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Estate Planning - Trusts - Wealth Preservation - Business Law

Estate and Trust Planning in 2020: News You Can Use

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The Tax Cuts and Jobs Act of 2017 (TCJA) made some significant changes to federal estate and gift tax lifetime exclusion amounts. However, the TCJA fell short of repealing federal death taxes, and leaves the door open for Congress to decrease (or increase) the exclusions, or increase (or decrease) estate and gift tax rates, at any time. Unfortunately, the 3.8%  Net Investment Income Tax, which affects married couples with incomes exceeding $250,000 and trusts or estates with retained income exceeding $12,750 (for tax year 2019), is likely to remain until the Affordable Care Act is repealed or amended.

Substantial lifetime exclusion amount for estate and gift taxes

Our current federal Internal Revenue Code “unifies” the estate tax and the gift tax, providing for a combined tax credit that allows people both to make taxable gifts during their lifetimes and to transfer estate property to heirs at their deaths free of federal taxes up to a certain total amount. That amount increases each year to adjust for inflation, and for persons dying in 2020, the exclusion amount will be $11.58 million.

You might think this amount is high enough to prevent you from having to think about federal estate taxes. However, keep in mind that Congress could lower the exclusion amount at any time. (Indeed, if Congress does nothing, it will automatically revert to $5.49 million on January 1, 2026.) Furthermore, the federal death tax exclusion amount includes not just the value of financial assets and real estate that you own yourself (personally, or in your Living Trust), but also the payout values of your retirement plans and any life insurance that you own at your death. When calculating how close you are to taxability, be sure to include the value of any death benefits and group life insurance that your employer might provide.

Increase in the annual exclusion amount for gifts

The Code’s gift tax provisions are written to apply to even small gifts. However, Congress in its beneficence has provide for an “annual exclusion” that exempts from gift taxation and reporting gifts up to a specified amount. That amount is also adjusted for inflation, but only when thousand-dollar increments are exceeded. For 2020, the annual exclusion remains at $15,000.

A few reminders about the annual gift tax exclusion. First, you can give up to $15,000 to as many different people as you want. So if your estate is at, above, or near the lifetime exclusion amount mentioned above, making annual gifts to your children, grandchildren, nieces and nephews might be a good way to make sure they come to visit you often (as well as keeping your family’s money out of Uncle Sam’s wallet).

Also, there are several categories of gifts that can exceed this amount without incurring gift taxes or using up your lifetime exemption. Most people can make unlimited tax-free gifts to their spouses (except for noncitizen spouses – tax-free gifts to them are limited to $157,000 in 2020). Moreover, money you spend on medical care or education for someone else isn’t treated as a taxable gift so long as you pay the school, college, or medical care provider directly. (Directly means you write the check or incur the credit charge. Reimbursements of other people’s payments don’t qualify.)

As always, contact me if you have any questions about maximizing or using your lifetime or annual exclusions from estate and gift taxes.

[Revised: January 1, 2020]

Congress is Coming for Your IRA

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Philip DeMuth writes in the Wall Street Journal (behind its paywall) that the “SECURE Act” now under consideration in Congress “would upend 20 years of retirement planning and stick it to the middle class.” It’s good reading, and explains how the proposed law’s authors believe that owner/beneficiaries of inherited IRAs (and 401Ks and Thrift Savings Plans) should no longer be permitted to withdraw plan funds over their actuarial lifetimes, but instead be forced to withdraw them within 10 years of the original owner/beneficiary’s death.

This is not a good deal, and would make inherited IRAs subject to higher taxes sooner. Folks hoping to keep inherited IRAs as nest eggs for their own retirements would instead be forced to withdraw the assets and pay taxes while still young.

DeMuth’s article is well-done and accurate in detail. For those without a WSJ subscription, a recent article in Barron’s, titled The Stretch IRA Is About To Snap Under the Secure Act, provides a broad summary.

How Old is Your Durable Power of Attorney?

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When you created and signed your General Durable Power of Attorney, you did it to make sure that a person chosen by you could take care of financial and personal matters for you if you were to become incapacitated.

However, as this 2016 New York Times article explains, when an Agent takes a power of attorney document to a financial institution, the institution might not accept the document. Instead of honoring the power of attorney, some banks and investment houses have been known to insist that the account owner or owners sign the institution’s own power of attorney form, despite Virginia law apparently to the contrary.

Durable Power of AttorneyIt’s usually easiest in such a situation just to go ahead and fill out the bank’s form. However, that’s not always possible if you or your relative has developed dementia, or there’s another emergency and time is of the essence.

Unfortunately, these are not rare occurrences. Estate planning and elder law attorneys often encounter financial institutions unwilling to honor valid powers of attorney. Even though Virginia law requires institutions to accept a durable power of attorney, and insulates them from liability when they do accept one, attorneys have seen some institutions resist. The usual reasons are because Agents’ IDs don’t exactly match the names on the powers of attorney (think marriage, divorce, or other name change – or use of a nickname instead of a “driver’s license name”), or because a power of attorney is deemed “stale” — signed too many years ago to be accepted without additional assurances under the bank’s or investment company’s internal rules.

And in many cases, the brokerages or banks have valid concerns. They are concerned about potential financial exploitation of their customers, particularly seniors, and are on their guard when Agents whom they have never met walk in with powers of attorney that enable them to control substantial sums of money. When they insist on using in-house forms, or obtaining updated powers of attorney or recently-dated doctor’s letters, it’s usually because they’re concerned about their potential liability to the account owner.

Fixing the Problem Before It Happens

What can you do? First of all, if your (or your loved one’s) General Durable Power of Attorney is more than five years old, come in and see me to have it updated. The fresher the power of attorney, the less likely it is to be challenged. Equally important, transfer your individual, non-retirement accounts to your Living Trust, if you have one. Banks are much more willing to deal with Successor Trustees than they are with Agents under powers of attorney, because the rules for trusts are much more manageable, and the bank’s exposure to liability therefore is lower.

(The Durable Powers of Attorney that I am currently drafting specifically authorize Agents to complete financial institutions’ in-house power of attorney forms on behalf of the principal.)

As a backup, you can ask your brokerage or bank if it requires its own durable power of attorney document. If it does, take home a copy, or have the institution email me the form or a link to it online. I’ll look it over for you, warn about any problems it could raise (and indeed there might be none — but the print is likely to be small) and advise you on what to do next.

Finally, if your Durable Power of Attorney requires a doctor’s letter for it to “spring” into action, consider whether you would prefer to have it immediately effective. A middle ground is to make your power immediately effective, but also to hang onto it yourself (in a safe place known to your Agent) until it is actually needed.

It may seem like extra work, but by preparing ahead, and reviewing and updating your powers of attorney now, you will be ready if and when you need to represent a loved one as Agent, or a loved one needs to represent you. To get started, you can call or email me right now.

Yes, Young (And Not-So-Young) Singles Actually Do Need Estate Plans

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In most cases, married couples can rely on each other, or their adult children, in case of accident or disability.

But if what if you’re single, with no family members close at hand? What would happen if you became disabled or died unexpectedly?

You’ll need people.

First, think about who should be your backup person in case something bad happens to you. Who would you trust to have access to your bank accounts, credit cards, and financial assets if it were necessary to pay for your hospitalization and to pay your bills until you were back on your feet? A parent or sibling living hours away might be able to handle your affairs from a distance, but only if he or she knew the details of your financial life. You might instead prefer to talk with a friend who lives close by about a “you help me and I’ll help you” arrangement. And such arrangements are best handled by a combination of a Living Trust and a Durable Power of Attorney for financial and personal matters.

Second, who would make immediate health care decisions for you if you were incapacitated and couldn’t make them for yourself? You would need to grant that person a Medical Power of Attorney and let him or her know your wishes in detail.

Finally, who would you name as Trustee of your trust and Executor of your Will, to carry out your wishes if you were to suddenly die?

You’ll need a plan.

Life PreserversAnd now that you have such a person in mind, what information should you give him or her now, and what should you possibly withhold until later, about your financial, medical, and personal affairs? Until this information is needed by your Agent, can it be kept safe and away from prying eyes?

The answer is yes, and there’s a logical, step-by-step process that we can go through to make your backup plans. Advising and assisting you about organizing your affairs, drafting the appropriate documents, and helping you work through the people and institutions who could help in case of emergency is my job as an estate and trust attorney. And I’d be happy to help.

Why put if off any longer? If now is not the time to get started, then when? Contact me and I’ll send you information, at no cost and with no obligation, about getting your planning started.

Your Estate Plan, Your Trusts, and Your Retirement Accounts

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You should read this excellent short column by financial writer Arden Dale of The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” on integrating IRAs, 401(k) plans, federal employee Thrift Savings Plan (TSP) accounts, and similar retirement savings accounts into estate and trust plans. The article deals primarily with choosing primary beneficiaries in a way that will minimize estate and income taxes. For most married retirement plan beneficiaries, that will mean choosing their spouses to receive the plan proceeds outright and free of trust, via a rollover after the first spouse’s death.Safeguard Your Retirement Plan For Children

However, trusts continue to be important contingent, or secondary, beneficiaries, especially for larger plans. The ability of your children or grandchildren (and in some cases, your spouse) to compound retirement plan investments over a long period of time makes IRAs and similar plans one of the most valuable tools for wealth succession planning for your family. Well-drafted retirement plan trusts help ensure that such plan “stretch-outs” will be administered property. I will normally recommend a separate IRA Inheritance Trust if you wish to

  • preserve and guard retirement plan assets from your beneficiaries’ “predators and creditors” – including remarriage spouses, your children’s and grandchildren’s creditors, and their improvidently-chosen spouses;
  • control distributions after your death (discourage or prevent a beneficiary from withdrawing all of the assets he inherits from you at once, absent a very good reason);
  • direct otherwise-reluctant retirement plan administrators to divide an account into separate accounts for your children;
  • limit payouts to any special-needs beneficiaries (including those who become disabled after your death) to protect ongoing government benefits; and
  • ensure that your retirement plan money stays in your family.

Generally speaking, if you and your spouse’s combined retirement plan assets exceed $250,000, it will be cost-effective for us to create stand-alone IRA Inheritance Trusts for each spouse in addition to your Revocable Living Trust. If you’d like to arrange an appointment or a phone call, or receive more information via email, please call or email me, or use the contact tool in the sidebar.

(Updated: December 2017)

The 3.8% Net Investment Income Tax is Still Here

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One little-mentioned provision of the Patient Protection and Affordable Care Act is the 3.8% net investment income tax (NIIT) that went into effect on January 1, 2013. Various commentators refer to it as the “Obamacare surtax,” the “health care surtax,” or the “Medicare tax”; but whatever one chooses to call it, it is still going to be with us unless and until the ACA is repealed.

Last-Minute Estate Planning In 2012This surtax is assessed on Form 1040 (for individuals) and Form 1041 (for trusts and estates) upon the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over a threshold amount. For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; and all other individual taxpayers, $200,000. For trusts and estates, the threshold amount is the amount where the top income tax bracket for trusts and estates begins ($12,500 in 2018).

Does the Health Care Surtax affect me?

Stated another way: 1) If your modified adjusted gross income (MAGI) for 2018 is less than or equal to the threshold amount that applies to you, you will not pay the health care surtax. 2) If your MAGI is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.

What’s all this about MAGI? Basically, it means that your healthcare surtax liability is determined on your income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital-gains income tax rate for high-income taxpayers stands at 20% in 2018, so the total federal tax on capital gains (with the surtax) could be 23.8% in 2018 and beyond. (Don’t forget to add state capital-gains taxes to get your true marginal tax rate on investment income.)

How Can I Avoid (Or Minimize) Investment Income Surtaxes?

The good news is that there are some steps Northern Virginia families can take right now to help you avoid or reduce the amount of your Obamacare surtax. Even though the Trump Administration and Congressional majorities have stated a goal of eventually eliminating Obamacare and the NIIT entirely, there are many slips ‘twixt cup and lip. Unless and until repeal is signed into law, there are no guarantees.

Now, more than ever, you need the assistance of experienced professionals to advise you and help you implement the best plan for you and your family. I stand ready to assist Virginia residents with the estate planning part of your project, and to work with your investment advisor and your CPA.

[Updated: December 2017]