Thursday, May 24, 2012

7 Major Errors in Estate Planning* - Part 2 of 7

A recent article in Forbes listed one author’s opinion of the 7 Major Errors in Estate Planning. 

The 7 Major Errors were listed as:
1.       Not Having a Plan
2.       Online or DIY Rather Than Professionals
3.       Failure to Review Beneficiary Designations or Titling of Assets
4.       Failure to Consider the Estate and Gift Tax Consequences of Life Insurance
5.       Maximizing Annual Gifts
6.       Failure to Tax Advantage of the Estate Tax Exemption in 2012
7.       Leaving Assets outright to Adult Children
I have the opportunity to discuss Major Error Number Two.

ONLINE OR DIY RATHER THAN PROFESSIONALS

There is an abundance of advertisements which purport that a person can create their own will or trust through the use of a certain company’s website.  These advertisements have led to the often repeated question I hear during an initial consultation – why should I use your services over an online company?  I have reviewed many of these internet wills and trusts, and many of these internet documents are laughable leading me to believe that an attorney had no hand in the creation of the documents.  While I would readily admit that the other documents I have seen seem to be fine, legally speaking, they often demonstrate a lack of personalization in meeting the client’s goals and objectives.  Recently, I decided to go through a more widely recognized do-it-yourself internet site that allows a person to create his or her own legal documents.  Although my experience was better than I had expected, I was left wanting the site to do things that it did not offer.  This may be why the site uses the disclaimer that “LegalZoom is not a law firm and is not a substitute for an attorney or law firm.”  These internet sites are not meant as attorney substitutes, and I would add that not all attorneys can properly prepare estate planning documents.  While such sites are slightly less expensive than an actual attorney, there is much more to a properly prepared estate plan than the legal document itself.  As Mr. Clarfeld states in his Forbes article, “estate planning documents should represent the culmination of a well thought out financial and estate plan.  Fill-in-the-blanks documents are not a plan and one size definitely does not fit all.” 

Monday, May 21, 2012

JUNE AFR's Announced:

Thursday, May 17, 2012

7 Major Errors in Estate Planning* - Part 1 of 7

A recent article in Forbes listed one author’s opinion of the 7 Major Errors in Estate Planning. 

The 7 Major Errors were listed as:
1.       Not Having a Plan
2.       Online or DIY Rather Than Professionals
3.       Failure to Review Beneficiary Designations or Titling of Assets
4.       Failure to Consider the Estate and Gift Tax Consequences of Life Insurance
5.       Maximizing Annual Gifts
6.       Failure to Tax Advantage of the Estate Tax Exemption in 2012
7.       Leaving Assets outright to Adult Children

I have proposed to my colleagues that we take turns discussing these 7 errors and how to remedy these problems for our clients.  Naturally, I’m taking the first error, since it is the easiest, but you’ll hear from me again before we have completed all seven.

NOT HAVING A PLAN

This one is easy to fix.  Get a plan.  It’s probably an over-generalization, but most estate planning firms offer free consultations.  See an attorney and learn what is involved and how much effort and cost is required to get a plan in place.  This error universally applies to all individuals, whether old, young, married, single, wealthy, with children, without children, etc.  In Nevada, we usually recommend revocable/living trusts for property owners in order to avoid the probate process in Nevada courts.  Other important elements to an estate plan in Nevada include a pour-over-will, a healthcare power of attorney, a directive to physicians (or living will), and a financial power of attorney.  A good attorney will also provide assistance and advice on how to “fund” your trust with the proper assets in order to accomplish your goals.

Tuesday, May 8, 2012

Funding the Exemption Sub-Trust

An estate-tax planning technique often contained in many Trust agreements for married individuals is to require the establishment of two or more sub-trusts when the first spouse dies, in particular the establishment of an Exemption Sub-Trust.  If the Trust agreement is properly drawn and the Exemption Sub-Trust correctly administered during the life of the surviving spouse, at the time of the death of the surviving spouse all of the assets of the Exemption Sub-Trust pass to the beneficiaries federal estate-tax free. This is true even though all of the income (and principal if need be pursuant to an ascertainable standard such as for health, education, maintenance and support) from the Exemption Sub-Trust is used for the benefit of the surviving spouse during his or her lifetime.  The equivalent exemption amount for federal estate tax purposes for deaths occurring in 2012 is $5,120,000.00 and the tax rate is 35%, but as of January 1, 2013 the equivalent exemption for federal estate tax purposes for deaths occurring in 2013 and thereafter is reduced to $1,000,000.00 and the tax rate is increased to 55%.  Accordingly, this estate-tax planning technique is of great importance.

When the first spouse dies, the Successor Trustees must determine what Trust assets should be used to fund the Exemption Sub-Trust.  This is a very important determination in light of the fact that the Exemption Sub-Trust assets remaining at the time of the death of surviving spouse will not be subject to federal estate tax regardless of value.  In other words, the Exemption Sub-Trust assets could be worth $20,000,000.00 at the time of the death of the surviving spouse and the equivalent exemption under law could be only $1,000,000.00, but nevertheless the assets of the Exemption Sub-Trust will not be subject to potential federal estate tax.  Therefore, assets with high appreciation potential (i.e. Apple stock, real estate on the Las Vegas Strip, et cetera) generally speaking should be used to fund the Exemption Sub-Trust.   But as is always the case, there is an exception to every rule.  The exception is where the beneficiaries of the Exemption Sub-Trust and the beneficiaries of any other sub-trust are not one and the same individuals.  In most situations, the beneficiaries will be the same.  However, where the beneficiaries will not be the same, the Trustee has to consider this when funding the sub-trusts in that the Trustee has a fiduciary duty to treat all of the beneficiaries fairly and impartially in carrying out the terms of the Trust agreement.  A corporate or individual Trustee could subject themselves to claims by non-beneficiaries of the Exemption Sub-Trust if in fact all of the assets with high appreciation potential are used to fund the Exemption Sub-Trust.  
At the Jeffrey Burr law office, we have many years of experience assisting and advising corporate and individual Successor Trustees in the administration of a Trust after the death of a Trustor, including the funding of Exemption and other sub-trusts.         

Tuesday, May 1, 2012

Funding A Credit Shelter Trust

Many of our clients who are married have joint revocable trusts that include instructions for the possible division of the trust upon the first spouse’s death.  The purpose of the division of the trust into two separate trusts upon the first spouse’s death is primarily estate tax reduction.  Sometimes these types of trusts are called “A-B trusts,” “2 trusts,” “credit shelter trusts,” and “exemption trusts.”   More recent clients may have trusts known as “disclaimer A-B” or “disclaimer 2 trust” and these trusts would also fit within the topic of this article.
Most planners feel that we currently have a disappearing opportunity to engage in lifetime gifting in excess of $1 Million.  In 2011, the lifetime Gift Tax exclusion amount for each person was increased to $5 Million.  For 2012, this amount was adjusted for inflation and is now $5,120,000.  This amount will change back to $1 Million in 2013 unless Congress enacts a change prior to December 31 of this year.
One strategy for utilizing this higher gift tax exemption that people have been receptive to is to utilize the “exemption” or “credit shelter” that already exists in one of the trust types described in the first paragraph, and to make a completed gift into this type of trust for the benefit of a spouse.  Both spouses can accomplish this, but careful attention will be required to be sure that these credit shelter trusts funded with gifts are not treated as reciprocal trusts by the IRS. 
Some clients find the idea of making large gifts difficult since they are usually gifting these funds to children or grandchildren and the client essentially loses the ability to control or enjoy the property that has been gifted.  Gifting to a spouse, however, might be more easily tolerated than a substantial gift to children or grandchildren.  Aside from the dynamics of whether it is easier to gift to a spouse or successive generations, gifting is a powerful estate tax reduction technique.  The funding of a credit shelter trust is just one of many ideas that our firm can assist you with.  Please call your attorney to discuss gifting techniques or for more information on funding a credit shelter trust for your spouse.