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Whether or not we plan to do so, each of us will face death eventually. However, by planning we can make our passing easier and better in many ways for those we leave behind. The first article in the series demonstrated how you could gain privacy from the public by planning and using a trust rather than going through the public probate process. The second article in the series focused on how you can make the transition better through the manner in which you leave your assets to your loved ones. The third article in the series focused on the importance of communicating your plans to your family to avoid problems after your death. This final article in the series looks at the thorny issue of disinheriting a child.

Under the laws of most, if not all states, if you die intestate (i.e., without a will), some or all of your property would go to your children who survive you. If you leave a will, but forget to mention a child, in most states the omitted child would receive the same share as if you had died intestate. But you can decide to leave nothing to a child.

However, especially if the disinheritance is a surprise, your child could have hurt feelings and could challenge your estate plan by claiming you did not have the mental capacity to make the plan or by claiming you were under undue influence from someone else.

There are a couple of ways to lessen the risk of a challenge. As discussed in a prior article in this series, discussing your plan with your family will go a long way to reduce the risk of a challenge. Another way is to include a “no contest clause” in your plan. Such a clause provides that if the person challenges your plan, they get nothing.

Of course, in order for the no contest clause to have any deterrent effect, you would need to leave that person something so they would stand to lose something by contesting the plan.

For example, Betty has $3 million and has three children, Sue, John, and Alice. For good reasons, Betty decides to leave her assets to Sue and Alice and wants to leave John nothing. If she were to do that, John would be able challenge the plan. While he may not win, he could cause a great deal of turmoil. If instead, Betty were to leave John $100,000 and inserted a no contest clause, John would have to think twice before contesting. If John were to contest and not succeed, he would receive nothing. However, if he just walked away, he’d receive $100,000. Thus, in that scenario, Sue and Alice would each receive $1,450,000 and John would receive $100,000. Family harmony could be preserved to the extent possible. The family could be spared the financial and emotional drain of a protracted dispute.

There are countries in which you cannot disinherit your children. With rare exceptions (such as in Louisiana), you can disinherit your children in the United States. However, you should proceed with caution. It’s best to let your family know of your plans and the reasoning behind them. Even if they may not agree with your decision, they would be more likely to know the plans are your idea and respect them. Consider inserting a no contest clause in your plan as a deterrent to a contest of your plan. Finally, a no contest clause really has no deterrent effect unless there is a significant, although diminished, bequest to the person you’d be disinheriting.

Estate planning attorneys often strive to obtain valuation discounts. We set up Family Limited Partnerships and carefully supervise their administration, at least in a perfect world. We advise clients to fractionalize their real estate to obtain a fractional interest discount. 

But, discounts may not make sense for many clients. Remember, discounts must be taken consistently. In other words, if you are taking a discount for estate tax purposes, the same discounts will apply for income tax purposes. The problem is the client will want a low valuation for estate tax purposes and a high valuation for income tax purposes in setting the basis of the property. 

Let’s look at an example:

John has assets of $4 million, consisting entirely of Blackacre. The property is currently held in his sole name and no valuation discount may be taken. If John fractionalizes the ownership to tenancy-in-common and gifts a portion to his children (or an irrevocable trust) it may qualify for a discount of 10%-20%. So, the valuation could be reduced to $3.5 million, let’s say. 

Getting that reduction in valuation may make sense if we are looking at a 55% estate tax rate and a $1 million applicable exclusion. However, if the applicable exclusion is $5 million, fractionalizing the real estate could unnecessarily reduce the basis for the heirs without any estate tax benefit. 

Assuming an estate tax will be due, it would be necessary to weigh the state and federal estate taxes to be saved at death against the present value (at date of death) of the future state and federal capital gains taxes which would be owed by the heirs. Of course, this is a complex calculation which requires knowledge of the heir’s state of residence and the timing of the heir’s sale of the property. 

As you can see, in John’s case, if the applicable exclusion is at or above $4 million, his heirs would be better off if he does not fractionalize the real estate. If his estate is above the applicable exclusion amount, a calculation would have to be done to determine if discounting is beneficial. 

Obtaining a discount may be complex (such as an FLP) or simple (such as fractionalized tenant-in-common interests), but the decision is quite complex. 

Digital assets can be an important part of many people’s estates. Most people have some form of digital assets. Here are some examples of ordinary digital assets most people might have:

• Electronic-only bank accounts or brokerage accounts
• Passwords for access to credit card accounts
• Passwords for access to bank accounts and other financial accounts
• Log in information for Facebook or other social media
• Email accounts and passwords

For most people the most important digital asset might be their email account. By having access to that, someone could access other accounts which list that email address. They could use the “forgot password” feature on those accounts and have the new passwords sent to the email account to which they already have access. For most people, it’s wise to leave ways to access these accounts in a secure location. A simple way is by leaving these passwords in a safe deposit box. Another option is to use an electronic safe, such as that available through Docubank’s SAFE (http://www.docubank.com). That way, if you die or become incapacitated, your executor, trustee, or agent will have access to your digital assets, assuming your documents provide the appropriate language.

But, actors, artists, and others may wish to control their likeness or the electronic duplication of their works of art, etc. Serious consideration should be given to such assets. For example, a famous work of art may be worth a great deal, but the rights to the electronic dissemination and reproduction of the image may be worth even more. The rights to use a deceased celebrity’s image could be worth hundreds of thousands of dollars. Robin Williams died recently. His estate plan forbid the use of his image for 25 years.

Whether you are an everyman or a celebrity, you should consider how your estate will handle digital assets.

Bob

Death and taxes are life’s two certainties. While they are both inevitable, Tax Day in April comes around every year. We get much more practice preparing our taxes than planning funerals or organizing memorial services.

Tax Day has once again come and gone, and we know it will be back. Yet death and funerals happen infrequently, and they always seem to be a surprise. I suggest utilizing these five tips to reduce the stress of addressing both death and taxes:

1. Deal with it: Neither the Tax Man nor the Grim Reaper will wait when the appointed time comes. Avoid procrastination! Just as talking about sex won’t make you pregnant, talking about funerals won’t make you dead.
2. Plan ahead to save money: Smart taxpayers look at all the angles for taking advantage of deductions before the end of the year. Smart consumers pre-plan their funerals so they know the substantial costs involved and can figure out how to afford a meaningful “good goodbye.” 

3. Collect important information: Taxpayers who place all their W-2, 1098, 1099 and other tax forms in one place make it easier when it’s time to file. Similarly, have one place for the estate planning, advance directives, veteran discharge papers, personal information, and list of people to contact upon death. It makes it much easier having important information all in one place.
4. Keep good records: Knowing your income and expenses for the year simplifies accurate, complete tax preparation. Knowing a person’s birthplace, social security number, mother’s maiden name, family contacts, and other information can save family members much stress at a time of grief.
5. Make it meaningful: Charitable contributions made before the end of the year can help reduce taxes while helping the taxpayer’s favorite causes. Discussing preferences for an end-of-life celebration, before there’s any death or illness, gives family members helpful insights to create a meaningful ceremony when the time comes.

Take the sting out of death and taxes by taking these steps to organize your information and communicate your wishes.  Cal me with any questions,

Bob

No truer words were spoken than when Elvis sang, “I’ll have a blue Christmas without you.” When the holidays roll around, we especially miss those we love who have died.  From Thanksgiving into the New Year, a few changes to the family’s routines can soften the holiday blues over the death of a loved one.

Break Traditions

Go someplace new at holiday time and make new memories. One Christmas season, a woman at a holiday party spoke about her fifty-six-year-old son who died of a heart attack on Christmas Day the year before.

She and her daughter-in-law planned to go out of town and do something completely different for the holiday. They booked a winter get-away to the Grand Canyon. Other families may wish to go skiing or take a cruise in a warmer climate.

This can be a healthy response — to strike out in a new direction on a tradition-laden day when a loved one is no longer present. It recognizes the “new normal” all families face as they go through mourning, processing grief as time passes.

Include the Deceased

Acknowledging the deceased during the holidays is not morbid or unnatural. It’s okay to share memories. That loved one is probably on everyone’s mind already.

Set up a tabletop memorial to those who have died. In our family, we place large pictures in the dining room of our deceased loved ones. In this way, they are, in a sense, present as the whole family enjoys the holiday meal. This option acknowledges the person’s passing while continuing to observe annual family events.

You might light a candle next to photos of loved ones. You can also play music that invokes their memories, prepare favorite foods or special recipes they were known for making, or bring out old family films and take a trip down memory lane.

Talk About It

Before there is a death in the family, use holiday time together to discuss advance directives and preferences for final arrangements. Having a conversation to share this vital information reduces stress at a time of medical crisis, and it’s strangely liberating!

The nonprofit organization Engage With Grace offers five key questions they call The One Slide Project – so named because all five questions fit on one page. They suggest discussing these questions when the family is gathered for the Thanksgiving holiday:

• On a scale of 1 to 5, where do you fall on this continuum? (1 being “Let me die in my own bed, without any medical intervention,” 5 being “Don’t give up on me no matter what, try any proven and unproven intervention possible”)
• If there were a choice, would you prefer to die at home or in a hospital?
• Could a loved one correctly describe how you’d like to be treated in the case of a terminal illness?
• Is there someone you trust whom you’ve appointed to advocate on your behalf when the time is near?
• Have you completed any of the following: written a living will, appointed a healthcare power of attorney, or completed an advance directive?

If you have advance directives or a living will, does your family know where the papers are located? It’s important to inform the people who will speak for you if you can’t.

Download the One Slide questions from www.EngageWithGrace.com.

Change in our lives is inevitable. Family traditions during the holidays remind us of people and times gone by. If those reminders bring sadness, change the traditions to deal with the holiday blues.

October 30^th is annual Create a Great Funeral Day. This “holiday” right before Halloween provides an upbeat excuse to start a conversation on a topic most families hesitate to discuss.

The first Create a Great Funeral Day, started by attorney and mediator Stephanie West Allen, took place in 2000. She registered the day at Chase’s Calendar of Events in 1999.

A few years earlier, she saw her husband struggling to pull together a meaningful funeral for his mother, who had left no directions before she died. Observing his grief, Allen felt that knowing what her mother-in-law might have wanted would have eased the pain of memorial service preparations.

As a result of that experience, she wrote Creating Your Own Funeral or Memorial Service: A Workbook. She was among the pioneering authors to create helpful funeral planning resources for the general public.

Allen cautions families against holding what she calls a “facelift funeral.” A facelift funeral goes through the motions but does not address our emotional needs for mourning the loss.

This concept harkens back to Dr. Maxwell Maltz and his book, Psycho-Cybernetics, a best-seller first published in 1960. Dr. Maltz was a plastic surgeon. He noticed that many of the patients who came to him for a new face were actually seeking to change their personalities.

While patients had their exterior features changed, often they still had emotional issues that plastic surgery could not address. He found that self-image is the key to human personality and behavior.

Facelift funerals are not emotionally fulfilling for the participants. These events might have a “rent-a-minister” who didn’t know the deceased and says as much. He might only speak of that religion’s views of heaven, hell, the afterlife, or other theological musings.

The problem is, a rising number of families identify their religion as “none.” To address this issue, non-religious funeral celebrants are getting certified in the U.S. every year. These people make funerals and memorial services all about the decedent by interviewing the family and creating services with themes of the person’s passions and purpose.

Certified funeral celebrants can be found online through two organizations that train celebrants, the In-Sight Institute (www. InSightBooks.com) and the Celebrant Foundation & Institute (www.CelebrantInstitute.org).

Create a Great Funeral Day is an opportune time to talk about what each member of the family would want in their final fling. People can also learn about new avenues available to help families create meaningful, memorable “good goodbyes” to loved ones.

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.