updating your plan. This first article examines the importance of updating Powers of Attorney, both Financial and Medical. The second part of the series looks at the importance of updating your primary estate planning documents, such as your Trust or Will. Together, these documents are the keystone in even the most basic estate plan and it’s important to keep them up-to-date.

First, what’s a Power of Attorney? It’s a document by which you appoint someone as your “Agent” to act on your behalf. If that Agent is unwilling or unable to act, the document can appoint one or more successor Agents. In other words, you give someone else (the Agent) powers you inherently already have yourself. With a Financial Power of Attorney, otherwise known as a General Durable Power of Attorney, you appoint your Agent to make financial decisions for you. The Power could be drafted to be “immediate.” In other words, the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you could make the Power “springing,” in other words it would only become effective upon your not being able to act for yourself because of incapacity. A Power of Attorney is “durable” if it continues notwithstanding you having incapacity. A Power of Attorney which is not durable would not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney appoints an agent to make medical decisions for you when you are unable to do so for yourself. A HIPAA Power appoints an agent t to access protected health information.

It’s important to keep your Powers of Attorney up-to-date so that you have the people you want as your agents. Every year around the holidays, it’s a good idea to look at your Powers of Attorney just to check if they name the people you’d want as your agents. Maybe one of your agents is no longer appropriate. Maybe the person whom you’d named as an agent is now too old or too frail to be your agent. Maybe you have someone else you’d prefer as an agent. Perhaps one of your children is now an adult and you’d want to serve as your agent instead.

The agents you select under your Powers of Attorney are vital to your incapacity plan. Make sure you keep the right people in those roles.

How can estate planning attorneys help families hold meaningful, memorable memorial activities, especially with the restrictions of a global pandemic?

Kyle Tevlin, founder of I Want a Fun Funeral, spoke about “Raising the Bar on Our Funeral Traditions” at the fourth annual Before I Die New Mexico Virtual Festival.

She showed a cartoon featuring two homo sapiens making cave paintings. The father had drawn a stick figure animal and the son had produced an illustration of a deer. The father says, “No Og, no! That’s not how we’ve always done it.”

“This is my analogy for funerals,” Tevlin explained. “We have this picture of what we think is great and we have no idea that there was something so much better, more elegant, and beautiful.”

Tevlin suggests making a memorial service a project that can help make the world a better place, take on a life of its own, and preserve the story of a loved one. She shared the inspiring example of Aaron Collins.

Aaron Collins died on July 7, 2012 at the age of 30. He left a note requesting that his family go out to eat and leave an “awesome tip,” suggesting $500 for a pizza. The experience was recorded and uploaded to YouTube by Aaron’s brother, Seth.

Generous people all over the world donated to reproduce “Aaron’s Last Wish” again and again. More than $60,000 was raised, Seth gave $500 tips to more than 100 waiters and waitresses. As a result, Aaron’s life story gets told over and over.

“From sadness and tragedy, now his family gets to talk about that loss with joy, a smile, and Aaron becomes a superhero who makes people happy,” said Tevlin. “This all only happened because Aaron Collins wrote this down ahead of time. The family only planned to do it once, but that’s all the more reason to do something little, because you don’t know where it’s going to take you.”

Tips for Engaging Memorial Actions

So, what do you do to be an engaged creator of a good goodbye? Tevlin recommends these seven tips to raise the bar on our funeral traditions.

1. Brainstorm an objective for what you will do to honor a person. Find a theme, a vision related to the essence of that person. An objective makes it easier for people to contribute, participate, and generate a wonderful memory.
2. Make your person’s personality shine, keyed to a hobby, passion, trait or quirk everyone will recognize. It can be fun or solemn, anything that is fitting.
3. Decide the scope of the tribute, from an event for immediate family to a global affair on the Internet. Bigger isn’t necessarily better, but step outside your comfort zone a bit for a greater reward.
4. “Roll Up Your Sleeves” means DIY as much as possible, enlisting the talents, contributions, creative ideas and resources within your circle. Involvement is where the bonding happens.
5. Enjoy the process. While sadness is unavoidable, these activities should bring joy. It’s a way of thanking the person for being in your life, warming your heart and providing an uplifting feeling.
6. Perfection is not required. Do what you can in whatever way you can, generating personal engagement and emotional connections.
7. There’s no time limit. Whatever the action or event, it does not need to be done immediately. It can easily be held on an anniversary, birthday, or other meaningful date.

Whatever is done in honor of a loved one, make it an event. Give it a name. Almost any activity can be made into a contest, which is practically guaranteed to be fun and memorable.

How did the 2020 elections shape the political landscape and what does that changed landscape mean for your estate plan? First, at the top of the ticket, it appears Joe Biden and Kamala Harris are the new President-Elect and Vice-President Elect, with an apparent 306 electoral votes to Donald Trump and Mike Pence’s apparent 232 electoral votes. Democrats retained control of the House of Representatives, although with a narrower majority.

The Senate is a more complicated matter. Republicans control 50 seats and Democrats control 48 seats in the Senate. Both Senate seats in Georgia will be up for runoff elections on January 5, 2021. There are Republican incumbents in both seats and the Democrats have an uphill battle to defeat them in runoff elections. However, if Democrats prevail in both runoff elections, the Senate would be tied with 50 Republicans and 50 Democrats and, beginning January 20, 2021, Vice President Kamala Harris would be the tie-breaking vote to give Democrats the majority in the Senate.

With Democrats in control of the Presidency, the Senate, and the House, they might be able to enact legislation similar to then-candidate Joe Biden’s Tax Plan. That plan included a reduction of the amount which could be passed free of estate tax from the current $11.58 million to $3.5 million. The Biden plan also called for increasing income tax rates and capital gains tax rates, as well as other changes.

What could this mean for you and your family? If you have assets that could be over $3.5 million by your death, this could mean you’d owe an estate tax of 40% on those assets above $3.5 million. You may be able to plan now to take advantage of the current exclusion of $11.58 million. (Note, even without Congressional action, under current law the current exclusion will be cut in half at the end of 2025.)

A possible Democrat-controlled government could change the estate tax exclusion retroactive to January 1, 2021. So, you’d need to act in 2020 to be certain to avoid a possible reduction in the exclusion. You could do this by gifting outright to your children or other beneficiaries. However, by gifting to a trust, you could protect them and the assets from creditors, divorcing spouses, and their own mismanagement. If you’re married, you could gift the assets to an irrevocable trust for your spouse’s benefit. Such trusts could distribute for the benefit of the beneficiaries under the distribution terms you’ve specified, such as for their health, education, maintenance, and support.

If you believe income tax rates will be higher in 2021, you might consider recognizing income in 2020 or deferring deductions to 2021 when they might be more valuable.

All of us face difficulties and tragedies in our lives. Some of these difficulties are expected and some are unexpected. 2020 has been a year of many unexpected difficulties. While all of us get sick from time to time, nobody anticipated the COVID-19 pandemic. Over 9 million Americans have caught the disease, resulting in the deaths of over 230,000 Americans.

Apart from coronavirus, there are many unexpected tragedies, such as 795,000 Americans suffering a stroke each year, according to the CDC. Another 805,000 Americans experience a heart attack each year, according to the CDC. Additionally, automobile accidents claim about 39,000 lives in the United States annually and injure many more.

Further, there are many lesser-known ways to face tragedy or death. An example is an amoeba that can eat the brain. While rare, the amoeba can come from the soil or water and can be lethal.

Few of us know exactly when or how we will face tragedy or death. But we know that we are all mortal and so we know we will face death eventually.

We may not be able to protect ourselves from everything, but we can prepare now for whatever might happen. Do your estate planning now. That way, when tragedy strikes, you’ll be prepared. If you’re prepared, it will be much easier for your loved ones.

To prepare, consider:

• A Property Power of Attorney in which you appoint someone, your “Agent,” to handle your property if you are unable to do so yourself.
• A Healthcare Power of Attorney in which you appoint an Agent to make medical decisions for you, if you are unable to make those decisions for yourself.
• A HIPAA power which gives people whom you designate, such as your Agent, access to your protected health information.
• A Revocable Trust to allow management of assets during life and at death. Such a trust allows the avoidance of the delays and expense of probate, which vary from state to state. Through this trust and the PourOver Will discussed below, you can spell out how you want your assets distributed to your beneficiaries to help them the most.
• A PourOver Will which sends any remaining assets to the Revocable Trust at your death and nominates guardians for any minor children.

Once you have all your ducks in a row, you’ll be ready for whatever life has in store for you, even a year like 2020!

When you’re planning your estate, among other things, you decide who should inherit your assets. You choose your beneficiaries, typically your children (or Living Trust depending upon the children’s ages), grandchildren, or other close relatives. But what if all the beneficiaries you’ve chosen and all their descendants have died? Then it would fall to the “contingent remainder” beneficiary.

Often the “contingent remainder” beneficiary has a slang nickname, like the “atom bomb” beneficiary or “exploding turkey” beneficiary. The contingent remainder beneficiary often is given this nickname because it’s a very unusual circumstance. The odds of all your descendants dying before you typically are very low. Of course, that’s not to say it is impossible.

But, still, you should give serious thought to whom you should choose for that role. Sometimes people choose their heirs at law because they think they should or must do so. However, if all your descendants have predeceased you, depending upon state law, that could mean your heirs would be some distant relatives with whom you have little or no relationship in real life.

Sometimes people choose a charity as the contingent remainder beneficiary. Sometimes they choose their alma mater, their church, or the charity to whom they’ve given consistently during their lifetime.

There’s not a wrong choice for the contingent remainder role. But you aren’t required to choose a particular one either. You have no obligation to choose your heirs at law, just because you may share a common ancestor. Give some thought to the decision and name whomever you feel in your heart would be the best recipient for your assets in the event your primary beneficiaries have predeceased you. You’ll be glad you did.

After you’ve chosen your beneficiaries, including your first line beneficiaries like your children (or Living Trust) and the contingent remainder “atom bomb” beneficiary, you’ll sleep better knowing that you’ve covered all your bases. You’ll know that your assets are going where you want them to go, even in the most unlikely of scenarios.

President Trump and First Lady Melania Trump announced they tested positive for COVID-19. Around the same time, numerous others at the White House also tested positive. In the United States alone, the pandemic has infected over 7.5 million people and has killed nearly 215,000 of them. Worldwide, the pandemic has infected over 36.5 million people and has killed over a million of them. In today’s pandemic, it’s more important than ever to make sure your estate planning documents are current. It’s 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. It’s important to have several layers of decision-makers.

In the Health Care Power of Attorney you appoint an “Agent” to make health decisions for you when you’re 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 isn’t able. You can appoint additional successors, too. It’s especially important to name additional successors in today’s pandemic. The fact that President and Melania Trump both tested positive for COVID-19 around the same time demonstrates the importance of naming several successors. It’s all too common nowadays for your initial agent to succumb to the same illness. If you name several successors, especially in a different household, you increase the odds that one of the agents will be unaffected and able to act for you.

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 health 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’re in the ICU with COVID-19.

It’s important to have these three documents, but it’s 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’s 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. So, perhaps you name your spouse first, then your adult child, then your brother or sister, etc. Keep in mind the importance of naming successors who aren’t in your same household and maybe not even in the same locality.

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 don’t work, your loved ones and fiduciaries can help you through the illness and make it easier for you and your loved ones.

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.