Redlands CA Estate Planning

“Defective” Trusts – What’s in a Word

Defective grantor trust is a really inappropriate name for something that, in the right circumstances, can be a very good idea.  Somewhere along the line somebody realized that people might be disturbed by hearing that their trust was defective so the term became Intentionally Defective Grantor Trust.  Kind of like – “Hey that defect in your trust.  We put it there on purpose.  So you should feel good.”

    If you are an estate planning insider, then you understand the legal-speak, the acronyms, and maybe even the latest estate law jokes. On the other hand, if you are not, then you may get bogged down in some of the insider jargon and, well, find yourself downright confused. So it is with “defective” trust planning, as reported in a recent Forbes article titled “Don't Freak Out If You Hear Your Trust Is Defective.”

    The defective grantor trust, and more specifically the Intentionally Defective Grantor Trust (IDGT), is more often than not the source of confusion that estate planning greenhorns face. That’s unfortunate. Why? Because so-called “defective” trusts usually work pretty well, and they work well precisely because they are defective.

    Here’s the rub: sometimes you want your trust to be a trust and sometimes you don’t, and a defective trust only fails when you want it to. The heart of the matter, defective or otherwise, is simply to say that there is a lot to learn about this weird intersection between your life, unique legal entities, and weird tax laws that we call estate planning.

    In the end, you should know your tools and how to use them. Work with an open and inquisitive mind, and then work with competent counsel to examine your options.

Reference: Forbes (October 15, 2012) “Don't Freak Out If You Hear Your Trust Is Defective”

Beneficiary Designation Benefits

Assets that allow beneficiary designations provide powerful benefits that permit the owner to designate who will inherit the assets, how they can inherit the assets, avoidance of probate, and potential tax minimization, to name a few. Most individuals do not give the necessary attention to how they designate their beneficiaries.

    There is the right way to do just about anything, and it’s usually not the easy way. Thankfully there are those rare shortcuts that are actually pretty solid, so long as you remember when and where to take them.

    When it comes to proper estate planning, the shortcuts are the existing options you already have with insurances and retirement accounts that allow you to designate your beneficiaries on a simple beneficiary designation form.

    For many of us, the beneficiary form is the first practical experience we have with estate planning. For thoughtful and downright tactful tips for designating your beneficiaries designations, consider a recent article in Fox Business titled “Bulletproofing Your Beneficiaries.”

    When it comes to beneficiary designations, some of them are shortcuts and some of them are dead-ends, and still others can completely undo your estate plans if you simply forget about them. That noted, there are at least two key points to consider. The second point is the beneficiary designation must be coordinated with your overall estate plan to designate the right beneficiaries (or even a system of trusts) to eliminate probate and minimize taxes. The first point, and a source of immediate concern, is that you must know who all of your beneficiaries are on all your accounts at all times. If you don’t know already, then it’s high time for a “beneficiary audit” of all your accounts and, if necessary, a reworking of those designations to meet your distribution goals.

Reference: Fox Business (October 1, 2012) “Bulletproofing Your Beneficiaries”

Medicare Coverage Skilled Nursing Qualifications May Be Eased

Tens of thousands of people with chronic conditions and disabilities may find it easier to qualify for Medicare coverage of potentially costly home health care, skilled nursing home stays and outpatient therapy under policy changes planned by the Obama administration.

    Medicare may be opening the doors to many who previously had been turned away and left without coverage for home health care, nursing home stays and outpatient therapies on the basis of a less than positive “improvement” prognosis. This change of course may actually be the result of a nationwide class-action suit and an agreement from the administration.

    For a perspective on the proposed settlement, turn to a recent article in The New York Times titled “Settlement Eases Rules for Some Medicare Patients.”

    The Medicare board has had a longstanding practice to require a likelihood of medical or functional improvement before a beneficiary could receive coverage for skilled nursing or therapy services, whether institutional or home-based. That left many care recipients in a lurch. If this settlement goes through and becomes practice, then the requirement is no longer “improvement” but “maintenance.” Accordingly, Medicare will provide services if they are needed to “maintain the patient’s current condition or prevent or slow further deterioration.”

Reference: The New York Times (October 22, 2012) “Settlement Eases Rules for Some Medicare Patients”

Clock Continues to Tick on 2012 Mega Gifts

The problem is that few professional advisers understand the issues and opportunities surrounding the gifting of legacy assets, and even fewer owners of legacy assets are even aware that such planning is possible.

    Did you know 2013 is looming on the calendar as a huge unknown when it comes to taxation? In fact, when it comes to 2013 taxation, the future may be catastrophic for estate tax planning. On the other hand, the clock continues to tick away on some incredible wealth transfer opportunities for 2012.

    These last few months are either a time to seize the unprecedented gifting opportunity of a $5.12 million gift tax exemption, or a time to run out the clock on this opportunity perhaps for the rest of your lifetime. The gift tax exemption is scheduled to return to $1 million.

    If you are looking to seize the opportunity in 2012, then you will find encouragement in a recent Forbes article titled “Romney Wants No Estate Tax - Case For 2012 Mega Gift Remains Compelling.” In short, the article notes that there are ways to give now without spoiling future opportunities, if you think carefully about the right kinds of assets to give. The author of the article calls such strategic assets “Legacy Assets,” and offers this quote from an attorney comrade:

    Legacy assets are ideal for the “megagift” for several reasons:

1. Art, real estate, family business interests and other Legacy Assets are secular investments, that are held for more than 10 years, and so the gifting of an asset does not substantially reduce the lifestyle or disposable financial wealth of the client,
2. The financial value of Legacy Assets is not correlated to the investment market,
3. The personal and social value of Legacy Assets is both real and significant,
4. Since there is both a financial and a social value to the ownership of Legacy Assets, they work well with charitable split interest trusts that can significantly leverage the Unified Credit, and
5. There are techniques that can be used with Legacy Assets that cannot be used for investment assets.

    So, 2012 - Mega Gift or not, Legacy Assets are worth considering. If beating the 2012 clock appeals to you, then you better get a move on it. The ball in Time’s Square seems to fall earlier each passing year.

Reference: Forbes (October 14, 2012) “Romney Wants No Estate Tax - Case For 2012 Mega Gift Remains Compelling”

Forbes Offers Compilation of Estate Planning Articles

National Estate Planning Awareness Week (Oct. 15-21). 

What’s that? As Forbes Senior Editor Deborah L.  Jacobs put it in a recent post: “It’s a bit of a contrivance by lawyers in the field to get you to seek out their services. But it’s also a good time to take stock of your life and do what’s necessary.”

    National Estate Planning Awareness Week has come and gone. Nevertheless, estate planning is a mindset and a rational behavior that is never out of season.

    While proper estate planning is no Do-It-Yourself project and competent legal counsel should be retained, there is plenty of literature available to help you learn the basics of estate planning and beyond. Leave it to Forbes to compile “The Forbes Guide To Estate Planning” from its storehouse of past estate planning articles. Of course, these 40 some articles give only the Forbes perspective, but it’s a quick glimpse at the panoply of topics and worth a read.

Reference: Forbes (October 14, 2012) “The Forbes Guide To Estate Planning”

Charitable IRA Donations Coming Back in Time for 2012?

Many experts are betting that Congress will revive a popular tax provision that allows those ages 70½ or older to save on taxes while donating assets in their individual retirement accounts to charity.

    But if you intend to give money to charity this year, don't wait for Congress to act.

    When it comes to taxes, these are very uncertain times. Have you heard of the impending “fiscal cliff?” While things are uncertain for 2013, you may be thinking Congress and the White House may retroactively extend some “expired” taxpayer favorites. For example, one move lost in 2011 is the ability to give the “required minimum distribution” (RMD) from your IRA to charity.

    But do not count on retroactive resuscitation for this favorite in time for your 2012 taxes.

    Until the end of 2011, as you likely recall, it was possible for individuals over the age of 70 ½ to simply rollover their RMDs from their IRAs straight into the waiting hands of their favorite charity. As a result, this saved these taxpayers from any pesky taxable income.

    The Wall Street Journal took up this matter in a recent article titled “Should You Wait on IRA Donations?” According to the article, aside from benefiting charity, the benefit to seniors making this savvy move includes:

    “By reducing your adjusted gross income, the tax provision may help you keep it below the thresholds at which you could lose some of your deductions and other tax benefits, or become subject to higher Medicare premiums and taxes on your Social Security benefits.”

    The verdict: it might not be worth risking the wait on Congress and the White House to find out the official ruling on charitable IRA distributions for 2012.

    The article notes, however, that even if you have to take the RMD and accept the taxable income, you can still give it away and claim a charitable deduction. Although that’s not as beneficial as the Charitable IRA rollover, it’s better than nothing and certainly far better than inaction. Why? There’s an excise tax on the failure to timely accept the full amount of your RMD.

Reference: The Wall Street Journal (September 22, 2012) “Should You Wait on IRA Donations?”

Planning for Special Needs

With each passing election season, the conversations about the cost of government-provided health care and Social Security get more urgent. But debates about the deserving and the undeserving and the proper level of budgets and taxes tend to gloss over the issue of disabled people — many of whom must hope that the programs they rely on are not cut, because they have no way to make up the difference.

    Have you heard that the best defense is a strong offense? So it is with making long-term plans for family members with special needs.

    Unfortunately, few parents of children with special needs fully appreciate what is at stake and how to protect it. To make matters worse, too few professional financial planners are versed on the need to provide a long-term solution for such children, especially with shrinking public assistance benefits.

    The New York Times recently provided a mini-primer of sorts on the subject titled “Assuring Care of a Family Member With Special Needs.” While proper planning will vary from one family to another, given different needs, there are many tools to employ ranging from special needs trusts to life insurance. The key is to know which ones to use.

    As the article notes, special needs planning is only going to grow in importance as funds available for public assistance programs –  Medicare, Medicaid, Social Security, etc. – become more restricted and uncertain.

Reference: The New York Times (October 5, 2012) “Assuring Care of a Family Member With Special Needs”

Social Security COLA Stagnates

More than 56 million Social Security recipients will see their monthly payments increase by 1.7% in January… The increase is among the lowest since automatic annual adjustments were adopted in 1975.

    Did you know your Social Security payout increase will be the lowest ever at 1.7%? It’s true, according to official confirmation on October 16.

    The COLA is the Cost Of Living Adjustment added to Social Security annually, based on inflation and increases in the Consumer Price Index (CPI.) For some seniors, planning for the new year means planning around the COLA and hoping for the best. Alternatively, a reduction or a weak increase in COLA may mean seniors will need to make up the difference out of savings. Nevertheless, the CPI is an imperfect indicator and a debated one as well.

    This matter was taken up recently by USA Today in an article titled “Social Security benefits to rise 1.7% in 2013.”

    Well, if you are on Social Security, what does this mean to you? Likely it means a great deal, especially if the tax picture changes next year. What about that payroll tax cut that’s set to expire? To bone up on what may be coming down the pike, you might want to review a recent Forbes article titled “Social Security Benefits To Rise 1.7%; Workers Face Up To $2425 Payroll Tax Hike.”

References: USA Today (October 16, 2012) “Social Security benefits to rise 1.7% in 2013”

Forbes (October 16, 2012) “Social Security Benefits To Rise 1.7%; Workers Face Up To $2425 Payroll Tax Hike.”

Alternative Charitable Giving Strategies

There is certainly a place for special trusts and foundations, but they are not a requirement.  There are many ways people aren’t aware of to be charitable both in your own family and also in your community.

    Giving can be complicated, especially when it moves beyond handing over cash or writing a check. A recent Forbes article provides some practical advice you may not have considered. The article is titled “Five Ways To Be Charitable Even If You Aren't Bill Gates.” And if you’re not Bill Gates, the “five ways” do not require the complexities of family foundations.

    Here are the Forbes tips for your charitable consideration:

1. Give the gift of education. Have you thought about giving to your own children or grandchildren and in the form of a 529 college savings plan or a direct gift to the college?
2. Give your IRS distribution to charity. Since you have to take your required minimum distribution anyhow, send it directly to a charity instead. This option is available for the remainder of 2012, but its future is uncertain. 
3. Name your charity as your beneficiary on your retirement account. This option is appropriate if you’ve decided that any retirement funds left over should eventually pass to charity instead of loved ones. Be sure to designate your charitable beneficiaries accordingly! Note: The full amount of your retirement account given to charity is income tax free. If left to a non-charity, then the full amount is taxable as ordinary income.
4. Donor-advised funds. By giving to a donor advised fund, you can give today, take the charitable deduction in this year’s taxes, but decide which charities to benefit next year or beyond. They are easy to establish too.
5. Charitable gift annuity. Are you keen on the idea of receiving a guaranteed lifetime monthly income, especially as an assurance in old age? If you also want to benefit charity in the process, then consider hitting two birds with one stone by opting for a charitable gift annuity.

    This is just an overview of the “five ways” featured by Forbes, so be sure to consult with your financial, tax and legal advisors regarding the appropriateness of each for your circumstances.

Reference: Forbes (September 20, 2012) “Five Ways To Be Charitable Even If You Aren't Bill Gates”

Annual Gift Exclusion to Get Inflation Increase?

Next year, that $13,000 limit on gifts is expected to increase to $14,000—an inflation adjustment required by law. The number isn't yet official—and won't be until later this year when the Internal Revenue Service will announce this and many other inflation adjustments.

    When it comes to estate planning, it ultimately comes down to what the laws themselves provide. But fear not, not all questions of estate planning law come down to politics. For example, with no political posturing involved at all, the annual exclusion amount is set to rise for the first time since 2009.

    The Wall Street Journal broke the good news as early as it could, in a Q&A entitled “Expect Gift Limit to Rise Next Year.” First, a caveat: it’s not the present lifetime exclusion of $5.12 million you can expect to see increase, as the jury is still very much out on that one. Rather, it’s the annual gift tax exemption presently set at $13,000.

    Currently, you can exclude $13,000 per person per year, before ever reducing your lifetime exemption amount. Good news: that amount is set to adjust up to $14,000.

    We await official numbers, but they should arrive later in the year. If and when the annual gift exclusion increases, this will bring a welcome bump in your wealth transfer opportunities.

    If nothing else, the attention given to this uptick in the annual gift exclusion also may offer a wake-up call to the power of annual giving. Just think of what you can do for each of your loved ones with an annual gift of $14,000.

    Likely your loved ones could use the extra assistance in these tight financial times, and you get the benefit of seeing their stewardship (or lack thereof). In fact, depending on whether they are wise or foolish with the gift, you can make adjustments to your estate plan accordingly.

Reference: The Wall Street Journal (September 29, 2012) “Expect Gift Limit to Rise Next Year”