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Clients often think that estate planning is for other people: It’s for people on their death bed; or it’s for people with terminal illnesses; or it’s for the really rich. While these are all true, it’s also for people who are not rich and are not sick.

First, we never know when tragedy might strike. A recent emergency landing by a Jet Blue flight highlighted this point. Here’s the cnn.com story about the incident. Luckily, the plane landed safely. However, those passengers who had done their planning rested a little easier, while those who had not done their planning suffered even more stress. It’s not just the unlikely event of a plane incident which might face each of us.

In 2012, 33,651 people died and 2.36 million people were injured in automobile accidents in the United States. That’s an average of 119 people killed and 6,466 people injured in American automobile accidents each day. In addition, millions of people are treated in emergency rooms each year due to slip and falls. In a recent year it was 8.9 million people. It seems that Americans are rather accident-prone!

No wonder clients seem to be motivated to do estate planning as much by an upcoming vacation trip as by anything else. I did not always understand this phenomenon. The risk of something happening on a vacation trip is really quite remote. But, what I did not always understand, it is not the actual occurrence of an event, it is the fear of such an occurrence which is at issue. In other words, even if the accident or injury never occurs, the fear of the plane, train, or automobile crashing, or boat sinking, is still in the front or back of the soon-to-be-vacationer’s mind.

While there is nothing to reduce the actual risk of an adverse event by planning, they do reduce the extent of the negative consequences by planning.  Estate planning provides a valuable service in helping reduce negative consequences.

Bob

The “Secure Act” was part of a larger law that passed with (rare) bipartisan support in late-December 2019. It is effective January 1, 2020, for most purposes. This is a series of articles on the Secure Act. The first article looked at the basics of the Secure Act. This second article examines planning strategies for dealing with the Secure Act.

As laid out in the first article in the series, the Secure Act requires more rapid distributions of retirement benefits to most beneficiaries, a 10-year rule for all except “eligible designated beneficiaries.” So, assuming your beneficiary would be subject to the 10-year rule, what can you do to get the best stretch?

There are no perfect solutions. However, there are some things you can do which will allow you to make the most of the stretch allowed under the Secure Act. This article will examine two strategies. The first is a simple strategy, to “Roth” the retirement assets while you’re alive. When you convert your IRA to a Roth IRA, you pay income tax on the assets upon conversion. After that, you never have to take distributions during your lifetime. When you or your beneficiaries take distributions, they’ll be free of income tax, including any growth on the assets. This is because you’ve already paid the income tax due to the Roth conversion. After the Secure Act, your beneficiaries will still be subject to the 10-year rule (unless they’re “eligible” as outlined in the first article in the series). But, they could wait until the end of the 10-year period and take the entire balance out at that time. This would allow the assets to grow free from income tax for the longest possible period. Without a Roth conversion, the beneficiaries would likely need to take them over several years to minimize the impact of taking the retirement assets into income and driving the beneficiary into a higher marginal income tax bracket. The Roth strategy avoids that because the withdrawal of the assets doesn’t impact the beneficiary’s taxable income because a Roth IRA is tax-free upon distribution.

The second and more complex strategy is having a Charitable Remainder Trust (“CRT”) as the beneficiary of the IRA or retirement plan. A CRT itself is a tax-exempt entity but distributions to the non-charitable beneficiary carry out the income tax characteristics of income earned by the CRT. The IRA would payout to the CRT within 5 years of the Participant’s death, bringing taxable income to the CRT. But, as a tax-exempt entity, the CRT itself would pay no income tax on the distributions from the IRA.

However, the CRT has a non-charitable beneficiary, like the Participant’s adult son or daughter, and a charitable remainder beneficiary. In other words, the CRT could payout during the term of the CRT, perhaps over 20 years, to the non-charitable beneficiary. For example, it could payout 5% of the CRT’s assets each year for 20 years. As that distribution is paid out to the non-charitable beneficiary, they’d pay the income tax carried out by the distributions from the CRT. Whatever is left after the term of the CRT (20 years in our example), would go to the charitable remainder beneficiary. The tax-exempt nature of a CRT allows for a much longer deferral of the income taxation than the 10-year rule of the Secure Act itself would allow. This additional deferral is due to the nature of the CRT itself.

But, a CRT has certain strict rules and tests. At least 10% of the actuarial value of the CRT must go to charity. At least 5% must go each year to the non-charitable beneficiary. There is overhead with a CRT as it requires annual tax returns and other compliance. A CRT may be a great solution for those with a large IRA or retirement plan who want to defer income taxation for their beneficiary as much as possible and who are charitably inclined.

The Secure Act is now part of the law. You can accept its 10-year limitation on deferral. Or you can plan to maximize the deferral within the limitations of the Secure Act. The simplest way to maximize the deferral within the Secure Act’s 10-year limitation is a Roth conversion. A more complicated, but potentially more powerful solution is to name a CRT as the beneficiary and deferring income taxation based on the nature of the CRT. A qualified estate planning attorney can help you choose the solution that’s right for you.

It is back-to-school time in America. As Labor Day approaches, schools are starting back up. From an estate planning perspective, this is important in that many young adult students are heading away from home. Here’s a link (http://www.forbes.com/sites/deborahljacobs/2014/08/15/two-documents-every-18-year-old-should-sign/) to an interesting Forbes article on the topic.

People are typically reluctant to think about planning for themselves. But, seldom do they think about the planning for their adult children. But, it is very unlikely that the young adult would think of estate planning on their own. They are more concerned with what courses they’ll be taking, or what the dating scene might hold for them. The fact is that the parents still typically feel responsible for their young adult children, even if they are not legally responsible for them.

I always suggest that my clients to discuss with their children about having powers of attorney. The adult children should have a power of attorney for property. Normally, the child would name the parent(s) as the agent(s), although another agent could be named. If the child is reluctant because their parent could use it to find out about grades, the POA could be modified to exclude specifically any transaction having to do with finding out grades. If the child is particularly reticent and concerned about their independence, the power could even be made springing. However, an immediate power of attorney would be more useful and could be used by the parent to sell a car when the child is away at school, or many other transactions of convenience for the child.

The child should also have a health care power of attorney. This is especially important as accident and injury is more prevalent in the college age group.

Call me with any questions,

Bob

If you have married someone and your spouse has children from a different relationship, those are your step-children. Even if you have helped raise the child from a very young age, unless you have adopted the child, they would not be considered your child for inheritance purposes. The implication of this can be significant.

Here’s an example: When Harry met Sally, Sally had a newborn child, Betty. Harry married Sally shortly thereafter. They raised Betty together, but Harry never adopted her. Sally died while Betty was in college, leaving Harry all her assets. Unfortunately, Harry didn’t have an estate plan. As a result, when Harry died the following year, he was intestate. According to the laws of the state where Harry lived when he died, since his parents and spouse had predeceased him, his estate would go to his siblings, with whom he and Betty had only strained relationships. Betty really needed the money to pay for college and to get a good start in life. But now she’d be penniless and would feel abandoned by her father.

Harry and Sally could have avoided this situation. Of course, Harry could have adopted Betty when she was young. However, that may not have been possible or desirable for numerous reasons. Also, if Harry didn’t have an estate plan, even if he had adopted Betty, she would have inherited the assets outright.

If Harry had left his estate to Betty in a trust, this would have solved numerous problems. First, his assets would have gone to Betty whether or not he had adopted her. Second, he could determine how Betty should get the assets. For example, Harry could have provided for Betty to receive the assets in trust instead of outright. If Betty had creditor issues, Harry could have left the assets in a trust which would have protected the assets from her creditors. If Betty were too immature to manage the assets, Harry could have left the assets in a trust with someone else named as trustee to manage the assets until she reached a suitable age. The trustee could provide Betty what she needed from the assets in the trust and then turn the balance over to her when she achieved the age set by Harry.

Like Cinderella, step-children often get the short end of the stick. If you intend to leave assets to your step-child, you need to plan to do so. The laws of intestacy will not take care of your step-child. You have to affirmatively provide for the step-child in your estate plan. Otherwise, like Cinderella, your step-child would get nothing.

The next article in this series on planning for children will examine the importance of planning for special needs children.

A “special needs” child is a child who faces a physical or mental disability and may require needs-based benefits, such as Medicaid or Supplemental Security Income (SSI). A special needs child is precious, like any other child. But the same planning won’t work for this unique child. Further, a lack of planning is even more problematic for a special needs child than it would be for a child without special needs. Let’s look at an example:

Mike has $900,000 in assets and has three children, Amy, Bobby, and Charlie, who has special needs. If Mike dies without a plan, his assets would be split equally among his three children. If they are adults at the time of Mike’s death, they would receive the assets outright. This could be problematic for many reasons. First, Mike may want a different allocation. He may want to provide more for Charlie because of his greater need. Also, he may want to leave Amy or Bobby’s shares in trust to provide divorce protection, asset protection, or simply protect their inheritances from their own immaturity. But an outright distribution is especially problematic for Charlie, as a special needs beneficiary. Charlie may be receiving SSI, Medicaid, or other needs-based benefits. If Mike dies without a plan, Charlie would inherit 1/3 of Mike’s assets outright (in most states). While the $300,000 of assets would be helpful to Charlie, it would make him ineligible for his benefits. He’d have to spend the $300,000 to cover his medical care and other things which his benefits had been covering.

If Mike had planned, he could have avoided this result. Mike could have left the assets for Charlie in a “special needs trust.” Amy or Bobby could be the trustee and distribute from the special needs trust for Charlie’s benefit. If Mike did this, Charlie would not be deprived of his needs-based benefits. Since Charlie’s inheritance would have been in a special needs trust, it would not have been counted as an available resource for Charlie. But, Amy or Bobby, as the trustee of Charlie’s special needs trust, could spend from it to enhance Charlie’s quality of life, by paying for his vacations, entertainment, classes, or other things to improve his quality of life. This would allow Charlie’s life to continue with as little disruption as possible after Mike’s death.

Mike also could contribute assets to an ABLE account which would complement a special needs trust. Up to $100,000 in an ABLE account would not jeopardize Charlie’s SSI. The ABLE account would not jeopardize Medicaid benefits, regardless of its size. (There may be only one ABLE account for a beneficiary.)

A special needs beneficiary has many struggles in life. But these struggles can be minimized if you plan in a way that doesn’t jeopardize their needs-based benefits.

Retirement assets, including 401(k)s, IRAs, etc., comprise a large portion of the average American’s wealth. Planning for these assets is critical, not just due to their value, but also due to their special nature.

Traditional IRAs and 401(k)s and the earnings on them are tax-deferred. Roth IRAs and 401(k)s are tax-free. However, there’s another characteristic of these plans which is the subject of this memo.

Both traditional and Roth accounts share asset protection during the life of the person who contributed to the account, otherwise known as the “Participant.” A Participant’s IRA has protection under federal bankruptcy law to at least $1 million (adjusted for inflation), while a 401(k) has unlimited protection under federal bankruptcy law. (An IRA may have greater protection under state law.) However, upon the Participant’s death, the accounts lose all bankruptcy protection, whether IRA or 401(k), Roth or traditional due to the Supreme Court’s decision in Clark v. Rameker.

But let’s see what happens after death. Betty had a $2 million IRA. On the IRA beneficiary designation form, she designated her IRA equally to her two children, John and Sally. Betty trusted John’s judgment but did not trust Sally’s. Betty left John’s share of her IRA outright to him. Betty designated Sally’s share of the IRA to a trust which Betty had set up for Sally’s needs.

John and Sally got along well, so they shared ownership of a lake home. When they didn’t use it, they rented it. Neither John nor Sally focused on upkeep. So, they didn’t bother to repair the property’s dock when they heard creaking boards and saw the trail of termites. A renting family decided the dock was a perfect spot for a vacation photo. Unfortunately, the dock collapsed and they were seriously injured. They sued John and Sally and got a judgment for $5 million against each of them.

Since Betty had left John’s share of her IRA outright to John, the creditors could seize his share of the IRA. However, Betty had left Sally’s share of the IRA to a trust for her benefit. The trust allowed for distributions to Sally only in the trustee’s discretion. Because the IRA had been left to the trust for Sally, the creditors could not reach Sally’s share of the IRA.

At Betty’s death, the protection inherent in the IRA under federal bankruptcy law evaporated. However, the IRA still could be protected in a different way. The discretionary trust for Sally provided its own asset protection. The IRA which Sally’s trust received at Betty’s death had no asset protection itself. But, the trust “wrapper” provided protection.

If Betty had left John’s share of the IRA in trust, he would not have lost it to creditors and he would have had access to it in the future. IRAs and 401(k)s enjoy asset protection in bankruptcy during the life of the Participant.

Bob

The IRS issued Revenue Ruling 2013-17. The Ruling provides that a married same-sex couple, married in a jurisdiction which respects the marriage, will be treated as married for all purposes by the IRS. This is regardless of whether the couple was domiciled in a state that respected their marriage when they got married or later moved to a state that did not recognize the marriage.

Let’s say a same-sex couple residing in Oklahoma travels to New York for the weekend. While in New York, they get married in accordance with the laws of the state of New York. They then return to Oklahoma, where they continue to reside. Since they are legally married under the laws of New York, they will be treated as married for purposes of federal tax law, regardless of where they live. This is notwithstanding the fact that Oklahoma treats them as “legal strangers.”

This goes beyond and is a significant expansion of the ruling in prior cases deciding on the subject. As of today, there is no reason to treat a married same-sex couple any differently when drafting their trust(s), at least from a federal tax perspective. Of course, most states still do not respect same-sex marriages and the couple may face state estate / inheritance taxes, property tax reassessment, etc.

The revenue ruling also provides that a same-sex couple in a Civil Union, Domestic Partnership, or other similar non-marriage institution will not be treated as being married under federal tax law.

Also, if the couple had been married in the past, they have the option (but not the obligation) to amend any prior returns on which the statute of limitations has not yet run.

Going forward, it appears that married trusts are the vehicle of choice. If the couple is in a community property state and intends to stay in that state (Illinois is not), a joint trust is likely the best choice. If the couple intends to move frequently, then separate trusts may be the better option. If the couple is married in one state and moves to another state that does not respect their marriage, it may not be possible to unwind their marriage in any divorce court. The state in which they were married may have a residency requirement for a divorce. If the state in which they live does not recognize their marriage, it is likely they will not hear a divorce case either. Separate trusts would make it far easier to divide the assets without the judicial assistance of a divorce court, if that becomes necessary. Same-sex marriage is too short-lived to have meaningful statistics on same-sex divorce.

Nearly half of all American marriages end in divorce. Accordingly, it is important to consider that possibility when doing your planning.

Impact of Estate Planning on Divorce

Moving assets between spouses can be advantageous for tax planning. For example, often a couple will transmute separate property to community property in order to get a step-up in basis at the death of either spouse. Also, spouses in separate property states often will equalize assets to fund a family trust at the first death (portability notwithstanding). These can be great strategies. However, it is important to advise clients that doing so could change how assets would be divided upon a divorce.

Impact of Divorce on the Estate Plan

In every state I know, the divorced spouse is removed as a beneficiary of a will and trust upon divorce. Typically, this is what the person would want. However, the person and his or her spouse sometimes share a special bond, even if they are divorcing. Thus, sometimes the person will want to keep his or her spouse in the estate plan. Accomplishing this is not as simple as leaving things alone, however. After the divorce, the person should do a new trust reaffirming the bequests to the ex-spouse.

Of course, after the divorce, the person should do new powers of attorney for both financial and health care matters. While some states revoke these designations upon divorce, others do not. The person should also do a new HIPAA form, removing their ex-spouse as a person having access to protected health information.

One item which is often overlooked is beneficiary designations. The person should do new beneficiary designations for all items with such designations. While state law may revoke some designations of the ex-spouse, it cannot revoke the designation on ERISA plans, such as a 401k. It is best to redo all beneficiary designations post-divorce.

Bob

I can’t believe I am going to write this, but here goes.  You may think about estate planning for the first time when you embark on a career path. When you go through a benefits orientation session you may be told that your company provides you with a minimal amount of life insurance. The company pays for this base amount of coverage, and you have the option of paying for increased coverage. Many companies provide their employees with health insurance as well. Some of them pay for the insurance premiums in full, and other companies subsidize health insurance coverage for their employees and their employees’ families.

Your employer may provide access to affordable health care for you and your family. But what about the four-legged members of your family? You might not think about the costs that you could face if your pet, who is just as much a part of your family as your own children, was to get injured or become ill. You may be surprised to hear that many companies are now offering pet insurance to their employees. Veterinary Pet Insurance is the largest provider of pet insurance, and thousands of companies are offering their employees the opportunity to purchase insurance with subsidies and discounts through VPI.

In a recent interview, Deana Single, VPI’s Director of Group Accounts noted, “With more than 63 percent of U.S. households owning at least one pet, offering pet health insurance to employees is both a practical and unique benefit option. Each year we see a substantial increase in the number of large companies and associations that are looking for new and enticing ways to incent and compensate employees. By adding VPI Pet Insurance to their voluntary benefits package, employers can offer a fantastic incentive to pet-loving employees at no cost to the company.” Though VPI is the largest provider, other companies and organizations offer pet insurance as well.

For some people, pet insurance will soften the financial blow if a pet were to ever need expensive treatments or surgery. However, for those of lesser financial means, the insurance could actually be the difference between the life and death of a pet.

Bob

According to a recent study by the Mind Perception and Morality Lab at the University of Maryland, people view patients in a persistent vegetative state (PVS) as worse off than patients who have died. Published online in COGNITION, the study consisted of three experiments. Here is the Abstract: 

“Patients in persistent vegetative state (PVS) may be biologically alive, but these experiments indicate that people see PVS as a state curiously more dead than dead. Experiment 1 found that PVS patients were perceived to have less mental capacity than the dead. Experiment 2 explained this effect as an outgrowth of afterlife beliefs, and the tendency to focus on the bodies of PVS patients at the expense of their minds. Experiment 3 found that PVS is also perceived as “worse” than death: people deem early death better than being in PVS. These studies suggest that people perceive the minds of PVS patients as less valuable than those of the dead – ironically, this effect is especially robust for those high in religiosity.”

The complex views of PVS illuminated in this study further illustrate the importance for clients to be clear in advance about their medical wishes and to not assume that others will be able to infer what they would want. It also speaks to the possibility that people may hold simultaneously conflicting views about PVS when making decisions on behalf of a loved one in a persistent vegetative state.

A Medical Power of Attorney coupled with a Living Will alleviates these issues.  Call me to discuss.

Bob