Wednesday, August 31, 2011

2011 Estate and Income Tax Figures

The following are some of the important tax rates and changes that are in effect for 2011:
- The 10%, 15%, 25%, 28%, 33% and 35% individual and trust tax rates have been extended for 2 years through December 31, 2012.
- The estate tax top rate is 35% with an exemption amount of $5 million

The Real Deal With the Estate Tax Ememption

The Federal Estate tax exemption for 2011-2012 is $5,000,000 per spouse.  Under previous law, in order to take advantage of both spouses exemptions, there needed to be proactive planning to take advantage of both exemptions.  This was often done through a testamentary trust being established by way of a will, or setting up a credit shelter trust during your lifetime.  This way both $5,000,000 exemptions would be passed to the next generation federal estate tax free (MA however has it's own state estate tax- see below).
      However, the new tax law signed by President Obama on Dec. 17 contained a great tax break for married couples.  Beginning January 1st, 2011 surviving spouses can add the unused portion of a deceased spouse's exemption to their own estate tax exemption and there is no need to have potentially expensive trusts.  So, for example, if one spouse dies, and leaves a taxable estate of $3.5 million, the "unused" balance of the deceased spouse's $5 million exemption is transferred to the surviving spouse for use at a later time. 
     How to do This-  To "port" a deceased spouse's exemption to the surviving spouse, the executor of the first deceased spouse's estate must file a federal estate tax return and make an election to allocate the unused exemption to the surviving spouse.
      The only catch with the new law is that, so far, portability is only available for two years - 2011 and 2012. It would be a wonderful thing is this portability feature was made permanent but for now we will just have to wait and see.
     Massachusetts has it's own Estate Tax Bite-  MA has an estate tax exemption of $1,000,000 per household.  So in this case anything over the $1MM threshold will be subject to MA estate taxes.  So if the gross estate of both spouses of $2,000,000 for example, taxes would be owed on the whole amount.  The tax rate is a progressive one that maxes out at 16%.

New MA Homestead Exemption effective 3/16/2011

Effective March 16, 2011 a new law, MGL Chapter 395, will provide changes to the current homestead law, some of the changes include:
·         Automatically protects up to $125,000 in home equity without filing
·         Protects up to $500,000 for those who file for homestead protection
·         Allows spouses to both file - currently only one may file
·         Clarifies that there is no need to re-file after refinancing
·         Provides coverage for homes kept in trusts.
According to the new law, all currently existing homesteads shall continue in full force and effect.  Updated Homestead Forms will be available shortly.
     What this Means: The Homestead act protects equity in your home from attachment from creditors who have an interest that is acquired after the homestead is filed, not those who already have an interest before the homestead is filed.  Mortgages (first and second) are exempt from the homestead exemption, MassHealth is also exempt.  You would generally be protected from other creditors, credit card debt, lawsuits, auto loans, and any other creditors not already exempt as named above.  The filing fee for a Homestead Declaration is $35, so the benefits far outweigh the cost.

The Costs and Consequences of not having a Will

Estate planning is one of those things everybody knows they should do, but a surprising number of people put it off until it’s too late, or do it wrong in the first place.

Too many people of all ages hesitate to have wills drawn up. There is no good reason to do that. If you die without a will, you will have lost the right to specify who inherits your property. In this situation, the state decides how your property will be distributed, and it is unlikely the allocation will match your preference. Moreover, in many states, the law will allocate your property in a way that may be not be fair to your spouse.

Some individuals feel that because they are married and own their property jointly, there is no need for a will. What if you and your spouse die together in an accident? Who will receive your property? If you have young children, who will become their guardian? If your young children inherit property, who will manage it?
It is important to know what property passes by will, and what does not. Any property owned with “rights of survivorship’’ goes to the other owner(s). Property with a named beneficiary goes to the party named. Any property disposed of by contract goes to the named owner(s). The provisions of your will do not override the preceding specifications. Any property you own individually that does not have a named beneficiary passes by will. Your will can also cover property you may not be aware of. For example, if you receive an inheritance or a legal settlement, the provisions of your will can address these assets.
Many advertisements suggest you can avoid legal fees by purchasing books, legal forms, or computer programs to create your will. In my opinion, that is foolish. If any mistakes are made, the will can be disallowed. A straightforward will is not expensive, and many attorneys won’t charge for an initial meeting. Reputable attorneys will provide you with a cost estimate after you provide basic information.

Is a Will Based Plan or a Trust Based Plan Better for Me

     Often clients will seek my estate planning guidance and a common initial question is whether a Will or a Trust is a better fit for them.  The answer, as you may imagine, is completely dependent on what the client wishes to accomplish and in what manner.
    A Will is able to name an executor of your estate, the beneficiaries of your estate, guardians for minor children, among other things.  I always say a first basic goal of estate planning is to avoid probate.  Why you might ask?  To most clients surprise, everything that passed through a Will is in fact subject to the probate process.  This means all assets that pass through your Will must be supervised by the probate court which involves probate costs to your estate or your heirs.  Additionally, probate is a public process and notices are published in newspapers and other materials to notify all heirs and potential creditors that they may be able to take a bite at the apple, your estate, by filing a claim against it.  Lastly, probate can take up to 12 months to formally close, which could result in up to a 1 year delay in your beneficiaries using and enjoying your property (assets, real property, personal property, etc.).  These are some of the downsides to a Will based plan.
     A Trust on the other hand (living trust, revocable trust, revocable living trust) is what I describe a Will on steroids.  It accomplishes everything a Will does, with some added protections.  A successor Trustee is named (called an executor or personal representative in a Will), beneficiaries are names, guardians for your children, etc.  There is no probate process with a Trust based plan, thus avoiding probate costs, avoiding any delays in distributing your assets to the trust beneficiaries, and the terms of the Trust are kept private and confidential.  There are some addition protections in a Trust based plan.  You can elect to stipulate to whom, in what manner, and when you beneficiaries receive the Trust proceeds.  It can be left outright to the beneficiary, or it can be kept in further Trust so as to allow beneficiaries to access their share at different stages or ages in life.  You can continue to "control the purse strings" of your estate well after your death.  Special needs provisions, estate tax savings provisions, and many other client specific interests can be provided for in a very efficient manner.
     After a brief discussion together we can discern whether a Will based or Trust based plan better fits your situation.  If you have no other estate planning documents, I always advise, whether a Will or a Trust is selected, looking into a package of ancillary documents which often include a Durable Power of Attorney, Massachusetts Health Care Proxy, Living Will, Homestead Declaration, and /or a HIPAA release.

Revocable Living Trusts: Not Just for the Rich

“They’re too young to have a trust.”
“They don’t own enough for a trust.”
Some attorneys have even said that recommending a trust-based plan for young families is tantamount to malpractice. I’m certain that not only is it not malpractice to recommend a trust for some families, it’s potentially malpractice not to.
Many practitioners believe young families with kids don’t need trust-based planning. It’s more accurate to say they don’t believe they can afford it.
But nothing could be farther from the truth. Families with children at home and any assets at all cannot afford not to plan properly. Here’s an example:
A (Non-Fiction) Story
Seventeen years ago, my cousin, a young mother, became an instant widow. Her husband along with her brother, both pilots, died in a plane crash in the mid-South.
If that weren’t tragic enough, my cousin has been subjected to ongoing court proceedings over the assets her son inherited. She’s had to appear in court each year to account for every penny of the assets she herself should be managing, and she had to pay a financial guardian and bond fees.
My cousin has raised her son alone, while dealing with ongoing legal proceedings. And when her son reached sixteen and a half, they got into an argument typical of that age and he left. He moved out because he knew he’d be getting his inheritance.
She has no control over how her son uses that money, if he’ll do something productive with it or fall into traps kids encounter—peer pressure, thinking they know it all, believing that the first hit of meth won’t hurt them.
She said, “If you can prevent that for even one family, you will have done a great service.”
The Scary Reality
Kids instinctively separate from parents in the early teen years. The main leverage we have to continue to encourage kids is financial. Ordinarily, kids are willing to stay close to the nest until they’ve acquired the skills they need to go out and make their own way. Whenever the financial balance is upset, kids may be harmed by the assets they acquire. I don’t need to list the umpteen teenage stars or heirs that have let money get the better of them.
Preventing kids from receiving assets at 18, creating certainty in who will raise our kids, and responsibly providing for them and our guardians are worthy goals for families that trust-based planning, and kids’ protection planning, are perfectly suited to achieve. Avoiding the financial burden and emotional gauntlet of a conservatorship is a more compelling reason to plan than avoiding estate taxes or passing on wealth to our heirs. Those goals take on more importance as we age.
An Ounce of Prevention
Because of the statistical reality that some parents do die and become incapacitated—three times in my own large family—kids of parents who do not plan are at risk both of becoming involved in lengthy court proceedings or worse, getting lost, temporarily or permanently, in the foster care system.
We have the opportunity to prevent that—by helping parents understand the stakes in plain English, sharing stories like my cousin’s and making planning financially accessible.
Financial Accessibility
We can make our services accessible by offering an automatic payment program (ACH debit) and let them pay over time interest free. Local banks that want your business will allow small-batch debits. Offering ACH debits, we can help families make that investment, earn their trust, and create clients for life. After all, they are going to be the older and wealthy families of the future. Often, they’ll decide not to use an ACH payment but the mere fact that they could use it helps them make the leap of faith.
When parents understand trust-based planning, they ask why their friends don’t have them, but their parents do. I tell them, as a profession, we don’t make a concerted effort to educate families. If we did, far more would have trusts in place for the long term.
Parents know they need to “do something.” But they don’t know what or where to turn. They don’t want to hire a large law firm for fear of getting billed in six-minute increments or getting lost in the shuffle. They want someone they can turn to, someone who means something to them, who’s earned their trust, who will be there to guide their family through tragedy and back into life.

This article was originally written by Martha J. Hartney, Esq., also a member of WealthCounsel and can be seen here.

Estate Planning Considerations for Blended Families

As the rates of divorce and remarriage climb, those with recently blended families may be witnessing the emergence of troublesome estate planning issues. The interests of a new spouse and child can create conflict with a parent’s desire to provide fairly for children from a previous relationship, causing unforeseen complications, misunderstandings, and damage to the blended family unit. For those family members without a clear understanding of their new rights and obligations, the following scenarios provide examples of common planning problems and potential solutions to these issues.

Scenario #1
: All Assets to Surviving Spouse. Many married couples choose to leave all of their assets to each other upon the first death, under the assumption that the surviving spouse will treat all of the decedent’s children equally. However, children from a prior relationship may not be provided for by the surviving spouse in accordance with the desires of the deceased parent. Since a surviving spouse has no legal obligation to support or provide an inheritance for the predeceased spouse’s children, a parent may unknowingly disinherit a natural child by leaving all of his or her assets to a new spouse. Also, if the surviving spouse is substantially younger than the deceased spouse, a majority of the child’s eventual inheritance could be depleted during the lifetime of the survivor, greatly reducing what amount, if any, is left for the child upon the death of the surviving spouse. The QTIP Marital Trust is often the best estate planning vehicle by which to address this issue. While the surviving spouse must be entitled to receive the current income of the QTIP Trust, he or she does not have to be granted the ability to ultimately dispose of the property. Therefore, the first to die can control the final distribution of the QTIP Trust and be assured that the property will go to his or her children upon the second death.
Scenario #2: All Assets to Children. When a deceased parent leaves all, or a majority, of the family assets to his or her children, the surviving spouse may not have sufficient resources to continue to live comfortably. In order to alleviate the financial burden caused by this situation, many states allow a surviving spouse to claim an “elective share of the augmented estate” of the deceased spouse in order to ensure that no spouse is entirely disinherited. The elective share amount is statutorily calculated, allocated to the surviving spouse, and paid from the assets left to the children of the deceased. A marital agreement (either prenuptial or postnuptial) can prevent these complications. In the classic marital agreement, each spouse agrees to give up some or all of their right to the other spouse’s assets. Each spouse is then able to arrange his or her estate plan so that it will be distributed in accordance with their wishes, free of claims (such as the elective share claim) which might otherwise be made by the surviving spouse.
Scenario #3: Assets to Minor Children. If a deceased parent unwittingly leaves assets outright to a minor child from a prior marriage, the surviving parent (usually an ex-spouse) is likely to acquire control over the inheritance until the child reaches the statutory age of majority. Upon attaining that age, the child would legally be allowed to access – and spend – the entire inheritance. The most common vehicle for achieving flexibility and fairness in this situation is the trust, with provisions requiring an appointed trustee (rather than an ex-spouse) to hold the assets in trust until the child reaches a predetermined age. The trustee is also granted varying degrees of discretion to distribute trust funds to the child until he or she reaches the final withdrawal age, which allows the child to benefit from the inheritance without the ability to squander the assets.
Scenario #4: Assets Split Between “Old” and “New” Family. Although many parents desire to treat all of their children equally, others have determined that fairness does not always mean equality. Instead of evenly splitting an estate among living children, some parents prefer to divide their assets unequally after considering the respective needs of each child. It is not uncommon for a client with a much younger spouse to create benefits for his or her children from a prior marriage by purchasing a life insurance policy and designating the proceeds payable to them. Rather than postponing the child’s inheritance until the death of a stepparent, the child can receive a large cash sum immediately upon their parent’s death, and the remaining estate assets can be left to the new spouse.
Consider Family Goals. Successful blended family estate planning is a matter of setting and communicating goals, learning the available legal strategies, implementing the chosen documents and setting appropriate expectations for the client. With guidance from experienced counsel, the various goals of each family can be met by crafting and implementing estate plans that provide for each spouse and protect the interests of their respective children.

This post was from Jennifer L. Moccia, JD, LL.M., also a member of WealthCounsel and can be seen here.