There is much confusion over the function of a Special Needs Trust.  Special Needs Trusts (sometimes referred to as Supplemental Needs Trusts) are designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons while still allowing them to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid program. 

There are actually two different types of Special Needs Trusts.  The first type, often referred to as a Third Party Special Needs Trust, is created by a friend or relative of the person with special needs to hold gifts or inheritances for that individual.  The funds in the Third Party Special Needs Trust are not considered a resource of the person with special needs, therefore allowing the person to continue to qualify for Medicaid benefits.  The Third Party Special Needs Trust can be established at any time, but usually is created early in a child’s life as a long term means for holding assets to benefit the disabled family member.

The second type, often referred to as a First Party Special Needs Trust or D4A Trust, is frequently used to receive personal injury litigation proceeds on behalf of a disabled person in order to allow the person to continue to qualify for Medicaid benefits.  This Trust can be established at any time before the beneficiary’s 65th birthday. 

The Special Needs Trust must be part of any parent’s estate planning tools when he or she has a child with special needs.  As a part of Estate Planning, the costs of the creation of the Trust are tax deductible.

A Third Party Special Needs Trust that is funded by parents or other third party sources will not be required to pay back Medicaid.  However, a First Party Special Needs Trust, which is funded by a personal injury Settlement or otherwise from the person with special needs own assets, will be required to pay back Medicaid when the child dies.

The only assets within the Trust that are subject to the repayment obligation are those assets which originally belonged to the disabled individual him or herself that are transferred into the Trust (i.e. assets such as earnings from a job, savings, certain Social Security back payments, personal injury recoveries, and the like).  At the individual’s death, the Trust is liable for an amount equal to the Medicaid used during the lifetime of the disabled or chronically ill individual.  It is not uncommon for a Trustee or a disabled individual to ask a court to direct certain assets into the Trust.

The cost for not creating the proper Special Needs Trust is for assets to be used before Medicaid will be accessible by the person with special needs and that the assets will not then be available for those expenditures that are not otherwise covered by Medicaid.  This is a quality of life issue, i.e., how to help someone’s life be better and still receive all appropriate government help.

Shop Maryland Week begins Sunday, August 8th through the 14th. This means that qualifying apparel and footwear less than $100 is exempt from the Maryland 6% sales tax. Maryland will also be offering in 2011 a tax-free three day weekend February 19th through February 21, 2011. The sales tax will not be applied to any sale for Energy Star products for e.g. washers, dryers, furnace etc. Energy Star requirements as developed by the U.S. Department of Energy.

For more information call 800 MD-TAXES or email shopmaryland@comp.state.md.us.

Florida is the latest state to jump on the liability reduction bandwagon with new section 736.0902 (Non-application of Prudent Investor Rule),that limits the duties and liability of Irrevocable Life Insurance Trust (ILIT) trustees Freed from investment responsibilities with respect to an asset that few trustees profess to fully understand, the trustee may focus on paying premiums on time and sending out “Crummey” withdrawal notifications.  The drafters likely intended § 736.0902 to be the next step in the evolution of protective insurance statutes.  Since imitation is the sincerest form of flattery, it will be interesting to see whether other states adopt similar statutes.

The Florida Supreme Court recently issued it’s long awaited ruling in the case of Olmstead vs. Federal Trade Commission.  This decision is significant regardless what state you live in because the Florida Supreme Court is now the highest court to continue the trend of other courts across the country to allow creditors to make claims against a single member LLC.

This week, we lost one of baseball’s iconic owners, George Steinbrenner.  He bought the New York Yankees from CBS over 30 years ago at a price tag of about 10 million dollars.  As a long-term Yankee fan, I, like most New Yorkers, have had a love-hate relationship with George Steinbrenner and his handling of the Yankees. 

How does this tie into estate planning?  Well, as a result of the inability of Congress to act, New Yorkers and Yankee fans should not have to worry about any significant changes being made to the operation and management of the Yankees, since his estate does not have to sell any assets to pay for any Federal estate taxes.  Yes, that is correct, even though Steinbrenner’s estate is estimated to be worth over 1 billion dollars, his estate will pass free of estate taxes to his family because of the expiration of the federal estate tax in 2010.  Note:  If Steinbrenner was a Florida resident, there would be no Florida estate tax, but if he was a New York resident or owned New York real estate, then his estate will owe New York estate taxes (which could be as much as or more than 160 million if his entire estate is subject to New York estate tax).

Steinbrenner’s death could prove to be a wake up call for Congress on the huge amount of tax dollars not being collected in 2010 as a result of the one year moratorium on Federal estate taxes.  Just from the death of Steinbrenner and one other multi-billionaire this year, the Federal government has lost approximately 5 billion dollars in Federal estate taxes.  Estimates of lost revenue range as high as 30 billion for the entire 2010 tax year as a result of there being no Federal estate taxes in 2010.

This past June, senators introduced legislation that would implement a progressive estate tax starting at estates valued at 3.5 million and a 10% surcharge on estates larger than $500 million.  These senators would also like to see the 45% tax rate from 2009 retroactively imposed on all estate of individuals dying in 2010.  If Congress retroactively reinstates the estate tax for individuals dying in 2010, it likely that this story and saga will continue for many years, since there are at least a few families who have the resources and means to challenge the constitutionality of a retroactive reinstatement of the estate.  It can be expected that any such challenge will go all the way to the Supreme Court.

This blog does not reflect necessarily my personal views on the estate tax.

Back in late March, Dan L. Duncan, a Texas billionaire, his net worth estimated by Forbes magazine at $9 billion and ranked as the 74^th wealthiest individual in the world, died in his home in Houston at the age of 77.  He leaves behind what is considered the first extremely large estate to pass free of Federal estate tax in the 2010 year, a result of Congress allowing the estate tax to lapse for the 2010 year.

As I have blogged in the past and continue to monitor Capitol Hill on this issue, Dan Duncan’s death was a big loss in collection of revenues that our country can ill afford at this time.   The one year estate tax lapse was signed into law back in 2001 when President Bush signed the 2001 EGTRA.  Every authority on estate taxes thought the gap would be closed with the 2009 new Democratic Congress.  The current Senate Finance Committee is continuing to work hard towards compromise and reinstating the tax, however it remains unclear whether compromise will be reached and/or a retroactive tax will be instituted.  (Should the issue not make it through the halls of Congress, the estate tax will revert to pre-2001 laws and estates of individuals dying in 2011 and after will be taxed at the $1million level).  The argument exists that President Obama would like to reinstate at that level for wealthy Americans, negating the progress and compromises of the past. 

Mr. Duncan’s surviving wife and descendants will most likely inherit billions that in any other year would have gone to the coffers of the US Treasury.  If he had died in 2009, 45% of the value of his assets in excess of $3.5 million (and not otherwise going to his surviving spouse or charity) would have paid in Federal estate taxes.  While Federal estate tax law has long allowed that assets can be passed untaxed to a surviving spouse (who is a US citizen), Mr. Duncan apparently left a very large part of his estate to his children and grandchildren including his two business entities EPCO and Dan Duncan LLP, the natural gas and pipeline companies he built.  Should his inheritors decide to sell the shares in these entities, they would have to pay capital gain taxes calculated on the difference between the shares original cost and their market value at time of sale.  However, capital gains are capped at 15 percent.  Should Congress decide to pass a retroactive estate tax, many attorneys believe this estate and inheritors have the means and motivation to take their court battle all the way to the Supreme Court to determine constitutionality.

Whether you agree or disagree that the wealthy should pay tax upon death is not the purpose of this blog, but rather I want to point out how the congressional leadership of this country has practiced what I consider to be ‘‘malpractice” and or lack of stewardship at a time when our country’s deficits and spending are soaring.  Furthermore, it is morally unacceptable that our leadership has allowed this issue to persist 6 months into the 2010 year leaving in limbo the planning needs of many wealthy citizens. Also, it would be a safe assumption that Mr. Duncan, whom was known in Texas as one of the greatest philanthropists giving millions away to charity, would want his lasting legacy to be associated with this congressional debacle.

Three U.S. Senators are calling for a 10% “Billionaire’s Surtax.”  In a letter addressed to their colleagues, the three senators who are advocating for the tax write, “According to Forbes Magazine, there are only 403 billionaires in the U.S. with a collective net worth of $1.3 trillion. Clearly, the heirs to these multibillion fortunes should be paying a higher estate tax rate than others.”

The letter also points out the case of the late Dan L. Duncan, the billionaire Texan who died in March, whose $9.8 billion fortune, because of the now lapsed Federal Estate Tax, will pass to his heirs estate tax free.  The senators write, “At a time when we have a record-breaking $13 trillion national debt and an unsustainable federal deficit, people who inherit multimillion- and billion-dollar estates must pay their fair share in estate taxes.” 

The senators’ proposal would be retroactive to the start of 2010, which would likely face a court challenge from Duncan’s heirs as well as others.

Alaska has officially joined the short list of states (North Dakota, Arkansas and Ohio) that allow people to safe-guard their wills against challenges after death.

The law, signed this month by Governor Sean Parnell, allows people to “prove” a will in probate and also have trusts declared valid.  The idea is that this will protect against relatives or other persons from challenging their intentions.

Many wills and trusts are challenged each year by beneficiaries or would-be beneficiaries.  Such battles cause huge problems and the person who left the legacy is no longer there to testify that the document actually says what he intended. There are four ways to contest a will; claim the person who made it was incapacitated, under duress, unduly influenced or didn’t follow proper rules.

The Tax Foundation, a nonpartisan group that describes itself as favoring simplicity, transparency, neutrality, stability, etc. in our tax system, recently published a report which concludes that the federal estate tax will “return from the dead” on January 1, 2011 even though “the arguments for making repeal permanent are strong.”

A full copy of this report is available via link from the Tax Foundation website at http://taxfoundation.org/publications/show/26360.html.

Attorney and Founder of the estate planning law firm, Altman & Associates, Gary Altman, Esq., is making full use of the possibilities of social media, with active profiles now on Twitter, Facebook and LinkedIn.

“Studies show that more than 60% of all Americans die without a will, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  This is outrageous.  The more venues I have to educate and stress the critical importance of estate planning, the better.  This is why, alongside our estate planning blog, Altman Speaks, we decided to expand our outreach on social media applications.”

Finding Gary Altman/Altman & Associates online:

·     Twitter:  http://twitter.com/garyaltman

·     Facebook:  http://www.facebook.com/GaryAltmanEsq

·     LinkedIn:  http://www.facebook.com/GaryAltmanEsq

·     “Altman Speaks” Blog: www.altmanassociates.net/blog

The Wall Street Journal recently reported that Congress is contemplating a “prepaid” estate tax.  It is unclear exactly how such a model would work, but one scenario would allow people to create “prepayment trusts” in which they’d put assets into the trust for five years and pay a 35% capital-gains tax on the gains of the assets.  Then, when they die, the assets would presumably pass to heirs without any estate tax.

The benefit for the government is the creation of much-needed revenue now, but a big drop-off in collections later.

Could this work?  Possibly, but not for everyone.  People with liquid assets who can easily pay the taxes on their trusts would certainly benefit.  But for the average small-business owner with little to no liquid assets, it would obviously be more difficult.

Of course, we’ll be keeping an eye out for more developments on this.

Little known fact:  May is Older Americans Month.  Here’s a passage from Administration on Aging’s web site, detailing the History of Older Americans Month:

When Older Americans Month was established in 1963, only 17 million living Americans had reached their 65th birthdays. About a third of older Americans lived in poverty and there were few programs to meet their needs. Interest in older Americans and their concerns was growing, however. In April of 1963, President John F. Kennedy’s meeting with the National Council of Senior Citizens served as a prelude to designating May as “Senior Citizens Month.”

Thanks to President Jimmy Carter’s 1980 designation, what was once called Senior Citizens Month, is now called “Older Americans Month,” and has become a tradition.

Historically, Older Americans Month has been a time to acknowledge the contributions of past and current older persons to our country, in particular those who defended our country. Every President since JFK has issued a formal proclamation during or before the month of May asking that the entire nation pay tribute in some way to older persons in their communities. Older Americans Month is celebrated across the country through ceremonies, events, fairs and other such activities.

This year’s theme “Age Strong! Live Long!” recognizes the diversity and vitality of today’s older Americans who span three generations.

The biggest hurdle facing estate planners is proscrationation.  No one expects anything bad to happen.  Most figure they can wait one more day, one more week, one more month to do estate planning.  Some opt to buy that flat screen TV or go on another vacation rather than to do estate planning.  In fairness, most of the time waiting or putting off estate planning is ok, because nothing happens.  HOWEVER, what if the unthinkable happens, whether it be a death, disability or lawsuit.  Then what? 
 
That is what happened recently to a client of mine.  They were referred by their financial advisor late last year.  They called in December and made an appointment for early January, which they canceled due to some conflict.  They eventually came in for their initial consultation in late February.  I was advised that the wife had cancer and her progronosis was not good.  We immediately drafted their estate planning documents and then tried to get them to come in to sign.  They made an appointment to sign, but then canceled it due to a doctor’s meeting.  We tried again.  Finally, we received a call that she was in the hospital.  We suggested that we go to the hospital to get the documents signed, but by then it was too late, she was not awake.

Unfortunately, she died last week.  The bottom line, no estate tax planning was done, and upon he husband’s death, the children will pay an additional $200,000 of Maryland estate taxes and if Federal estate taxes are restored in 2011, there could be an expected 700,000 of Federal estate taxes when the husband dies.  Moreover, if the husband gets remarried, it is possible that his new wife and family will actually inherit all of the assets.  Or, if he gets sued or goes into a nursing home, all of the assets will be subject to the creditor or nursing home.
 
If they had been able to do the estate planning that was recommended, all of the estate taxes would have been saved, the assets would stay in the family’s blood lines, and the assets would be protected from creditors, nursing homes, etc. 
 
I know how hard it is to plan.  But it is necessary and important to plan now.  Mostly because no one ever knows when it will be necessary and if it is necessary, not planning is a complete and total disaster waiting to happen.

Last week, President Obama signed a memorandum requiring any hospital that received Medicare or Medicaid funding to permit gays and lesbians to have non-family visitors and to grant their partners medical power of attorney. 

Prior to this legislation, many hospitals insisted that only family members by blood or marriage be allowed to visit patients - denying gay and lesbians partners to visit, even during a major health crisis.

The long-standing debate and recent changes to the law underscore the importance of estate planning for gay and lesbian couples and families.

Houston gas mogul, Dan Duncan, was the 74th richest person in the world when he died last month.  His $9 Billion estate might have meant upwards of $4 Billion for the IRS, however, with no federal estate tax imposed this year, they get nothing.

This scenario, some believe, could encourage lawmakers to push to retroactively impose an estate tax.  Others say that doing so would result in mayhem - law suits and headaches that could last for years.

If no action is taken, the estate tax will reset in 2011 with an exemption of $1 million and a maximum rate of 50%.  Of course, we’ll be watching closely and reporting on any changes.

April 3, 2010 Wall Street Journal article, “Inoculating Estates From Health Costs” by Kelly Greene:

Should you give away your nest egg to your heirs—and then stick Medicaid with your nursing-home tab when the time comes? Outrageous though it might seem, it is a perfectly legal estate-planning strategy.

Mark Matcho

Mother and son Vera and Paul Kubala were weighing such a plan pitched to them a few months ago at a financial seminar. Mrs. Kubala, who is 82, could have set up an irrevocable trust to hold an annuity she would buy using most of her assets. Upon her death, the annuity would go to her family. Meanwhile, if she needed long-term care, the lack of assets in her name would allow her to qualify for Medicaid. They decided against it in part for ethical reasons.

Does such a plan make sense for you? Even before you begin to tackle the moral dilemmas, quality-of-life issues might argue against it. “It’s not only important to think about how money’s being left to her family, but also how [the mother] is going to get the type of care she needs,” says elder-law attorney Vincent Russo of Westbury, N.Y.

Medicare, the federally administered health-insurance system for the aged, covers long-term health needs in only a few circumstances. Medicaid, the state-federal program that helps pay for care for the poor and disabled, covers nursing homes for those who qualify.

But the system is straining government budgets like never before. The program spent nearly one-third of its revenue, or about $110 billion, on long-term care in the fiscal year ended Sept. 30. That puts pressure on the system to cut costs, which doesn’t always mean excellent care. That pressure will increase in coming years as baby boomers retire en masse.

And you may have little say on where you spend your golden years. Nursing homes often get paid less by Medicaid than by private insurance. Some facilities—particularly newer, nicer ones—try to limit their Medicaid numbers. So, the government-paid bed you can get could be far from family in a facility you dislike.

Similarly, you can’t control the type of care you get. Even if your state has Medicaid funding for assisted-living units, there is probably a waiting list.

Due to budget pressures, the rules governing Medicaid planning have tightened. To become eligible, you generally must have no more than $2,000 in cash and investments. In the past, regulators looked at gifts you made up to three years before applying for Medicaid. Now, they look back five years. And the penalty period—during which you can’t get Medicaid to pay for care—starts when you apply for Medicaid, not at the time you made the gift.

Giving money to your children also could complicate their finances in unexpected ways—hurting their chances to qualify for financial aid to send grandchildren to college, for example. If you want to give your home to the kids, think about what might happen if they go bankrupt, get divorced, or decide sooner than you that it is time for a nursing home.

To make sure your kids get something while you keep a say over your long-term care, Mr. Russo suggests holding onto your money instead of setting up an annuity-funded trust. If it turns out you need long-term care, you could give half of your assets to your kids, tap the long-term-care services most appropriate for you at that point, and apply for Medicaid if needed. Then, with the rest of your money, you could either buy a short-term annuity or make a short-term loan to one of your children, using the payments you get back to cover as much of your care costs as possible.

Let’s say a mother gives half of her $200,000 in savings to her children and then applies for Medicaid (with care costing $5,000 a month). If she buys an annuity or makes a loan with her remaining money, she should have enough income each month to pay for 20 months of care herself. After that, Medicaid would kick in. Or, with luck, she may be back on her feet and never need it.

Contributed by:  Renee A. Bouchard-Kaiser

Can a will be kept too safe?  Surprisingly, the answer is yes!  We were recently engaged by family members to probate and administer a person’s Will and Estate.  During the initial estate settlement meeting with family members, we explained that in order to probate the Will and have the Personal Representative named in the Will duly appointed by the Court, we were required to file the original Will with the Register of Wills.  Unfortunately, family members had only a copy of the Will. We advised family members to search through the person’s personal papers, safe deposit box, dressers, night stands, home safes, etc. 

After a couple of weeks of searching, family members called saying the Will could not be found.  We advised them once again to continue searching through the home and look through the refrigerator, freezer, other appliances and unlikely hiding places.  Unfortunately, their search continued to turn up nothing.  Understandably, this worried and caused them great distress. They were concerned that their loved one’s last wishes would not be fulfilled and assets would have to be distributed according to the State of Maryland’s intestacy laws.

Without the original Will, we had to prepare and file a Petition to Accept a Copy of the Will in Lieu of the Original (as well as file the requisite notices to interested parties) with the Orphans’ Court.  Once the paperwork was filed, the Orphans’ Court placed the matter on its docket and our firm was required to appear before the Court to argue the matter.  Fortunately, the Petition was granted, the copy of the Will admitted to Probate, the Personal Representative officially appointed to act for the Estate and Letters of Administration were issued to the Personal Representative to confirm her appointment.

We gave the Personal Representative the Letters of Administration and advised that she was now able to gather the assets of the deceased family member and begin to administer the Estate.  Furthermore, we instructed that she now had the authority to prepare the decedent’s house for sale, re-title the decedent’s vehicles and have the decedent’s house and personal property appraised.

A month or two later, while in the midst of moving furniture out of the decedent’s home, one of the movers dropped a small sofa and a secret compartment in the sofa fell onto the floor.  Low and behold the missing Will was found inside!   The personal representative called immediately to explain what happened and we obtained the Will so we could file it with the Estate’s file located at the Register of Wills.

This happens often.  Many years ago, after searching for days for a deceased client’s Will, her nephew (the executor) found it in a file called obsolete papers.  Apparently, she was concerned that her brother would find her Will and destroy it, but she figured out her brother would not bother to look in this file, but her nephew, a former lieutenant in the Army, was determined enough to look everywhere.   

What Should You Do?

In our estate planning practice, once the ink has dried on our clients’ Will, his or her signature has been witnessed and notarized, we instruct them to make certain the Will is kept safe and briefly explain what could happen.

That said, we are often asked, “How do you keep a Will safe?”  There are several ways to do this:

1. Place the Will in a safe deposit box and be sure to let a family member know where the key and your box are located (or, better yet, make a trusted family member as an authorized person on the safe deposit box).
   
2. File the original Will with the Register of Wills in your County (though some Counties will not do this anymore AND what happens if you move, will someone remember to go look at the Register of Wills where you had once lived?).
   
3. Let us retain the original Will in our fire proof Will safe (but note that some law firms will not do this) or
   
4. Keep the Will located in a safe place in your home such as a wall or fire proof safe and tell someone you trust where it is located.

The bottom line is that, in the event you pass away, someone needs to be able to find your original Will, locate your assets, and have access to your accounts, passwords, PIN numbers, emails and log-in names.  So, if you keep your original Will at home (which we do not recommend), do not keep the original in a secret compartment that no one would ever find, unless you tell your Personal Representative where it is.  We also advise against wrapping a Will in tin foil and keeping it in your refrigerator or freezer!

Finally, doing complete and comprehensive estate planning can also protect against the chance that your wishes will not be fulfilled.  In previous posts, we have discussed revocable living trusts and how to use them as your main estate planning document.  We will blog more about this in the future.

Under current federal bankruptcy code, an exemption applies for certain tax-qualified retirement funds and accounts including assets such as many 401Ks, annuity plans, IRAs, qualified governmental plans, deferred compensation plans (state and local) and some tax-exempt organizations.

However, a Bankruptcy Court has concluded that, unlike a debtor’s own traditional individual retirement account (IRA), a debtor’s inherited IRA is not an exempt asset of her bankruptcy estate under Bankruptcy Code §522(d)(12).  This ruling underscores the importance of having your personal finances and estate plan working together, including coordinating the beneficiary designation of tax-qualified retirement accounts, annuities and IRAs with your estate plan. 

The impact of this Bankruptcy Court’s ruling was that the debtor’s interest in the IRA which he inherited from his parent was fully accessible (and therefore taken) by his creditor.  This ruling is consistent with a number of court cases in various states which have held that a debtor’s inherited IRA was not protected from the debtor’s creditors.

If your estate plan is structured to help protect your heirs’ inheritance from their creditors, and if part of your assets include tax-qualified retirement accounts, annuities and IRAs, then you must take this Bankruptcy Court’s ruling into account when structuring your estate plan, by creating a standalone IRA Trust to be the beneficiary of your tax-qualified retirement accounts, annuities and IRAs.

Note these other important conditions:

• If an IRA owner designates his spouse as beneficiary of his IRA and dies before the account is exhausted, the surviving spouse may roll over the decedent’s IRA into the spouse’s own IRA, or elect to treat the decedent’s IRA as the spouse’s own IRA.   This avoids the impact of the ruling noted above.
  
• A designated non-spouse beneficiary can’t treat an inherited IRA as his own, but can make trustee-to-trustee transfers of the inherited amount to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.  Thus, pursuant to the ruling above, this would subject the inherited IRA to the creditors of the designated non-spouse beneficiary.  In order to protect the IRA from the beneficiary’s creditors, the best approach is to create a standalone IRA Trust to be the beneficiary of the IRA.
  
• If the account owner dies before his required beginning date or RBD (which, for IRA owners, is Apr. 1st of the year following the year in which the owner attains age 70 1/2), the entire balance in a participant’s plan account must be:

-         distributed within five years after the account owner’s death; or

-         distributed to (or for the benefit of) the designated beneficiary, over the beneficiary’s life or over a period that doesn’t extend beyond his life expectancy.

• Slightly more liberal rules apply if the account owner dies after his RBD.

Those of you who have been following this blog, know of my weariness against “DIY” estate planning services.   I believe using these services, such as Legal Zoom, for one’s own estate planning services - wills, trusts, power of attorneys, etc. - is just a recipe for disaster.  While I can understand why people who do not think they have complicated lives/estates might be drawn to purchasing “simple” documents at Wal-Mart prices, making one wrong choice could prove disastrous.  Even if the basic form is good (which I do not believe they are), it is highly unlikely a consumer would  complete them correctly.

It appears that the State Bar of North Carolina (Unauthorized Practice) and a few Missouri law firms agree!  Legal Zoom has been slapped with an amended class action petition on behalf of plaintiffs in Missouri  seeking refunds of all fees paid to Legal Zoom by Missouri consumers.  In addition, a suit has been filed by the North Carolina unlawful practice of law committee for the State Bar of North Carolina with a cease and desist letter.    Legal Zoom is aware of the suits and will apparently vigorously defend the claims. 
 
Just remember that fixing your plumbing or electricity may cause a problem that you can have fixed by a professional (provided you do not burn your house down), but most estate planning documents are not actually used until some dies or becomes incapacitated, when it is too late to make changes, and then if they are wrong or not coordinated properly with assets and beneficiary designations, the wrong person may make decisions or receive assets or the right person may receive assets at the wrong time.   I encourage everyone to go to an experienced estate planning lawyer, who is well versed in tax law, who drafts documents customized to each person’s situation, to make sure that your wishes and objectives will be translated into your estate planning documents.  
 
Stay tuned for more comments on these events.

In an advisory opinion issued to the Maryland legislature, Attorney General, Douglas Gansler, issued an opinion on Wednesday that Maryland Courts would likely recognize as married, same-sex Maryland couples who were legally married in other states.  This should provide gay married couples with the same rights and obligations as heterosexual couples.

The exact implications of this decision are unclear, however, the decision may eventually grant same-sex spouses rights to health benefits and an exemption from Maryland inheritances, estate and transfer taxes.  That said, it might also impose obligations relating to child support and alimony, if later divorced.

In the past, Maryland has expanded benefits to those registered as “domestic partners”, but this opinion is much broader and may provide an incentive for same-sex couples in Maryland to get married in another state (that allows it).  It will likely be up to Maryland’s highest court to issue the final verdict on this matter and clarification on what it means.  A very controversial political topic, we will be certain to stay on top of this legislation for our clients.

As my readers are aware, all of us in the estate planning community have been following the mess that Congress created by not passing any sort of law to set the estate tax limits at a permanent level.  As most people now know, the estate tax was repealed effective, January 1, 2010, but is scheduled to be reinstated in 2011 at a rate of 55%.

As a result, many States have taken action and legislatures are introducing bills that would require all estate and trusts to be interpreted as if someone died on December 31, 2009, unless Congress acts to clarify the estate tax law.  On January 12, Virginia was the first state to propose taking action with Maryland, New York and Georgia following closely behind.  The point of this legislation is to carry out what the deceased intentions were and to provide closure and a clear answer to families who are in disagreement where a recent death could result in litigation.  As we discussed in previous blogs an unintended consequent of Congress not acting was there is no “applicable exclusion amount” in 2010.  As a result many estate documents could unintentionally disinherit a spouse or could unintentionally not create a “bypass” trust that will save estate taxes, if any, upon the surviving spouse’s death.  These bills could pass by the end of February and made retroactive to January 1 unless Congress acts.  Federal law always takes precedent. 

*Footnote:  Missouri, the District of Columbia, South Dakota, Minnesota, Tennessee, Indiana, Florida, Ohio, Wisconsin and today Delaware are all drafting legislation to address estate planning documents for decedents dying in 2010 in their respective States.

Also, with the release of the budget yesterday, it appears the office of OMB has indicated that the 2009 level would apply in 2010.  The Wall Street Journal also reported that President Obama has proposed reinstating the estate tax to the levels of 2009 with a $3.5 million exemption with a 45% marginal rate to be extended permanently.  There are different income tax proposals which would eliminate some of the 2001 tax cuts at top rates.

Stay tuned.  I will be writing more on this subject as news breaks.  If you have any questions about your own specific situation or estate planning documents, please send me an email.

As we’ve been discussing, both the estate tax and the generation-skipping transfer tax were repealed at the end of 2009.  The twist being that, at any time, Congress may vote to retroactively re-instate the tax, or, if no action is taken this year, it may automatically renew in 2011.    That said, there is still a gift tax for people who give away more than $1 million during life – the only difference is that the top tax rate has been reduced from 45 percent to 35 percent.
 
One of the many provisions of estate tax law that is often overlooked is the gift tax exclusion for amounts paid directly for someone’s tuition or medical expenses.  Many people understand that they can give away 13K (or 26K for a married couple) each year without any gift or estate tax consequences.  What you might not know is that you can pay for things like medical expenses or tuition in any amount what-so-ever.  You could pay for a friend’s operation or college or business school tuition (or even someone’s private high school or other lower school education tuition) with no gift or estate tax consequence.  Similarly, a grandparent could help their children pay for current, day-to-day medical or tuition expenses - things like doctor co-pays, prescription drugs, and dental bills.  The only condition is that these “med-ed” payments, as they are called, must be made directly to the providers of those services.
 
To facilitate this in the simplest way possible, we have advised clients to open a “Family Savings Account”.   For example, a client opens a bank account in their own name starting at whatever amount they want (adding to it as needed).  They then give debit cards to their children or grandchildren and let them use the debit cards for payments made directly for tuition or medical expenses.  Alternatively, a client can give as many children as they want power of attorney over that account, so that they can write checks (again to medical providers or to educational institutions for tuition). 
 
Although you don’t technically need a lawyer to set up an account such as this, you obviously do need to trust the person who has check-writing authority or a debit card to not spend the money on other things.  And, in some cases, it might just be preferable to have a lawyer, accountant or financial adviser play this role and write checks on behalf your children, grandchildren’s or other desired persons’ medical and tuition expenses.

I have spoken out many times against “Do-It-Yourself” estate planning services - most recently in an article for Boomer-Living.com entiled, ”The Dangers of DIY Wills and Trusts - Packaged Estate Planning Documents Are a Big No-No.”  From LegalZoom and Suze Orman’s Will & Trust Kit to LegacyWriter and Build-A-Will, there are no shortage of companies and products promising “customizable” wills and other estate planning documents – at “a tiny fraction of the cost of an estate planning attorney.” 

There are many flaws with this “one-size-fits-all” model for estate planning:  Laws change.  Laws also vary from state to state.  Most importantly, only a well-experienced professional who is current on the laws and your unique circumstances, can provide you with the kind of security and accuracy crucial to having a solid estate plan.  It’s one of those life choices in which you really will get what you pay for.

A simple story underscores why:

There is an old story about a factory which shut down due to an equipment failure.  The owner of the factory called a renowned expert to rush to the factory to get things moving. The owner told him, “This shutdown is costing us $100,000 per day!”  The expert arrived, walked around the faulty machine, then took out a screwdriver and adjusted a thing or two.  Within moments the machine came back to life and the factory began to hum with activity.  The owner was thrilled—until he was given a bill for $10,000.  He roared, “But it took you less than 10 minutes to fix the machine—it cannot possibly cost $10,000!”  The expert calmly responded, “No, it took me a lifetime to know exactly where and how to use that screwdriver.  The bill is $10,000—but the value to you is $100,000 per day.”

Last week, the Senate took steps towards placing estate tax legislation (the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009) onto the Senate calendar. This maneuver may result in the Senate bypassing the Senate Finance Committee in an effort to address the most recent estate tax legislation, which expired at the end of 2009.  On December 3, 2009, the House approved the bill, but the Senate, wrapped up in healthcare legislation, failed to act on the measure.

The proposed legislation would indefinitely extend the current exemption for estates up to $3.5 million per individual and $7 million for married couples.  It would also set a maximum rate of 45 percent on estates above this threshold.

A colleague of mine, Adrienne Carlson,  forwarded me a link to her latest blog post, “The Ten Most Obscure Tax Deductions You Should Be Using this Year” and it’s worth the read:

There are tax deductions out there for just about everyone imaginable. Unfortunately, many of them go underreported because few people are even aware of their existence, leaving a multitude of extremely valuable write offs going completely overlooked every year. The following tax deductions and credits remain some of the most commonly forgotten on return forms, but also some of the most lucrative as well. Take advantage of these whenever possible to ensure the most thorough and financially gratifying tax return possible.

1.  Fees for tax preparation and financial planning
2.  Safety equipment for work
3.  Exchange students, adoption, and foster care
4.  Interest on savings bonds
5.  Local and state income tax
6.  Charitable contributions that aren’t cash
7.  Health insurance premiums
8.  Owning a hybrid vehicle
9.  Higher education
10.  Saving for Retirement

For more information on the above deductions, you can read the complete blog post here.

The final year of The 2001 Tax Act (EGTRRA 2001) is now upon us, and estate tax repeal, at least temporarily and unless reinstated retroactively, is upon us.  Quite frankly, I never expected this to happen.  I, along with many of my colleagues, anticipated Congress to act before this.   Now, we have to consider that, at least for some part of the 2010, all transfers at death will be estate tax and generation-skipping transfer tax free. 

The Early Byrd Catches the Worm

That said, due to the Byrd Rule, which limits laws with a negative fiscal impact to 10 years, EGTRAA is set to expire on December 31, 2010.  This means that the estate tax law is scheduled to revert back to what it was as of January 1, 2001, as if the changes never occurred.  (The federal estate tax exemption will become $1,000,000, the GST exemption will be somewhat greater, and the maximum estate tax rate will return 55% - with a surcharge for certain estates of 5%.)

The looming question is:  Will Congress be able to address the massive confusion that is taking place when trying to understand and plan for a year of no estate and GST tax?  Complicating the matter, if Congress were to make new legislation retroactive to January 1, 2010, numerous lawsuits over the constitutionality of such a move may occur.  Such proceedings could end up tied up in the courts, possibly culminating in a Supreme Court decision.  

The Blame Game

It should not be a foregone conclusion that Congress can make the estate tax retroactive to January 1, 2010.  Many already feel the reinstituting the estate tax on a retroactive basis would be unconstitutional.  And, many say it would be in the best interest of the country to do nothing and let EGTRRA sunset (which means a $1,000,000 estate tax exemption, with a maximum rate of 55%).  The Democrats argue that a Republican Congress and President signed the law creating this insanity.  Republicans argue that they have steadfastly argued for total repeal of the “death tax” – which resonated with the people, at least back in 2001. Democrats had the opportunity to permanently end the “death tax” and chose not to.  Both sides had numerous opportunities to compromise on an exemption number (like 3.5 million or 5 million or even greater) and an estate tax rate (like 45% or 35% or even lower).  In addition, this issue will likely be a significant mid-term election discussion.  The most likely outcome of all of this will largely depend on the political priorities on Capitol Hill.

Step by Step

Probably the most controversial and confusing aspect of EGTRAA is that it replaced, for 2010, the estate tax and GST with a modified carryover basis.  Under the law that was effect in 2009, subject to some exceptions, assets owned at death received a basis “step-up” to a fair market value at death.  For example, if a client were to die owning a stock that they purchased many years ago, the beneficiaries could sell that stock at its fair market value of today and pay little or no capital gains tax (though the value of the stock would have been subject to estate taxes at it fair market value on the date of death).  The only capital gains tax that would be paid is the difference between the sale price and fair market value at time of death.

Under the 2010 repeal of the estate tax, a beneficiary receives property with an adjusted basis equal to the lesser of the decedent’s basis or the asset’s fair market value at the date of death.  This means the automatic “step up” is eliminated at death but retains the “step down” for depreciating assets.  Many attorneys agree that this modified carryover basis will impact far more decedents than those that would have been impacted by the estate tax.    To offset this loss, EGTRRA provides the executor or any other person responsible for the decedent’s property can allocate a $1.3 million “aggregate” increase on an asset by asset basis.   Assets left outright to a spouse receive an additional $3 million “spousal property basis increase”.  Assets left to a spouse in a “marital trust” may be eligible for this additional $3 million property basis increase depending on the terms and provisions of the marital trust.  In any event, this ability to increase the basis on certain assets will certain complicate the administration of estates of persons dying in 2010 and could lead to lawsuits if an executor’s action in increasing the basis of certain assets benefits the estate’s beneficiaries unequally.

The Bottom Line

I have always advocated that all existing estate plans created more than 4 years or so ago should be reviewed to make certain the client’s objectives are still being met.  The elimination of the estate tax for 2010 makes it imperative that many estate plans be reviewed and possibly changed.  For instance, if someone created their estate plan when the federal exemption was significantly lower, and should the client die in 2010, a client’s estate planning documents may include a formula that could shift assets from a spouse to another beneficiary.  This may be of particular concern where a client wanted his or her children or other relatives to receive the amount that passed free of estate tax and for the surviving spouse to receive the balance.  If all of the assets pass free of estate tax, then the surviving spouse may end up with nothing.  This could be a totally unintended consequence and could be particularly ugly for second marriages and children from a prior marriage.  It is important to make certain that the will or trust language will ensure assets are available for the surviving spouse.

As all of the above demonstrates, it is important that every person’s estate plan be periodically reviewed and provide the necessary flexibility and provisions to take account of current and ever changing tax circumstances.

As we have been following, the federal estate tax is set to disappear in 2010.   The push by Democrats to extend the current rate permanently failed to pass a short- term extension to override the tax’s expiration date last week.    Currently the top rate is 45%, with a $3.5 million exclusion rate.  Per the 2001 Legislative act and if Congress can get nothing done, there is no estate tax for the 2010 year but come 2011, the rate will increase to 55%, with a $1 million exclusion rate. 

There is also a little known provision inside the 2001 legislative act that may cause much angst to those people who inherit property 2010 and later sell it paying a higher capital gains tax.  This means that you have to calculate the gain based on the price the decedent paid for the asset, instead of the value at the time of transfer.  This means that many people would have a new capital gains liability from the provision in the 2001 Legislative act.  So instead of looking at the 2010 year as a tax break, it will be another tax increase for those that inherit property. 

The combination of depressed asset values and confusion over the estate tax rules has created an environment where people are not moving forward with their planning, sitting on the sidelines waiting for Congress to make a ruling.  Hopefully, Congress will be spurred into action early next year to address the issues around this legislative act.  They need to move forward so that many upper and middle class families can proceed with effective estate planning.

Serves me right, I go on a wonderful 10 day vacation from work and look what happens:  Congress finally passes an estate tax bill.  The full story is that the House has passed a bill that would permanently FREEZE the applicable exclusion amount (i.e., the amount that passes free of Federal estate tax) to 3.5 million and FREEZES the rate at 45%.  The Senate will now take up the passed House bill.  Then, if the Senate makes any changes, it goes to a conference committee.
 
The good news:  Something may happen before the end of this year to end the uncertainty.  AND the bill that passed the House does not change any other aspect of the estate tax laws (other than repealing carryover basis, which would have been a disaster anyway).  Therefore, GRATS, valuation discounts and other estate planning tax reduction techniques are still viable.
 
The bad news:  Anything can happen and NOTHING is permanent.  Hence, Congress can still act before the end of this year to eliminate or restrict GRATS and valuation discounts.  Clients should not be lulled into a false sense of security.  Action should be taken as soon as possible before Congress closes the door on these techniques.

Great food, family get-togethers, holiday cheer…estate planning?!?  While it may seem like a less than ideal topic for a fireside chat, estate planning is critically important and the holidays can present a golden opportunity to get things in motion.

Here are few things to consider:

The More, The Merrier – With siblings scattered across the country and grandkids away at college, it’s rare that families members are the in the same place at the same time.  Odds are that holiday get-togethers are the only exception.  Take advantage of having more of your loved ones under one roof so you can have the conversations you need to have with individuals or a group.

Don’t Be Left Out in the Cold - A common misconception is that estate plans are only important for the ultra wealthy - the Gates, Buffets and Rockfellers of the world.  Nothing could be further from the truth. Yet, more than 60% of all Americans die without one, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  If this is the case, then unfortunately, no one will care about the best interests of your family, your heirs and your legacy. 

Ties that Bond – We all love the timeless gift-giving traditions of the holiday season – but that new tie, while nice, certainly isn’t legacy-building.  What do you want to be remembered for?  What do you want to pass on to the next generation?  Estate planning can go well beyond simply who/what will get your assets.  Other considerations include values, taxes, medical care, charitable gifts, educational trusts, pets and more.

Say “No” to Online Shopping – Buying a sweater online is one thing, but drafting a will online is another.  Think of drafting a Will online like trying to tackle your own electrical or plumbing problems.  It’s risky business.  Why chance your family’s future to an online estate planning service instead of hiring an experience professional to assist you?  If you draft a Will by yourself, and it has a problem, by the time it is discovered, it could be too late.  The stakes are too high.

Making a List, Checking It Twice - Even if you already have an estate plan, it needs to be reviewed at least every four years.  That said, if any of the following events occur, you should have your estate plan reviewed immediately: 

• A change in marital status
• The birth of a child
• A change in your state of residence
• A significant change in the value or character of your assets
• A change in intended beneficiaries
• The death of a beneficiary
• The death of a guardian, trustee, or personal representative named in your will
• A change in tax laws affecting federal (and your local state) estate tax deductions and calculations
• A change in privacy laws or other laws that affect the access to medical and financial information

The bottom line:  An outdated or inadequate plan is often worse than no plan at all.

Take time this holiday to discuss estate planning with your loved ones.  You’ll be glad that you did.

A reporter recently asked me the question:  “Who is Responsible for Debts After Someone Dies?”

After someone passes, family members typically have no obligation to pay the debts of the decedent from their sole and individual funds.  Debts of the decedent must be paid by the decedent’s probate estate or otherwise by assets passing from the decedent, as provided under state law. 
 
Every state has a different law and these laws can change at any time, either by legislative action or a court case.  For instance, in Maryland, a creditor or debtor must file a claim within 6 months of death or the debt can be denied and not paid.  Another legal possibility is that a claim can be filed only against the probate estate, so assets that pass outside of probate, like a joint bank account, etc, could be free from attachment by an debtor or creditor. 
 
There are situations in which a family member has accepted responsibility, before death, by being a co-applicant on a credit card or by saying so when the decedent went into a hospital or nursing home.  In those cases, that family member will very likely be liable for the debt. 
 
Finally, if a family member inherits a house or car that has a secured debt, the family member will have to pay the secured debt, or else that creditor can foreclose or repossess the house or car.

A colleague of mine sent me the below info on two tax provisions which are scheduled to expire after December 31, 2009.  Here’s how they might impact you:

1.  For 2009 only, you have the option of skipping your required minimum distribution (RMD) from traditional IRAs and certain other qualified pension plans. This suspension of the RMD rules applies to distributions you would have had to take because you’re over age 70½ or are the beneficiary of an inherited traditional or Roth IRA.

If you took a distribution earlier this year and would like now to reverse it, you have the later of 60 days from the distribution date or November 30, 2009, to roll the money back into a retirement plan.

2.  If you’re 70½ or older, you can make a 2009 donation of up to $100,000 directly from your IRA to a qualified charity without treating the donation as a taxable IRA distribution. (Distributions from employer-sponsored retirement plans - including SIMPLE IRAs - are not eligible.)

No charitable deduction is allowed for the donation unless nondeductible contributions are transferred.  In that case, a charitable contribution deduction may be allowed if you itemize deductions on your tax return.

I have written previous blogs on this topic in an effort to plan and keep my clients informed of the possibilities for the future.  As we rapidly move forward to the end of the year, I thought that by now, we would have seen some discussion in congress on the estate tax law and possibly an amendment to the current legislation.  Everyone had predicted that 2009 would be the year we saw change, but what if Congress just allows the estate tax to go back to 2001 levels?

Let’s review the current law as it exists today 2009:  $3.5 million exclusion from generation skipping transfer (GST) tax; $3.5 million exclusion from estate tax; $1 million exclusion from gift tax; 45% top marginal rate and no credit for state estate taxes (states like Maryland and DC imposed their own estate tax, which is currently a deduction on a Federal estate tax return). 

Now, for 2010 we are slated for no Federal estate tax; no Federal GST tax and $1 million exclusion from gift tax.   If nothing happens in Congress, then we are slated to return in 2011 to the pre-2001 tax laws:  i.e., $1 million GST exemption (as indexed for inflation after 1998); $1 million exclusion from estate tax; $1 million exclusion from gift tax; a 55% top marginal estate tax rate, and state death tax credit reappears (so that any state death tax is a dollar for dollar reduction from the Federal estate tax).

This scenario of uncertainty makes it extremely difficult for advisors and their clients in the creation of estate planning documents.  Some possibilities are: Congress could do nothing; Congress could pass a one year extension of the 2009 law; Congress could extend the current law and exemption levels permanently; Congress could reduce or increase the various exclusions rate etc. 

And, while I hope not, the administration and lawmakers in Congress could just allow the 2001 estate tax reform legislation to expire and therefore the estate tax laws would revert to the pre-2001 limits in 2011. The question becomes how do you plan and discuss strategies and make recommendations to clients.  I have always advised clients to plan for the tax law that we currently have, but to keep your estate plan flexible enough to account for future changes to the tax laws or your assets and net worth.

However, given the current uncertainty and the possibility that Congress could allow the current law to lapse so that we have once again have an exclusion from GST tax to be $1 million (as indexed), some clients may want to plan to avoid GST tax on a full 3.5 million dollars worth of assets, even if the law in the future only allows for an exclusion at a lower rate. 

One strategy would be to make a taxable gift in 2009, pay gift tax in 2010, and exempt as much as 3.5 million from GST tax.  Only clients who have very large estates should even consider this pre-payment of gift (and estate) tax.  If you are interested in this type of strategy, you would be able to provide a future estate and gift and GST tax pool of funds that would be available for multiple generations of your descendants. 

A second strategy would be to create a trust for the benefit of your spouse.  While there would be no current estate or gift tax, you would be able to fully use your 3.5 million exclusion from GST tax by using a currently little used technique called a “reverse QTIP election”.  Basically, you would establish a QTIP Trust for your spouse, fund it with 3.5 million of assets, file a gift tax return next year, and fully allocate your GST exclusion to the 3.5 million gift to the QTIP Trust.  Again, you would be able to provide for your future descendants to have access to a pool of funds that would never be subject to estate, gift or GST taxes.

Using these and other strategies can provide for a tax free transfer of wealth to your future generations.  Creating a flexible estate plan that takes into account the current estate tax laws will produce the most optimal estate plan for you and your heirs.

Here are some of the most common estate planning myths, debunked:

1.  Estate plans are only important for the Gates, Buffets and Rockefellars of the world. 

False.  In fact, nothing could be further from the truth.  Yet, More than 60% of all Americans die without one, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  Regardless of the size or value of your estate, peace of mind comes in having a thoughtfully and professionally prepared estate plan.

2.  I can draft my own will using an online estate planning service.

False.  This is a huge no-no.  Buying a sweater online is one thing, but drafting a will online is another. If you think that you will be saving a few dollars by using forms found on the internet or in a do-it-yourself book to prepare your estate planning documents, then your family will be in for a rude awakening when they learn that part or all of your documents are not legally valid/don’t work as you had anticipated or that your assets go to individuals not named in your Will due to outdated beneficiary designations.

3.   I already have a will.  I don’t need further estate planning.

False.  Think you’re covered for life?  This is one of the most common and tragic mistakes when it comes to estate planning.  People dying with outdated, incomplete or unsigned wills – all are recipes for disaster. 

Your (entire) estate plan – will, trusts, heath care proxy, etc. - needs to be reviewed at least every four years and as often as any of the following events/scenarios occur:

-  The birth, death or disability of a child.
-  A change in state residence.
-  A change in marital status.
-  A significant change in the value or character of your financial assets that would make your estate taxable on a Federal or State level.
-  A change in intended beneficiaries.
-  The death of a beneficiary.
-  The death or disability of a guardian, trustee or personal representative.
-  A change in tax laws affecting federal and or state estate tax deductions.
-  A change in privacy laws that affect access to medical or financial information.
-  You have minor or problem children.
-  You want to leave some or all or your estate to charity.

Federal and State Laws Are One in the Same.

False.  Many states, including Maryland, have moved away from the Federal exemption of $3,500.000 and exclude only up to $1 million.  Therefore, even if you are exempt on a Federal level, your estate may still be exposed to State estate taxes.  Furthermore, most individuals don’t realize that state laws are very specific about what can and can’t be in a will, trust, or medical or financial power of attorney.  Or who can and can’t be a witness to a signing of a will or trust, and what formalities or protocols must be observed when signing.  Working with a qualified estate planning attorney will help to avoid this kind of simple and yet costly mistake.

The Bottom Line?

Only a qualified estate lawyer can help you to sort out complex family or financial situations and ensure that your estate is distributed how and to whom you want it to upon your death.

When someone dies, his executor or personal representative is responsible for preparing the decedent’s final income tax return and the decededent’s estate is liable for all income tax due.  If the executor distributes the estate without payment of the income taxes, the IRS could hold the executor personally liable for the unpaid income taxes. 

In a recent Florida case, this is what happened.  The executor’s excuse for not paying the income taxes was that the income was placed in a jointly held account with his brother and that the brother had agreed to pay the income tax.  However, when the brother later refused, the IRS sued the executor, not the brother, and won. 
 
This case is a reminder that anytime someone uses a probate avoidance technique, like a joint account, or paid on death account or transfer on death account, there are unintended consequences, such as the one above.  The person named as executor as the responsible for paying the income and estate taxes, but may not be able to obtain the funds from her persons who receive the assets. 
 
A much better way to plan is the bucket concept.  Either place all your assets in one bucket or direct that all your assets are to be placed in the bucket upon your death, and then the person in control of the bucket can make sure that he or she has the assets to pay the income and estate taxes due at your death.  Then, once those taxes are paid, the assets can be distributed according to your wishes.  This always works whereas Joint accounts paid on death accounts, do not always work and can have unintended consequences that totally undermine your wishes and objectives.  The bucket noted above is a revocable or living trust that is created upon your death and if fully funded avoids probate at death.

Today, the Social Security Administration announced that there will be no cost-of-living increase for 57 million Social Security beneficiaries next year because consumer prices have fallen.

This announcement marks the first time that Social Security benefits have not been increased year over year since the cost-of-living adjustment was put into effect in 1975.

Hoping to off-set the strain this will put on seniors and other Americans such as veterans and people with disabilities, President Obama is calling on Congress to send a second round of $250 in emergency recovery assistance. The original $250 relief payment was paid out of general revenue. That would likely be the case for the second payment as well.

A recent article on TheHill.com, Debate Over Estate Tax Likely to Wait Until 2010″, suggests that a split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it is set to expire at the end of the year.

Many experts forsee that the most likely scenario for estate tax reform is a one-year extension on current estate tax laws which would buy Congress time to make broader reform in 2010.

We will, of course, be following this closely!

A recent Wall Street Journal blog reiterated what my firm considers an estate planning must:  Take the time to create an Advanced Medical Directive.  This issue was brought into the spotlight during the unforgettable Schiavo case in which Michael Schiavo went up against his in-laws, politicians, advocacy groups, the courts, and even the government, to have his wife, Terri Schiavo — diagnosed as being in a persistent vegetative state (PVS) for several years — disconnected from her life-sustaining feeding tube.

It is always tragic when someone dies.  In the past couple of months, well known individuals and celebrities have unexpectedly died - Farrah Fawcett, Michael Jackson, Billy Mays and Steve McNair.  It has now become known that Steve McNair did not have a Will or any sort of estate plan.  Besides his current wife and two children, he had two children from a previous relationship.  It is now up to the laws of Tennessee to determine who receives his assets and how and when they are distributed.   Given the probable size of his estate, the IRS may actually be the biggest beneficiary as a result of his death, receiving upwards of 45% of his assets.
 
Most of us do not think we are going to die tomorrow.  This is especially true of athletes.  The lesson that should be learned by these unfortunate deaths is that the future is unknown.  And, while there is a media circus surrounding the death of Michael Jackson, in the end, it will be determined that he created a conservative, private estate plan that will allow for the future wellbeing of his children, mother and others and or charitable causes close to him.
 
The bottom line is no matter how young or healthy you are, no matter your wealth or family situation, estate planning allows you to control who receives  your assets, allows you to determine who makes decisions for you and your young children, allows you to determine how and when your assets are distributed and finally, may prevent the IRS from receiving the lion’s share of your estate.

Currently, up to $3.5 million of an estate’s value is exempt from Federal estate tax for deaths occurring in 2009.  In 2010, the estate tax is scheduled to expire for a period of one year, returning in 2011 with a lower $1,000,000 exemption.  That is, unless Congress has anything to say about it.

Estate taxes have become a major source of revenue for the Federal government and chances are good that Congress is not to let the estate tax expire even for one year.  We in the estate planning community are keeping a watchful eye on this, knowing that chances are good that Congress will enact legislation in order to avoid the full repeal of the estate tax.

Many states, including Maryland, have moved away from the Federal exemption and exclude only $1 million.  Therefore, even if you are exempt on a Federal level, your estate may still be exposed to State estate taxes.  

Advanced planning is the only way to shield against any estate tax.

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Some things to consider:

Leaving Your Entire State to Your Spouse

The majority of married couples leave everything to the surviving spouse in their wills. In some cases, this can be advantageous.  However, in others, it can mean paying substantial and avoidable estate taxes when the second spouse dies.

Reduce the Size of Your Estate Through Gifting

Using the annual gift tax exclusion of $13,000 per recipient can reduce the size of your estate.  If your spouse joins in the giving, you can transfer up to $26,000 to any number of recipients during the year.

Establish an Irrevocable Life Insurance Policy

In most cases, the proceeds of life insurance policies are subject to tax as part of one’s estate.  Establishing an irrevocable life insurance trust as “owner” of the policy can shelter the proceeds from estate tax.

In response to a budget crisis, the Delaware Legislature and Governor reinstated into Law the Delaware Estate Tax for people dying on or after July 1, 2009.  This new tax will be tied to the federal state death tax as it existed in January 2001 and applies to estates of $3.5 million or more.  After the elimination of the federal state death tax credit in 2005, one of the legacies of the Economic Growth and Tax Relief Act of 2001 (2001 Tax Act), over half of the states in the union lost their estate tax revenue, or they simply decoupled from the federal system altogether to prevent revenue loss.

For example, Virginia had a separate state death tax that they repealed.  This year, in Virginia, three bills have been introduced to create a new estate tax hoping to create over $100 million in revenue for the State.  All of these proposed bills have failed to pass in the legislature.

What this all means:  States facing large budget deficits along with the growing economic challenges are once again looking at “estate taxes” as a means to buffer or balance their budgets by taxing the deceased.

As always, we will be following all of the local jurisdictions in regard to their estate tax laws.  Currently, as stated above, Virginia does not have an estate tax, while Maryland and D.C. both have an estate tax on estates valued at over $1.0 million.

Now that the untimely death of Michael Jackson is turning into a custody battle brewing between the Jackson Family, the biological Mother of his children and possibly the Nanny, I believe it is important opportunity to mention how essential it is that parents name guardians for their children in the event of incapacity or death.

Many people are under the impression that estate planning is “just for the wealthy” or for the elderly.  This could not be farther from the truth.  Whether you have many assets or not, it is essential for families with children to clearly define who should care for your children if you are not able to so.  A court will normally honor the wishes of the parent to determine who should take care of the children. 

No one can predict how or when we will die, however, we can dictate how our children and our assets will be handled after your death with basic estate planning.  This includes appointing someone to make medical and financial decisions for you, if you are unable, as well as naming guardians for your children, for both the long and short term.  Again, if these decisions are not put in writing, you have left it up to a judge to make decisions for you, sometimes after a messy and costly court fight. 

This past winter, one of my clients, a single Mother with two teenage children suddenly died.  Because  thorough and complete estate planning had been done, a close family friend, who agreed to move into my client’s house, was named as the guardian and was able to immediately begin caring for the teenage children.

So use this sad and tragic passing of one of entertainment’s icons as a call to families to take control of your future and that of your children.  Do not wait to have basic estate planning, i.e., wills, advanced medical directives, correct beneficiary designations, power of attorneys and guardianship, documented so if something tragic happens, you have directed who should make decisions, who should care for your children and how your assets shall be used after your death.  And, at the same time, use the opportunity to document the values you want passed along and how you would like for them to be raised.  Don’t let the courts do this for you!

A California court has made the late Michael Jackson’s mother, Katherine Jackson, the temporary administrator of his estate pending a hearing next Monday.  Mrs. Jackson’s had petitioned for the status out of concerns that a host of third parties could try to steal from the estate.

In addition to various bank accounts, Mrs. Jackson and her attorney worry about Michael’s stake in the Sony-ATV Music Publishing Catalog - which includes Beatles’ works — thought to be the most important asset in the estate.

Right now, it’s uncertain whether Michael Jackson had a will as none of the family members were aware of one.

You wouldn’t think so, but many times celebrities dies without a comprehensive estate plan in place.  It does not surprise me that there are already allegations regarding inappropriate conduct by various parties.  I believe that this will be the tip of the iceberg. 

The lesson for us normal folks is to plan early and to make sure all assets are owned properly and that all retirement accounts have the proper beneficiary designations.  Everything should be coordinated and reflect the exact wishes of the individual.  Moreover, it is important that the people close to you know about your planning, though maybe not the exact details, and know who to call when the unfortunate happens.

Charitable gift annuities allow donors to make a tax-deductible contribution and, in exchange, receive regular payments for the rest of their lives.  Ideally, about half the initial gift remains with the charity when the donor dies.

For donors 65 or older, gift annuities might seem like a smart option because they can yield between 5.3% and 9.5 - less than they could probably get from a commercial annuity, but appealing at a time when yields on five-year certificates of deposit and 10-year Treasuries are hovering around 3%.

However, the economic downturn could cause some charities, which typically back the annuities themselves, to have trouble meeting their pay-out obligations.  For example, if a charity goes bankrupt, creditors ahead of you in line could have a claim on assets intended to fund your payments.  Making matters worse, the gift is irrevocable — meaning you can’t get your money back if the charity runs into trouble.

A financial advisor contacted me recently regarding one of her clients.  A widow died in 2006, leaving her estate to her daughter.  Her estate included US Savings bonds of $350,000, of which $280,000 was interest which she had never paid tax on.  The daughter had the bonds changed to her name, thereby deferring the income tax until the savings bonds matured.  This can make sense, but in this case it did not.  Because the estate was subject to state estate tax, but not federal estate tax, there is no offset against the future interest income for the state estate tax paid.  In other words, there are two taxes on the interest income, state estate tax and federal and state income tax.

A better plan would have been to realize some or all of the interest income on the final income return of the widow.  That way the income tax paid would be a deduction against the assets of the estate, thereby saving Maryland estate taxes AND avoiding the double tax situation. 

This is a classic example of having to pay more tax than necessary because of the lack of proper planning and lack of obtaining professional tax advice after someone died.

I have heard that members of a House and Senate negotiating committee have worked out a compromise on estate tax reform.  While details are still not know, it appears that the estate tax would be kept permanently at the 2009 levels.  This means that individuals could exempt $3.5-million from Federal estate taxes and a couple, with basic estate tax planning, could exempt $7-million from Federal estate taxes.  Estates over these amounts would be taxed at a 45 percent rate.

Stay tuned for more breaking news.

Great news and information for anyone interested in including their pets into their estate plan!  This April, Governor O’Malley signed into law HB 149, which will allow statutory pet trusts in the State of Maryland. 

Key Components of HB 149 (These provisions apply only to pet trusts created on or after October 1, 2009.)

• The animal must be alive during the settlor’s lifetime.
• The trust ends at the death of the last animal covered by the trust.
• If the settlor did not appoint someone to enforce the trust, the court may appoint an enforcer. 
  A person with an interest in the welfare of the animal may ask the court to appoint an enforcer or to remove an enforcer who is not doing his/her job. 
• Trust property may be used only for the pet’s benefit unless the court finds that the value of the trust property is excessive. 
• If the settlor did not provide express directions, excess trust property passes to the settlor (if still alive) or to the settlor’s successors in interest if the settlor is dead. 
• The Rule Against Perpetutities does not apply to pet trusts. 

Benefits of a Pet Trust

• Ensures your pets will be cared for, as you yourself have cared for them
• Ensures that there are funds available and a care taking system is in place
• Appoints a caregiver and at least one backup caregiver
• Appoints a Trustee to make sure that the care giver is doing his or her job
• Protects the money designated for the pet and ensures that it lasts for the duration of the pet’s life
• Gives directions regarding health care needs, exercise needs, diet needs, preferred veterinarian, and burial/cremation plans for your pet
• Provides that any funds remaining in trust at the death of the pet goes to charity or a family member
• Provides a method for finding a caretaker in the event that the caretaker or the back-up caretaker you have selected is unavailable
• Assets in a pet trust are NOT subject to the caregiver’s creditors, marital disputes, or bankruptcy. (Alternatively, if you leave an outright gift of money to a person in your will in exchange for the care of yur pet, the money will go to that person’s heirs or beneficiaries at his or her death and will not be available to care for the pet).
• You can provide for a temporary emergency/caregiver in the event that something unexpected happens to you providing them with keys to your home, feeding and care instructions, the name of your veterinarian, and information about permanent care instructions.
• Planning can lead to peace of mind, reducing the anxiety that many pet owners experience when they envision their beloved pet living without them
• There is no assurance that if you leave money to someone outright to care for your pet that they will do what was promised
• To ensure that certain people are notified, so your pet’s care will not be interrupted
• To ensure that caretakers are pre-selected by you
• To provide a source of funds for your pet’s care
• To inform future caretakes of your pet’s care instructions, likes and dislikes, and your wishes as to your pet’s burial and cremation

I recently gave the Wall Street Journal my take on the most important questions you should ask you aging parents.  Here’s the list:

• Have you named someone to make medical decisions for you (and to obtain medical information)?
• Have you named someone to make financial decisions for you? 
• Do you have a list of your assets, passwords, login, other important information; if so, where is it?
• Where do you want to be buried?  Who do you want to invite to your funeral?  What type of funeral do you want?
• Do you hide cash or jewelry in your house?  Can you tell me where it is hidden?
• Do you want any of your grandchildren to get anything when you die? 
• Have you clearly determined who is going to receive your personal effects?
• And the most difficult:   When was the last time you have revised your Will/estate planning and should you revisit it at this time?

Taking the time to ask these questions now will save you from big headaches and financial burdens later.

I remind my clients often to contact us immediately any time there’s been a significant change in their lives, including, but not limited to:  the death of a beneficiary or anyone else named in your will, a change in marital status, new children, a change in state residence, and, as we’ll discuss in more detail, a significant change in the value of your assets or a change in tax laws. 

It’s no secret that the majority of Americans have been impacted by the current economic crisis.  Investment values have sharply declined, leaving many (particularly those nearing retirement) unsure of what to do with their assets. 

This financial uncertainty, coupled with the January 1, 2009 increase of the federal estate tax exemption from $2 million to $3.5 million, may be causing a shift in your estate plan. 

How?  Very often, estate plans can use formula clauses to fund a bypass (tax savings) trust with assets up to the maximum amount of the federal estate tax exemption ($3.5 million) with the “remainder” of the estate (often including IRAs and 401(k) accounts) passing to a surviving spouse. 

For example, a client may wish for a set percentage of assets to pass outright to a surviving spouse.  But, lower asset values and the higher estate tax exemption may result in an inadequate amount.

Another area for concern is with charitable gifts or distributions to children, grandchildren or other relatives on the death of the first spouse.  With fewer assets to go around, one might be concerned about making such allocations out of concern that there won’t be enough left to a surviving spouse.

The bottom line?  Not all estate plans are created equal and they certainly can require updating.  After all, an outdated or inadequate plan is often worse than no plan at all.

In most trusts, there are current beneficiaries and future beneficiaries.  A current beneficiary is someone who is currently entitled to receive, either mandatory or discretionary, distributions of income or principal.  A future beneficiary is only entitled to distributions of trust income or principal upon the death of the current beneficiary or beneficiaries.  The law in most states, including Maryland, has long held that a current beneficiary is entitled to receive an account, on an annual basis, of the income, expenses, gains, losses and distributions of the trust.   However, whether a future beneficiary was entitled to receive an account was not always required.

Today, the Maryland Court of Special Appeals held that a future beneficiary, i.e., someone who was not currently entitled to receive the income or principal of the trust, but is only entitled to receive a distribution upon the death of the current beneficiary, is entitled “to make a reasonable request for an accounting [of the trust] based upon his status as a Trust beneficiary who possesses a future interest in the Trust.”

Also, and maybe more importantly, the trust in this case was a joint revocable trust, one which both spouses create and are the trustees and beneficiaries.  This revocable trust divided into two trusts when the first spouse died.  One of these trusts was irrevocable that could not be changed by the surviving spouse.  The other trust was revocable and could be changed by the surviving spouse.  The Maryland Court of Special Appeals held that the future beneficiary was entitled to receive an accounting of both trusts, even the one trust that the surviving spouse could completely change. 

In my practice, I have rarely created joint revocable trusts, except when I am almost certain that there will be no estate taxes at either spouse’s death.   This case confirms my belief that joint revocable trusts should not be used in Maryland when there will be the creation of an irrevocable trust at the first death in order to save estate taxes at the second death.  In those cases, I always recommend separate revocable trusts.  After this Maryland case, I will continue my practice and recommend separate revocable trusts for married couples who have a potential estate tax problem (i.e., a combined estate in excess of 1 million dollars, which is the amount of assets that can pass free of Maryland estate tax).

A client came to me recently with a very unfortunate story.  Her Great Uncle, Bud, from NY, a single man with no children, had passed away a few months prior and, as is too often the case, he hadn’t properly updated his will before he died.  Like many, he procrastinated.  This unfortunate mistake resulted in everything being left to an ex-fiancée whom the man hadn’t seen in nearly a decade – his home, his investments, the entire estate – that which ultimately included, a 529 Plan which he’d set up for my client’s 6 year old son when the child was a baby.  You see, his Will was over 10 years old, had never been changed, even though he moved states, never married, and started to make gifts to his nieces, nephews and their children.  Moreover, not only did he leave everything to his ex-fiancée, he named her as his executor, and therefore totally in charge of all of his affairs and assets at his death.

You see, when Uncle Bud set up the 529 college education savings plan as a gift to his Great Grand-nephew, he named the great-grandnephew as the beneficiary.  However, what he didn’t do was to add one or both of the child’s parents’ names as the “participant” or “owner”.  You see, the “owner” or the “participant” actually controls the 529 account, even to the extent of changing who the beneficiary is.  Yes, the gift to the great-grandnephew could be changed and given to someone else.  So, when the uncle passed and my client called the provider of the 529 plan (Fidelity) to make sure it was protected, she was told that the 529 account was now considered a part of the deceased’s estate (now belonging to the ex-fiancée) and that because her name wasn’t listed as a owner or participant and because the 529 account was owned by a custodian (i.e., uniform gift or transfer to minor) or a trust, she would need the executor of the estate (also the ex-fiancée) to essentially “turn it over to her” in writing.

How could this be that a gift, so undeniably intended for the great-grandnephew, be taken away?  This is where 529s can be tricky in that they are gifts, but also not gifts.  The law allows for the owner of a 529 Plan to change or remove a beneficiary at any time.  As the executor of my great uncle’s estate, rather than do the honorable thing, the ex fiancée opted instead to remove the child’s name from the 529 plan and transfer it to someone else and/or cash it out. 

My client might have gone to court to contest the ex-fiancée’s decision, but, in this case, the cost of doing so would have surpassed the value of the 529 account itself.  It’s really a shame, but this story underscores the importance of having your financial and estate planning documents thoroughly reviewed and cross-referenced.  Also, the beneficiaries and owners of your accounts must also be reviewed to make sure they are coordinated with your estate planning documents and your goals and objectives.