Monday, October 12, 2015

Estate Planning Mistakes to Avoid

As an estate planning attorney, I often find it of interest to read about a celebrity’s estate plan.  Celebrity estate plans can provide both good and poor examples of what should and should not be done by all of us.  Recently, I came across an interesting article entitled “7 Estate Planning Lessons from Celebrities” which brought focus to this very topic.  I would recommend reading it as the lessons provided are applicable to those with significantly less wealth than the celebrity examples found in the article.  To bring focus to just two of the seven lessons provided in the article, I would like to focus on the estate plans of Philip Seymour Hoffman and Heath Ledger.  

Philip Seymour Hoffman didn’t want his children to become “trust-fund kids.”  However, it is reasonable to conclude that Hoffman had a desire that his children’s reasonable needs be met with his wealth.  Against the advice of his attorneys, Hoffman’s estate plan was to leave his entire estate to his long-time girlfriend Mimi O’Donnell.  It was Hoffman and O’Donnell’s mutual understanding that she would use his wealth to provide financially for the children, in her absolute discretion.  This plan had two significant flaws.  First, because Hoffman and O’Donnell were not married, the transfer of Hoffman’s estate to O’Donnell was taxable for estate tax purposes.  Second, without proper instructions and guidelines as would typically be found in a trust agreement, there is no guarantee that O’Donnell will use Hoffman’s wealth in a manner that Hoffman would have approved of in relation to the upbringing of his children.  Lesson to be learned from Hoffman’s estate plan is to not leave your estate to one person without proper guidelines and instruction in a legally enforceable document like a trust.

Although quite young at the time of his death, the 28 year-old actor Heath Ledger had a will when he died in 2008.  Apparently, Ledger had drafted his will previous to the birth of Ledger’s daughter leaving his entire estate to his parents and sisters.  Fortunately, Ledger’s family did the right thing by allowing the entire estate to pass to his daughter.  The result of Ledger not taking the time to update his will after the birth of his child could have been ugly with the worst case scenario of Ledger’s daughter receiving nothing from her father’s estate.  The lesson to be learned from Ledger’s estate is that as certain life events occur, a review and update of your estate plan should take place.

Wednesday, September 23, 2015

AFRs for October 2015

The Section 7520 rate is 2.0%
October 2015  Annual Semi-annual Quarterly Monthly
Short-term 0.55% 0.55% 0.55% 0.55%
Mid-term 1.67% 1.66% 1.66% 1.65%
Long-term 2.58% 2.56% 2.55% 2.55%

Wednesday, September 16, 2015

Tom Clancy’s Estate and the Importance of Planning for Blended Families

Tom Clancy, renowned author, died on October 1, 2013. Tom died with an estate worth approximately $83 million. Tom was survived by his wife, Alexandra Clancy, a daughter born to Tom and Alexandra and four adult children from Tom’s prior marriage.

When Tom died, he left a Last Will and Testament (“Will”) that governed the disposition of his probate assets. The Will provided that his probate estate is to be divided into thirds – one-third to his wife in trust (the “Marital Trust”), one-third to his wife and all of his children in trust (the “Family Trust”) and one-third to his children from his prior marriage in trust (the “Children’s Trust”).

Due to the size of Tom’s estate and his estate planning elections, Tom’s estate is required to pay a significant amount in estate taxes, apparently approximately $16 million. Tom’s personal representative (aka executor) allocated a portion of the taxes owed to Alexandra’s inheritance. Alexandra objected and claimed that based on a codicil that Tom executed, which amended the terms of his Will, Tom’s intent was that no portion of her inheritance would be responsible for the estate taxes. Rather, Alexandra claims the entire burden should be borne by the portion going to Tom’s four adult children from his prior marriage.

As a result of Alexandra’s claim, a dispute ensued between her and Tom’s adult children. On August 21, 2015, a Baltimore judge ruled in favor of Alexandra, a decision that is likely to cause a protracted legal battle.

This case provides a prime example to blended families of the importance of engaging in appropriate estate planning. Relationships can be finicky, especially relationships between a child and his or her step-father or step-mother. Estate planning should not be a straw that breaks the camel’s back and ruins that relationship. Not only that, disputes between children and their step-parents can erode the hard-earned estates of the deceased parent through legal fees, which could be avoided with appropriate planning. 

If you have a blended family and do not have the appropriate estate planning in place, please contact our offices to further discuss your situation. 

Wednesday, September 9, 2015

Crummey Indeed; Providing Proper Crummey Notices to Beneficiaries of an ILIT is Essential to Preserve Tax Benefits.

A highly regarded estate tax-savings tool utilized in estate planning is the Irrevocable Life Insurance Trust, commonly referred to as an “ILIT”.

Establishing an ILIT allows proceeds from a life insurance policy to escape estate taxes upon the death of the insured.  Under the current income tax laws, proceeds from a life insurance policy are paid to the beneficiaries of the insurance policy entirely income tax free.  For estate tax purposes, however, if you are the owner of a life insurance policy, the proceeds from that policy are included in your taxable estate on your death, and therefore become subject to the estate tax.  For example, if you are single with estate assets (other than life insurance) valued at $5,000,000, and if the proceeds of a life insurance policy payable on your death amount to $2 million, the estate tax due is approximately $628,000.

With an ILIT, on the other hand, the $2 million policy is removed from your taxable estate because the policy is owned by the trust. Thus, in the above example, placing the policy in a properly drafted ILIT would completely eliminate any estate tax on your death, while freeing up the entire $2 million for your heirs.  In combination with the favorable income tax laws, an ILIT can ensure that the proceeds from a life insurance policy escape both income and estate taxes. Additionally, contributions to an ILIT in the form of premium payments can also be made gift-tax free.

To enjoy those tax savings, it is imperative that you send the appropriate “Crummey” notice to the beneficiaries of your ILIT if required.  “Crummey” notices are required any time you make a gift to your ILIT.  In order to claim the gift tax annual exclusion (the amount that you are permitted to gift each year without incurring gift taxes) for gifts made to your ILIT, you must notify the ILIT beneficiaries of their right to withdraw such gift. Only by giving appropriate notice to these beneficiaries of their immediate right of withdrawal will you be able to claim the gift tax annual exclusion under the Internal Revenue Code.  Otherwise, you may incur gift tax liability.

To give appropriate notice, you can send a letter to the beneficiaries of your ILIT with the following information:

1.   A statement that a gift was made to the ILIT;
2.   Amount of gift that is subject to the particular beneficiary’s right of withdrawal;
3.   Amount of time the beneficiary has to exercise the withdrawal right before it lapses;  and
4.   A request that the beneficiary notify the trustee if he or she wishes to exercise the withdrawal right.

In addition, to keep adequate records, you may also want to send a separate receipt of acknowledgment. Each beneficiary can sign and give it back to you, stating that they received the required notice of their right to withdraw.  As previously mentioned, if these notices are not sent you may incur gift tax liability.

An ILIT is an excellent tool that can save you and your estate potentially hundreds of thousands of dollars in estate and gift taxes, if the proper formalities are strictly adhered to.  If you have questions about whether an ILIT is right for you or if you have been properly preparing the requisite Crummey notices, contact one of our attorneys at (702) 433-4455.

-Attorney Rebecca J. Haines

Thursday, August 27, 2015

Do Not Forget State Inheritance-Estate Tax In Your Estate Planning

The primary death tax concern in most estate planning situations is the federal estate tax.  Generally speaking, federal estate tax is based on the dollar value of the trust-estate of the decedent, is due nine (9) months after the date of death, and is taxed at a forty percent (40%) tax bracket.  The good news is that the federal estate tax equivalent exemption for deaths occurring in the 2015 calendar year is Five Million Four Hundred Thirty Thousand Dollars ($5,430,000.00).  In other words, if the net taxable estate is Five Million Four Hundred Thirty Thousand Dollars ($5,430,000.00) or less, there is no federal estate tax.  Also the federal estate tax equivalent exemption is indexed for inflation, so theoretically the amount of the exemption should increase each calendar year.  Because of the large dollar amount of the exemption, federal estate tax is oftentimes not a major factor in the estate plan of many people.

However, there is a potential second death tax when a person dies.  Some U. S. states levy their own death tax called an inheritance or estate tax.  Currently six (6) states have an inheritance tax, fifteen (15) states have an estate tax, and two (2) states have both.  Most eastern states have an inheritance or estate tax, while most western states, including Nevada, have no inheritance or estate tax.  The two (2) western state exceptions are Washington and Oregon.

Unlike the federal estate tax, state inheritance tax is based on the amount a beneficiary inherits and the beneficiary’s relationship to the decedent.  Also inheritance tax is usually the personal liability of the beneficiary.  With inheritance tax, there are often different rates and different exemption amounts for spouses, children or siblings.  State inheritance or estate tax rates are lower than the federal estate tax rate of forty percent (40%).  The state with the highest maximum estate tax rate is Washington at twenty percent (20%) followed by eleven (11) states with a maximum rate of sixteen percent (16%).  Nebraska has the highest maximum inheritance tax rate of eighteen percent (18%) followed by Kentucky and New Jersey at sixteen percent (16%).

What happens if the decedent dies a resident of the state of Nevada where there is no inheritance or estate tax, but the beneficiary is a resident of New York where there is estate tax?  Which state law controls, Nevada or New York?  With one exception, the state law of the residence of the decedent at the time of death, not the state law of the residence of the beneficiary, controls as to the applicability of state inheritance or estate tax.  In the above example, Nevada law controls since it was the residence of the decedent at the time of death so there would be no state inheritance or estate tax.  The one exception is real estate located in another state.  In the above example if the decedent owned real estate in New York or some other state that has an inheritance or estate tax, the state law where the real estate is located would control at least as to that real estate.
John R. Mugan, Esq.

In summary, although federal estate tax is oftentimes not a major estate planning consideration due to the amount of the federal estate tax exemption under current federal law, one must not overlook possible state inheritance or estate tax.  This is particularly true if one owns real estate outside the state of Nevada.  

Thursday, August 6, 2015

Do I Really Need An Attorney To Prepare My Estate Plan?

Friends and family often ask me if they really need an attorney to prepare the estate planning documents.  There are many forms on the Internet or online services that offer do-it-yourself planning.  I admit, these forms are services are much cheaper than paying for an attorney…at least on the front end.
The problem with doing your own estate planning documents is that you lack the legal advice that comes with estate planning documents.  This legal advice is an important part of your estate plan; it ties all the legal documents and assets together into an integral, working plan.  If you make a mistake in your estate planning documents or in how your assets are held, those mistakes cannot be fixed once you are deceased. 
I will admit that, as an attorney, I am biased in writing this post; however, as the attorney in the office that handles most of the probate cases, this year I have seen an increase in awful estate planning documents.  Its only August and I have already seen a large number of invalid or incorrect wills, incorrect deeds and invalid trusts.  I may be biased, but when mistakes are made, I end up fixing them on the back-end.  These errors lead to very expensive probates and often times assets passing to unintended beneficiaries. 

Here is a list of the top mistakes I have seen this year:
  • Improper witnessing of the will (missing language the Nevada law requires to admit the will to probate)
  • Improper titling of real property between spouses
  • Failure to designate beneficiaries in the will or trust
  • Beneficiaries acting as the witnesses the will
  • Failure to fund a trust
When a person has a serious illness, they go to a doctor.  Everyone accepts that fact that you need medical advice (not from google) to make sure you get the proper medical treatment.  Estate planning is similar, if you choose to do-it-yourself you may end up doing more harm than good.  You need an attorney to draft proper documents, integrate assets into those documents and to make sure all the pieces fit together properly.   Make sure your documents can speak for you when you can no longer speak for yourself.

Attorney – Corey J. Schmutz

Wednesday, July 29, 2015

Avoiding Family Disputes: Utilizing Lists Disposing of Personal Property in Your Estate Plan

Oftentimes the most treasured pieces of property in an estate are those items which you do not hold formal legal title to. Unlike a car or home where ownership is evidenced by a title or deed, there are typically no such records for family heirlooms such as china dishes, jewelry, photo albums or vinyl records signed by the Beach Boys.

When the owner of these personal property items dies, the items are generally given to the beneficiaries named in the owner’s will or trust. But oftentimes the items are given by way of general provisions. For example, a will may provide that half of a person’s entire estate will go to Son and the other half will go to Daughter. In that case, half of the personal property items will go to Son and half will go to Daughter. The executor ultimately decides how to allocate the personal property items between Son and Daughter ,which may cause a rift between Son and Daughter if they do not see eye to eye on who gets what. They may ultimately decide to go to court to resolve their dispute, which costs time and money. The person creating the will or trust could specifically designate which items of personal property will go to Son and which will go to Daughter to avoid this outcome; however, this can be difficult because people collect, lose, and gift personal property items to family and friends throughout their lives. Thus, what a person owns in terms of personal property is not static. Because of this, drafting a specific provision for each personal property item in a will or trust would likely be inefficient, as the document would need to be continually updated to reflect a current inventory and disposition of that inventory.

Fortunately, Nevada law does not require this kind of drafting and instead offers an alternative, which allows a will or trust to reference another document known as a "List Disposing of Tangible Personal Property". This list is legally binding and can govern the disposition of personal property items.

To be legally binding, the list must contain the following:

1. The date the list is executed;
2. A title on the document indicating its purpose (such as, "List Disposing of Tangible Personal Property");

3. A reference to the will or trust to which it relates;
4. A reasonably certain description of the item to be disposed of and the beneficiaries; and

5. The handwritten or electronic signature of the person disposing of the property.

This list may be prepared before or after a will or trust is executed and it can be altered or amended at any time.

To take advantage of this statutory provision that allows for the disposition of tangible personal property by list contact one of our attorneys and we can help you to create a comprehensive estate plan where these most treasured items will be disposed of according to your wishes, thereby reducing the potential in-fighting among your beneficiaries.