When we saw that National Health Care Decisions Day had come and gone (it was April 16), we were sorry to have missed it, but also wondered: “Why just one day?”
National Health Care Decisions Day (NHDD) is an annual public relations event designed to bring attention to health care powers of attorney, aka health care proxies, and living wills, aka advance directives. These are two of the four documents we recommend that every adult have (the other two are a will and financial power of attorney), and we believe not only is every day a good day to talk about them but also that it’s better if people spend more than one day thinking about what these very important documents should say.
The health care power of attorney (HCPOA) designates a person to act as your agent in the event you cannot communicate your own medical decisions. The agent you name steps into your shoes and speaks for you as best he or she can. Note that this document comes into effect ONLY if you are unable to make or communicate decisions concerning your care; you continue to make your own decisions as long as you are able. The living will details your preferences for care – and when care should cease – at the end of life, and your agent uses it to guide his or her decisions.
It can be difficult to think about being unable to communicate medical preferences, especially when you are healthy and don’t expect to fall ill anytime soon. But circumstances change, and it’s a gift to your family members and loved ones to give them the tools needed to be able to determine and follow your wishes. According to a Pew study, most Americans have thought about end-of-life treatment options, but only about a third have a living will.
Arizona law also provides for a mental health care power of attorney, which grants your agent the authority to admit you into a “level one” psychiatric treatment facility, which is a psychiatric hospital or a psychiatric ward in a regular hospital. These are particularly useful when there is a diagnosis such as bipolar disorder or Alzheimer’s disease that may require mental health care treatment. Having a mental health care power of attorney means your loved ones would not have to seek court approval to get you such high-level treatment. This power is often incorporated into the regular HCPOA and living will in a combined document.
These documents are governed by state law, and, to be legally effective, they must conform to the statutory rules. In Arizona, the HCPOA must be in writing, signed, and witnessed or notarized. If witnessed, the witness cannot be a family member, beneficiary of your estate, your named agent, or medical professional providing treatment. Arizona includes samples in statutes (HCPOA and Living Will). The statutory forms will suffice, as will one of the many basic documents you can find all over the Internet, but many people prefer to spell out in more detail the agent’s responsibilities and their own specific treatment preferences. Any estate planning law firm will have more detailed HCPOAs and living wills as part of a basic estate planning package or as stand-alone documents. At Bogutz & Gordon, our forms are constantly evolving; as legal or practical issues arise, the forms are adjusted to provide maximum clarity and minimum confusion for those who will actually be implementing them. Each client can then customize the language to suit his or her specific family or health situation.
If you end up unable to communicate your wishes and don’t have a health care agent, doctors will turn to the following people, in this order, to find someone who is able to speak for you: a spouse, unless you are legally separated; an adult child, and, if more than one, a majority of those available; your parent; your domestic partner (if you are not married); a sibling; and then a close friend. If none of these are available, a medical professional may consult with a health provider ethics committee or another physician. It should be noted that these “statutory surrogates” cannot authorize the withholding or withdrawal of artificially provided food and fluids, but health care agents can.
If your choice of agent differs from those above, it is crucial that you execute a power of attorney to ensure your chosen individual has the ability to act for you.
It also is crucial for each client to take the time needed to carefully consider how these documents may be used.
When it comes to the HCPOA, think through who may be the appropriate agent. Many married couples name the other spouse first, then a child or several children as alternates. Consider whether your spouse is really the appropriate person. Also consider the practical implications of naming several agents, especially if they are not geographically close to you. In addition, do you want them to make decisions together or would you like them to be able to act independently? Other considerations: Does the agent have the ability to deal with medical professionals effectively? Will he or she strongly advocate for you, and be able to handle the potential stress and time commitment? Do you believe he or she can separate his or her own emotions to carry out your wishes? Does he or she know you well enough to act in a situation that is unforeseen? It should be someone you know well and who knows you. After all, you are trusting this person with your life.
As for the living will, it requires examining your values and what is most important to you. Do you have strong religious convictions that influence end-of-life care? Is the ability to interact with others very important to you? These questions can be difficult to answer, and there are a multitude of resources that help walk you through these issues. And remember: your wishes can change over time, and you can always change your mind by executing new documents. In fact, many people, after witnessing the illness or death of a loved one, change their own living wills because they have grown to have a better sense of what they really want, or change their named agents after seeing how their family members handle various life events.
Once you have made these decisions, your work does not stop there. Talk to your agent. Because no living will can cover every single scenario that may come up, your agent needs to know your values and preferences, your thoughts about end-of-life care, and your spiritual or religious beliefs. Show him or her the power of attorney and living will, read the documents together, and if either of you has questions, contact an attorney or other expert. Make sure the agent understands his or her responsibilities if the document ever needs to be used, and elaborate on treatments mentioned in the document, so the agent can be fully prepared if something occurs that is not mentioned.
Here are some helpful resources:
The Arizona Attorney General’s guide: https://www.azag.gov/sites/default/files/sites/all/docs/lifecare/LCP_Packet_fillable.pdf
American Bar Association toolkit: http://www.americanbar.org/content/dam/aba/uncategorized/2011/2011_aging_bk_consumer_tool_kit_bk.authcheckdam.pdf
Caring Connections: http://www.caringinfo.org/i4a/pages/index.cfm?pageid=1
Compassion & Choices: http://www.compassionandchoices.org/
Project Grace: http://www.projectgrace.org/
Caring Conversations pamphlet: http://www.practicalbioethics.org/documents/caring-conversations/Caring-Conversations.pdf
National Resource Center on Psychiatric Advance Directives: http://www.nrc-pad.org/
Among the many books out there, this one comes highly recommended: A Better Way of Dying: How to Make the Best Choices at the End of Life, Jeanne Fitzpatrick, M.D. & Eileen M. Fitzpatrick, J.D.
You may have seen a headline or two recently proclaiming that President Obama aims to expand the estate tax, that he wants to take levels back to 2009, that he made the “permanent” estate tax levels Congress passed in January temporary again, that the “death tax” is getting “more deadly.”
These stories, based on the Obama Administration’s budget proposals for fiscal year 2014, may have been true in the sense that among the almost 50 proposals in the publication (known as the Greenbook) was an estate tax of 45% and an exemption of $3.5 million (2009 levels). But no one – no doubt including the president – expects any of that to actually happen.
In fact, President Obama has proposed these same limits every year of his presidency, and we’ve seen how much traction they’ve gotten. (Uh, virtually none.) With Republicans in charge of the House, and effectively the Senate with the filibuster, that’s not likely to change. Even if the sweeping estate tax changes don’t stand a chance, experts believe some of the narrower proposals could find some support.
Two of these would affect rather esoteric estate planning techniques: installment sales to grantor trusts and grantor annuity trusts (or GRATs).
The administration has had its eye on grantor trusts for a while now. In a grantor trust, the creator of the trust (the grantor) transfers property irrevocably into trust for beneficiaries (say, children), but retains certain rights to the property to be considered the owner for income tax purposes. This allows the grantor to not only gift an asset out of his or her estate to shift any gain or appreciation to the next generation, but by requiring the grantor to pay the income taxes, it shifts even more wealth to the kids.
Unlike a non-grantor irrevocable trust, the trust and the grantor are not considered separate entities, so the grantor also can sell appreciated property to the grantor trust without triggering capital gain or other income taxes. In such a sale, the grantor sells assets to the trust in exchange for a loan. The assets, now owned by the trust and out of the grantor’s estate, grow in value. The grantor gets the benefit of the loan payment, but any appreciation belongs to the trust and is not added to the grantor’s estate.
It’s these “installment sales” that Obama’s 2014 plan aims to reel in. Although it is not entirely clear how any legislation or regulations would evolve, at least some of these sold assets would be treated as owned by the grantor. This means the appreciation would no longer escape estate tax – eliminating the main purpose. The future of the idea is unclear, but it’s possible this technique will not last forever, so if it is on your to-do list, it might be wise not to let it linger for much longer.
Another estate tax-related proposal that could be implemented is limiting the terms of GRATs to ten years. A GRAT (grantor retained annuity trust) is a trust that acts like an annuity or an installment sale. A grantor transfers property to an irrevocable trust for beneficiaries, but retains the rights to annual payments for a stated term. The IRS has a calculation as to how the gift is valued. If the grantor dies during the term, the property is included in the grantor’s estate, but if the grantor survives the term, the remaining property passes to the named beneficiaries. There is no additional gift tax at that transfer, so if the property in the trust has appreciated more than the IRS guessed it would, there is estate tax savings.
Practically speaking, practitioners could set up many short-term GRATs, and for any assets that grew more than expected, there would be estate tax savings. For assets that didn’t grow as expected, the money all comes back to the grantor through the annuity payments, and there is no loss. Clients would typically set up multiple two-year GRATs with different investments, and the results were “heads you win,” “tails you don’t lose.”
Obama’s 2014 proposal would require a minimum 10-year term. A longer period would reduce the ability to “gamble” as effectively with multiple GRATs, because the long-term growth would be required to be spread out. While the technique could still be effective, the ability to leverage significant amounts out of an estate is reduced. Again, if you are interested in a GRAT, better to act relatively soon, just in case.
There also has been discussion about some scary income tax proposals in the Greenbook, though there would likely be a big, drawn out fight over tax reform to get them through Congress, and there’s a much bigger constituency to fight back. Among those discussed:
>Inherited IRAs would no longer be able to stretch out payments over the beneficiary’s lifetime; except for those inherited by a surviving spouse, they would have to be paid out in five years.
>Limits would be put on how much you could accumulate in tax-free retirement accounts. (The Wall Street Journal comments)
>New limits on exclusions and deductions.
>A “Buffett Rule” would create a new minimum tax (a “Fair Share Tax”) for adjusted gross incomes of $1 million to $2 million; 30% tax, but a 28% credit for charitable contributions.
For more information, check out: The Greenbook
If you are reading this article, you have a digital life. That digital life is something to consider addressing in your estate plan – or at least in instructions for your financial agent, personal representative, or trustee.
These days, most of us have at least some kind of digital presence. Consider:
- E-mail and stored contacts
- Online bank and brokerage accounts
- Electronic statements and bill pay
- Social media accounts (Facebook, Twitter, LinkedIn)
- Digital subscriptions (Netflix, cable, music services)
- Reward accounts such as frequent flier miles
- Storage, file backup, and cloud computing (Flickr, Dropbox)
- Domain names and websites
- Blogs or online gaming
- Online retail accounts (eBay, Amazon)
- Tax records stored on hard drive or online
These “digital assets” may be associated with several different e-mail accounts, and all have different usernames and passwords and sometimes additional security questions.
A personal representative is charged with securing a decedent’s assets and then distributing them to the beneficiaries—either named by you in a will or determined by statute if you have no will. If something happens to you, will your loved ones be able to access your digital life to figure out what you have and how to deal with it? Will they know what your wishes are with regard to any of it?
The legal landscape with regard to what are often referred to as “digital assets”is murky at best. Laws including the federal Computer Fraud and Abuse Act penalize “unauthorized access” to computers and data, and others, such as the federal Stored Communications Act, are designed to protect privacy. Laws such as these cause problems for loved ones seeking access to an incapacitated or deceased person’s accounts. Family members sometimes have to choose between breaking the account rules or the law and losing the information.
A few states (including Virginia, Connecticut, Idaho, Rhode Island, Indiana, and Oklahoma) have laws on the books to help fiduciaries gain access, but most are viewed as inadequate. (Virginia’s law, passed just last month applies only to deceased minors.) The issue is beginning to be addressed more broadly. The Uniform Law Commission, which recommends uniform state laws, is working on a statute that all states could adopt so there is consistency from state to state. That, of course, would do nothing to alter the federal laws.
In the meantime, you can take steps to help your loved ones discover and deal with your digital life. Compile the additional information and instructions your personal representative may require because part of your life is digital. Perhaps even name an additional person in your will to handle your digital stuff, maybe someone with some tech sense in terms of accessing accounts and recognizing their value.
Most essential: a list of your online user names, passwords and other prompts for accounts your personal representative would need to access.
To do this, inventory your digital activities for a period of time and catalogue all of the relevant information. Keep updating the list as you add more accounts or change passwords. Don’t forget the password to the computer itself. Provide some level of detail, such as which bills are auto pay, which are electronic but require action.
You’ll want to keep the list in a secure place. While a safe deposit box may seem like a good idea, consider how likely you would be to visit the box every time you open a new account or change a password. A home safe may make more sense. Let a trusted loved one know the list exists and where to find it.
Another option is a paid service, such as SecureSafe, Legacy Locker, or Assetlock to store information and alert loved ones in the event something happens to you. It should be noted that these sites are untested and may not survive you, so proceed with caution.
Secure Safe provides storage for documents and password management, and claims its storage is “as safe as a Swiss bank vault.” It has a careful process for allowing”beneficiaries” access to the information when the time comes. Basic services are free, but fees kick in for additional storage and services.
Legacy Locker allows you to store passwords and name a beneficiary for each of them. Upon death or incapacity, there is a multi-step verification process before any information is released. It’s free for three assets, and $29.99 per year or $299.99 one-time fee for unlimited assets and beneficiaries.
Assetlock (aka Youdeparted.com) purports to be a “secure electronic safe deposit box”where passwords; copies of important documents; and final instructions, wishes, and messages can be stored. Plans range from “Basic” (20 entries, 20MB of storage; $9.95 per year or $59.95 one-time fee) up to Ultra (unlimited entries, 5G of storage; $79.95 per year, $239.95 lifetime).
WARNING: Some similar sites seem to allow you to make bequests of your assets. Bequests, however, must satisfy statutory requirements of making a will, which in Arizona and most other states, means in writing and witnessed. Additionally, Bogutz & Gordon, P.C. has not tested, analyzed, or reviewed these sites or products, nor do we endorse them, and they are mentioned just as samples of the products available.
Consider each digital asset and what you would like to see happen to them and include an instructional letter with your documents explaining your wishes. Think about whether you would like your accounts kept as-is, transferred to someone else, or shut down. Who, if anyone, should have access to your private e-mail? If you have an active blog, would you like someone to continue it or post a final entry notifying followers of your passing? For online storage of photographs, research, writing, etc., would you want someone to be able to download the material as a memento or record of family history? Are there online communities you frequent and would you like to inform members of your passing?
If you have digital assets that have monetary value, consider addressing them specifically in your estate planning documents.
Ultimately, nothing digital is permanent, so there is no guarantee that your digital life will be preserved or passed on to your loved ones. To be completely safe, transform the important items into tangible objects: print them and put them in a safe place.
Like most important estate planning concerns, the goal is a practical one. Will the right people have access to the information you want them to have when necessary? Will the information be safe until it is required? And have you made sure that the wrong people will never have access to this information?
What to leave children, grandchildren, or other beneficiaries can be a difficult decision for anyone — especially if potential beneficiaries are not responsible with money or you are concerned a bequest will eliminate the need for hard work and productive contributions to society. A discretionary trust with incentive provisions is a possible solution.
For all the legalese you see in a Trust document, at its heart it is a set of instructions on what the Trustee is supposed to do with certain property in certain stituations. A discretionary trust gives the Trustee the ability to decide to make–or not to make–distributions to the beneficiaries, based on whatever standards or guidelines that the creator of the Trust (known as the Settlor) writes into the document. The Trustee’s discretion allows them to make judgment calls.
Sometimes, a Trust will let a beneficiary be his or her own Trustee because the Trustee’s decision making is not at issue, and instead the Settlor is concerned about protection from other parties. However, a Trust of this kind can alternatively provide that someone else is the Trustee. The Trustee could be another family member, a family friend, a bank, a professional licensed fiduciary, or a bank that acts as a corporate Trustee. Frequently, for younger beneficiaries, someone else is named as Trustee until a certain age, and then the beneficiary becomes his or her own Trustee.
The Trust document spells out how the Trustee is to spend the money for the beneficiary. The Trustee may be given varying degrees of discretion to decide whether spending is appropriate. If the Trustee has total discretion, the beneficiary has no right to demand a distribution. Since the beneficiary has only an expectancy interest in the Trust, he or she cannot use the Trust as security for a loan or to satisfy creditors.
Some examples of the levels of discretion:
- None: “The Trustee shall make distributions for health insurance premiums not paid for by an employer and insurance copays for necessary medical procedures and medication.” In this case, the Trustee must pay.
- Some: “The Trustee may make distributions for health insurance premiums, medical procedures or medications, taking into consideration all resources available to the beneficiary.” In this case, the Trustee can pay but he or she must assess whether there are other funds available.
- Total: “The Trustee, in his or her total and unfettered discretion, may make distributions for the general health and well-being of the beneficiary.” The Trustee then could purchase anything that contributes to good health – gym membership, vitamins, running shoes, relaxing vacation – or decline to distribute anything.
In addition to the general discretionary granted to the Trustee, the settlor can give the Trustee the power to specifically promote a productive lifestyle by cutting off distributions if a beneficiary becomes involved in destructive behavior, such as drugs, alcohol, excessive spending, or gambling. The money could simply be saved until the beneficiary’s behavior turns around, or the Trust could provide additional beneficiaries. A Trustee also could be given the option to make payments directly for the benefit of a beneficiary, to, for instance, a rehab facility or hospital, but not to the beneficiary.
A Trust also could specify that a distribution not be made to a beneficiary who is not striving to become a productive member of society by working, making reasonable progress in attaining an education or launching a career or business. Without provisions such as this, a Trustee may be at a loss to determine whether to pay for rent, food, and clothing for a healthy 30-year-old who simply chooses not to work.
There are some legal limitations to restrictions; they cannot be unreasonable or against public policy. A Trust could not, for instance, prohibit distributions if a beneficiary gets married or act as an incentive to divorce because public policy favors marriage.
Things to consider:
- Does the Trustee have enough flexibility to respond to changing circumstances? If you limit distributions to health and education, but your beneficiary is short on cash for a car repair, do you really want the Trustee to be unable to help?
- Is the Trustee power so flexible that the beneficiary has little or no ability to challenge a Trustee’s actions? If you give the Trustee absolute discretion, it may be difficult to challenge the Trustee’s decisions, and the Trust could be vulnerable to abuse. You could name several Trustees as a check and balance, have a Trustee committee, or appoint a Trust Protector to intervene in the event of a dispute.
- Do the terms create interpretation or enforcement difficulties? If you prohibit a “hedonistic” or “indolent” lifestyle, would your named Trustee have the ability – or desire – to make such a judgment? (“Hedonism,” by the way, is defined in Merriam-Webster as “the doctrine that pleasure or happiness is the sole or chief good in life,” and indolent as “habitually lazy.”) Would you expect the Trustee to investigate a beneficiary to determine what kind of lifestyle he or she is living? If your Trustee is a family member or close family friend, will he or she want to make that call? Would a bank or other institution? A prohibition against distributions to a beneficiary using drugs sounds simple on paper, but how does the Trustee need to prove this? Consider consulting with your prospective Trustees regarding the terms and whether they will accept the trusteeship with your desired terms.
- Do the terms create a complicated administration and potentially high fees? A lot of requirements, such as considering a beneficiary’s other resources or lifestyle choices, can create additional work for the Trustee, which may be reflected in the fee that the Trustee charges.
What will happen to your pack of furry friends when you die? Well, you can plan for that. Including pets in an estate plan has become common. In fact, some clients have come to us specifically to create an estate plan designed to care for their dogs, cats, horses, or other animals. Some people hold their animal companions in such high esteem that using the term “pets” is diminishing in their eyes; they are part of the family, and including them in an estate plan makes perfect sense.
There is obviously a broad spectrum as to what people want for their pets. Here are some options:
Name someone to inherit them
The simplest approach beyond doing nothing is to specify under the Will or Trust who should get the pets. This may include alternates if the first person isn’t able or willing to take the animals, as well as a method the Personal Representative should use to find a home if every person named is unable or unwilling to take the animals. Not only can this be done under the document, but also, because pets are “chattel” under the law, it can be included on a separate tangible personal property list permissible as an incorporation to a Will.
Name someone, and give some financial support
The next most common approach is to name who will get the pets and also provide some cash amount to offset the costs of caring for the animals. We frequently see sums between $500 and $5,000 given to the person for these purposes. Amounts, of course, vary based upon the animals. Generally, animals such as horses require a great deal more expense due to their size, cost of upkeep, and much longer lifespan. The person receiving the animal and the money is only morally bound, not legally required, to use the funds for those purposes, so you have to have a high level of trust in who is named.
There are options for people who wish to provide this type of arrangement but don’t know any good candidates. The Humane Society of Southern Arizona, for instance, has the “Guardian Angel” program. (See www.hssaz.org, under “How to Help.”) For a gift of $2,500 per pet, the Humane Society will place the animal with a good family, within certain minimum requirements. For $10,000, you also get monitoring by the Humane Society. For individuals who were planning to leave a bequest to the organization anyway, the care aspects become a freebie.
Create a pet trust
For those for whom the above options are not sufficient, including more legal certainty as to how the pets will be cared for and how their assets will be spent, there is the full blown “pet trust”–usually part of a Revocable Trust or as a Testamentary Trust provision under a Will. A pet trust can be fairly simple (say, $100,000 set aside for general pet care) or elaborate (Leona Helmsley’s $12 million arrangement comes to mind). Some relatively ordinary clients, however, are willing to see their entire estate, even $500,000 or more, set aside for their pets’ care.
There used to be controversy over whether a trust for a pet is valid, but A.R.S. § 14-2907(B) authorizes this type of trust, as follows: “A trust for the care of a designated domestic or pet animal is valid. The trust terminates when no living animal is covered by the trust. A governing instrument shall be liberally construed to bring the transfer within this subsection, to presume against the merely precatory or honorary nature of the disposition and to carry out the general intent of the transferor. Extrinsic evidence is admissible in determining the transferor’s intent.”
A.R.S. § 14-2907(C) adds that: “The intended use of the principal or income can be enforced by a person who is designated for that purpose in the trust instrument or, if none, by a person appointed by a court on application to it by any person.” So, you can name not only a Trustee but also a “pet protector” of sorts to check in on Fifi to make sure she is being properly cared for. If there is no such provision, someone else can drag the Trust into court and get themselves appointed to watch over it.
The substantive terms of a pet trust are typically more detailed than trusts written for people; after all, it is a chance to provide benefits for something that, parrots aside, cannot speak for itself. Here are a number of the provisions to think about, from the mundane to the unusual:
- Trustee. Probably the most important starting point is deciding who should hold onto the assets held for the pet. In some situations, a close friend or trusted relative will be the choice, but in others, an independent professional is a better fit. Banks and corporate trustees are not likely to be willing to act on these types of trusts (due to both size and nature), which leaves the option of a licensed fiduciary (such as Bogutz & Gordon). As mentioned above, you also can name someone to look over the shoulder of the Trustee to make sure they’re carrying out the wishes and taking care of the pet in the appropriate manner. Be careful to choose someone who is not likely to be antagonistic to the Trustee; court actions over the best interest of a pet could mimic estate litigation between siblings or bitter divorces.
- Residual Beneficiary. Arizona law provides for default beneficiaries upon the death of the last living animal (residuary beneficiaries under the Will, and if none, the decedent’s heirs), but most people wish to specify who is to receive any remaining trust assets. Common choices are family members, friends, and charities (including animal-oriented groups). These beneficiaries are the only actual beneficiaries, and will be entitled to receive required notices to trust beneficiaries under Arizona law (as modified by the terms of the trust).
- Additional considerations: Where will the animal live? Will the animal’s caretaker be paid, and if so how is compensation to be determined? Are there special care needs? If so, document them (diet, veterinarian contact information, health history, and social issues such as which pets should remain together). What if there’s an emergency? Inform family and friends about the plan, and make it easy to find. We’ve seen situations where an estate plan was set up explicitly, and at great expense, to keep pets in the owner’s home for the rest of the pets’ lives. When the owner died suddenly, paramedics called animal control and those carefully planned-for pets were sent to the pound–the last place in the world the owner intended. A sign on the door or refrigerator about emergency contacts may have helped avoid that result.
One rare request that can provoke discussion is when a person wants his pets euthanized when he dies. This can create a moral dilemma for the Personal Representative or Trustee asked to carry out the written wishes. Some veterinarians will refuse to euthanize a healthy animal, and if a Personal Representative or Trustee refuses to carry out the directive, it is difficult to think anyone, including a court, would penalize them. A good discussion on this topic can be found in an article by Suzette Daniels , in which she indicates that courts have prohibited euthanasia, but none has forced a Personal Representative to fulfill a provision requiring it.
College costs continue to rise, and new grads carry the burden of student loan debt while the job market remains bleak. If you have some extra cash, you probably have thought about helping out a loved one with education expenses.
Many do not realize that unlimited education expenses are exempt from gift and estate taxes. However, this only applies if they are paid directly to the educational institution; reimbursing the student will not qualify. Some generous grandparents even have arranged to pay tuition to an institution in advance in a lump sum. This can be a good option for people with estates large enough to worry about gift and estate taxes (over $5.25 million for a single person, $10.5 million for married couples) who want to reduce the size of the estate.
Another, more common option is a 529 plan, an investment vehicle designed to help families save for higher education. There are two types: 1) prepaid, which lets you pay tuition and other costs in advance at today’s rates, and 2) savings, which provides investment options much like a 401(k) or IRA.
Every state has at least one plan, and Arizona allows contributions to any state’s plan to be deducted on state income tax returns (up to $750 a year for individuals, $1,500 per year married couples filing jointly). Those with large estates should note that contributions also qualify for the annual gift tax exclusion ($14,000 a year for individuals, $28,000 for married couples), and you can lump five years’ worth of gifts in one year ($70,000 for individuals, or $140,000 for married couples) for as many beneficiaries as you like–another effective way to shrink an estate.
The main benefit of 529 savings plans is that the contributions grow free of income tax and distributions also are tax-free, so long as they are used for qualifying educational expenses. Unlike an outright gift, the donor can keep control of the account, determine when distributions are made and what for, and can take the money back (though there will be income tax due and a 10% penalty on any earnings).
Another type of account that allows for contributions to grow tax-free for education is the Coverdell Education Savings Account, or education IRA. Coverdells may experience a resurgence, thanks to the fiscal cliff deal (aka the American Taxpayer Relief Act, or ATRA), which made permanent certain aspects of the accounts that were set to expire. Coverdells are much like 529s, but contributions are limited to $2,000 per year per beneficiary, must be made before the beneficiary turns 18, and the beneficiary must be under age 30. In addition, the ability to contribute is phased out for donors with an adjusted gross income of $95,000-$110,000 for single filers and $190,000-$220,000 for joint filers. The advantages of Coverdells? They may be used for elementary and secondary education expenses, and many have more investment options than 529s. Forbes suggests that families contribute up to their state’s income tax exemption to a 529, and anything more to a Coverdell.
Here are answers to some common 529 questions:
What if you don’t know whether the beneficiary will go to college?
The accounts can be used for any accredited institution, including vocational schools. Savingforcollege.com lets you search for qualifying institutions by state. In Arizona, everything from All Beauty College in Fort Mohave to Refrigeration School in Phoenix to Virginia College’s Golf Academy of Arizona in Chandler makes the list.
What expenses qualify?
Tuition, fees, room, board, books, supplies, and required equipment for post-secondary education, which includes grad school. If a student is enrolled at least half-time, room and board counts, though the amount is limited to the institution’s figure used for federal aid. Not included: transportation, entertainment, computers, and Internet fees. Computers and Internet were qualified in 2009 and 2010. That perk disappeared, but there has been talk of a bill being introduced in Congress to include those expenses and make other changes.
What happens if the student gets a scholarship?
If a student gets a scholarship, you can withdraw up to the amount received with no penalty. Also, no penalty applies if the student dies or becomes disabled and the money is withdrawn (the earnings, however, are still subject to income tax). If a beneficiary decides not to go to school at all, the account can be transferred to another family member (including cousins) with no penalty. (The same penalty rules apply to Coverdells.)
Will it hurt the student’s chances of getting financial aid?
There would be an impact on aid. The formulas for federal financial aid are complicated, and there of course is no guarantee today’s formulas will be in place when your beneficiary gets to college. But, under current formulas, much depends on who owns the account (as donor, you can transfer ownership).
Financial aid is determined by assessing how much the student’s family is expected to contribute, the “expected family contribution,” or EFC. A student may be eligible for aid (often student loans) if the EFC does not cover the cost of attendance determined by the school.
If the owner is a grandparent (or another third party), the asset is not considered in the EFC. But distributions to the student will be counted as their ordinary income, which is taken into account for aid in the following year(s). Student income counts nearly 50% toward EFC. Thus, a distribution of $20,000 for tuition from a grandparent-controlled account in the student’s freshman year will reduce financial aid for the sophomore year nearly $10,000. One strategy is to delay 529 distributions until January of the student’s junior year, which is late enough to avoid being counted for aid purposes.
If the owner is either a parent or the student, the account is counted as a parent asset. Up to 5.64% of parent assets are included in the expected family contribution. So, for every $10,000 in the 529 account, financial aid could be reduced by $564. A student’s own asset, on the other hand, is counted 20% toward EFC. So, if a student has another type of account, such as a UTMA, it would reduce aid $2,000 for every $10,000 in the account. If that account generates income, 50% goes to EFC, just as ordinary income. (The same rules apply to Coverdells.)
Note also: schools that provide need-based scholarships are starting to revise packages when they discover there’s a 529 plan.
How do I select a plan?
Because Arizona’s income tax deduction applies regardless of where the plan is set up, you have a lot of options. You can enroll in some plans directly, and others require a financial planner. Morningstar publishes an annual list of the best and worst plans, and you can research and compare plans at www.savingforcollege.com and other sites such as 529Solutions.com.
529 information: http://www.savingforcollege.com/, http://529solutions.com/, www.collegesavings.org
The Wall Street Journal, on how to find a plan: http://guides.wsj.com/personal-finance/saving-for-college/how-to-find-a-529-plan/
Forbes, on Coverdell Savings Plans: http://www.forbes.com/sites/ashleaebeling/2013/01/14/new-tax-law-resurrects-competitor-to-529-college-savings-plans/
On New Year’s Day, Congress passed “permanent” changes to the estate tax laws, something that had not been done in 12 years. During those years, the estate tax exemption increased from $675,000 to $3.5 million (2009), was repealed for one year (2010), and finally rose to $5.12 million in 2012. Twice during that period we were within a few weeks of the exemption automatically dropping back to $1 million. A strange time, to say the least. Now, with the American Taxpayer Relief Act of 2012 (the formal name of the New Year’s Day bill, also known as ATRA), passed at the last minute, we finally have some changes that do not automatically expire.
So what are the changes? Perhaps taking the easiest route possible, Congress essentially made the estate tax law enacted at the end of 2010 permanent. The 2010 law started with a $5 million exemption in 2011, and that amount was indexed for inflation in later years, which is how we ended up with $5.12 million as the exemption in 2012. For 2013, the exemption will reportedly be $5.25 million. In future years, the exemption will continue to rise with inflation.
The main change from the 2010 law is that the top estate tax rate will be raised from 35% to 40%. This is still less than the estate tax has been historically; the top marginal estate tax rate has been as high as 55% (and even 60% when certain adjustments were applied). The increase in the marginal rate will probably make the most difference in the amount of estate tax actually paid, but it has less of an impact on planning.
ATRA retains the other elements of the 2010 law, including the fact that the full $5.25 million may be used for lifetime gifts. In addition, the annual gift tax exclusion had been $13,000 since 2009, but that figure has been indexed for inflation and is $14,000 for 2013. This means an individual can give away up to $14,000 to any recipient in 2013 without a gift tax return being required and without using up any of his or her combined $5.25 million gift and estate tax exemption. If the gift is larger than $14,000, the gift will use up part of the individual’s $5.25 million lifetime exemption. Any portion of the $5.25 million that is not used during lifetime remains available as an estate tax exemption at death. Before 2010, the lifetime gift exemption had never exceeded $1 million, even when the estate tax limit was higher. So individuals will continue to have the flexibility to give away significant assets while alive, which can be used to leverage the total exemption to further reduce estate taxes.
Another element of the 2010 law that has been made permanent is “portability,” which is the ability of a surviving spouse to use a deceased spouse’s unused estate tax exemption. Think of it as credits the government gives the surviving spouse that he or she is allowed to hold onto and apply against his or her own estate. The surviving spouse, however, must file an estate tax return because portability must be elected on the return to be used later. The law attempts to give married couples who don’t set up an “A-B” Trust the ability to use both exemptions, so that a married couple may leave roughly $10 million without estate tax. As discussed below, portability is not as good from a planning perspective as the traditional A-B Trust arrangement, but it is a helpful cleanup strategy when the first spouse dies, after which it is too late to set up that type of plan.
Of course “permanent” does not mean the estate and gift tax law will never change, only that it will not automatically change. There are no “sunset” provisions that require lawmakers to revisit this area. Those in Congress seeking more tax revenue may want to lower the limits and those opposed to “death taxes” in general could still argue for a complete repeal, it’s hard to imagine a huge impetus from either side to push for more changes any time soon. Most people are not as familiar with the estate tax as they are with the income tax, the estate tax raises a relatively small amount of revenue compared to other taxes, and it impacts a very small group of Americans. Congress may be content to let this issue lie for quite some time.
What’s most important to us as planners is how the “fiscal cliff” deal changes will affect our clients’ existing estate plans and whether any changes are necessary.
Most estate planning documents deal with non-tax issues. A Will, of course, ensures the client’s chosen beneficiaries receive the estate upon death in the amounts and proportions written into that document. The Will also names the Personal Representative (a.k.a. an Executor), who will administer the estate. Financial Powers of Attorney and Medical Powers of Attorney are intended to ensure that the client’s specific wishes are carried out and to appoint the person they want to make those decisions in the event of incapacity. These documents are critical to avoid unnecessary court oversight and the attendant expense, delay, and intrusion. Even Revocable Trusts primarily deal with non-tax issues, including the very valuable benefit of structuring assets to avoid the probate process at death and to provide creditor protection for beneficiaries.
The goal of avoiding court involvement is more important than ever because over the last few years, additional layers of laws, rules, and oversight have made court conservatorships, guardianships, and probates even more intrusive and expensive.
One of the most important benefits of a Revocable Trust comes from establishing a beneficiary’s share in a continuing trust, which we call a Lifetime Protection Trust. These can include trusts for children, where someone else will manage and protect the money until the child is a certain age. The need for someone to do this is obvious, and in this form of a trust you, rather than the court, decide who will manage the assets and make the decisions. A Lifetime Protection Trust also can extend past age 18, while a court conservatorship for a minor must terminate and distribute out to the child at that age. Even custodial accounts established at banks and brokerage firms expire no later than age 21, but most clients want to postpone distributions until children are more mature.
Trusts also have advantages for adult beneficiaries. Some may have special needs, and a properly drafted trust will protect the public benefits they rely upon, while allowing funds to be used for needs that are not covered by such benefits. Clients frequently want to benefit an individual, but know that for various reasons the beneficiary would not make good decisions if he or she received a lump sum. A Lifetime Protection Trust with someone else in charge may solve those concerns. None of these benefits have anything to do with the estate tax.
Even a beneficiary who is mature and responsible can benefit from a Lifetime Protection Trust. A capable beneficiary may serve as his or her own trustee and use the money as he or she sees fit. Even that type of arrangement protects Trust assets from creditors, including those of divorcing spouses, lawsuits, and bankruptcy. The Trust does have an estate tax savings aspect as well; it may not be subject to estate tax upon the beneficiary’s death. That will be meaningful to fewer people if the exemption stays high, but the other asset protection benefits of these types of trusts are invaluable for families with estates well under the tax limits.
There are, of course, some aspects of estate planning that have been geared toward minimizing estate tax. The most common of all is the “A-B” trust, where a husband and wife create a joint trust, and upon the death of the first spouse, the trust divides into a revocable Survivor’s Trust (A) and an irrevocable Family/Decedent’s/Bypass Trust (B). The irrevocable Family Trust uses the deceased spouse’s estate tax exemption so that it will not be subject to estate tax when the survivor dies. For a husband and wife who have this arrangement, the most important thing to consider is whether the survivor has an appropriate amount of flexibility to change the beneficiaries of the irrevocable trust. The survivor can have that flexibility through a power of appointment, and most families want the survivor to have at least some ability to make adjustments. It is critical that clients understand how much power the survivor has, and that it is neither too much nor too little.
There are more benefits to an A-B trust, even if estate taxes are no longer an issue. One is that the spouses may like the idea that the survivor will benefit from the irrevocable trust, but that the survivor will not be able to give all the money away or leave it to a new spouse. They know that what’s left when the survivor dies will go to the originally named beneficiaries. This is of course especially important with second marriages when the spouses do not have mutual children. Additionally, the irrevocable trust will be protected from creditors, as discussed above, so the survivor has that additional benefit.
Finally, the A-B arrangement still may help reduce estate taxes. For clients with enough money to exceed the exemption amount, the A-B Trust is a more tax-effective strategy than relying upon the portability provision. One concern is that the portability law could be discontinued. Even if it remains, having separate trusts allows the surviving spouse more flexibility and control. With separate trusts, the survivor can spend the money from Trust A and let Trust B grow and appreciate, gradually ensuring that more and more money is not subject to estate tax. Additionally, the generation-skipping tax (GST) exemption of the first spouse is not preserved through portability. It is, however, preserved in an irrevocable Family Trust, and that results in more estate tax savings for the next generation. Even those clients who do not currently have enough assets to warrant estate tax concerns may be concerned that Congress may lower the exemption at some point.
Balanced against all the potential benefits is the downside of an A-B arrangement. It does add a layer of complexity to the administration of an estate, and it requires that the B Trust be kept separate, with its own taxpayer identification number. However, especially if it gives the survivor the appropriate level of flexibility through a power of appointment, there isn’t a substantial downside to the creation of this trust arrangement, and the administrative work may entail no more than a few extra hours of work each year.
Of course, each individual has to decide what is best in light of the circumstances. However, it’s important to know that this “change” in the estate tax law doesn’t make it advisable to rip up the estate plan that you worked so hard to finally put in place a few years or even months ago, and start anew. This is one item you don’t need to add back to your New Year’s resolution list.
Adult children with aging parents or aging parents with adult children may be wondering, “Is this the holiday season to have ‘the talk’ about finances?”
A recent survey from Fidelity revealed that there’s a knowledge gap between grown kids and their parents when it comes to retirement and estate planning. Examples of the disconnect:
- 24% of children believe they will have to help their parents financially in retirement, while 97% of parents say they will not need help.
- 97% of parents and children disagree on whether a child will take care of their parents if they become ill.
- Children underestimate the value of their parent’s estate by an average of more than $100,000.
Articles about the survey suggested that this lack of awareness is a big problem, and everyone needs to get to the table and talk turkey.
At Bogutz & Gordon, this topic comes up fairly frequently. Attorneys here recommend that a couple of details should absolutely be shared, but a total tell-all is not necessary. Every family is different and every situation is different, and ultimately it’s up to an individual to decide how much children or other beneficiaries need to know.
As far as your overall estate plan, at least let loved ones know there is one. Your loved ones also should know where they can locate the original documents. If the originals are with an attorney, share the name of the firm or where to find information about the law office. If the originals are in a safe deposit box or stashed away in the home office, make sure someone has access to the safe deposit box or has a general sense of where to find the documents in the house.
In addition, it’s a good idea to let the agents of both medical and financial powers of attorney know that you have selected them for those specific roles.
The documents everyone should consider sharing are your medical power of attorney, which names a person (or persons) to make medical decisions if you are not able to, and your Living Will, which explicitly states what kind of care you wish to have — or not have. Unlike any of the other documents in a typical estate plan, these documents might be needed in an emergency, in the middle of the night after an accident or a sudden ambulance trip to the hospital. Making sure your agent has a copy of their powers and your wishes can make those situations easier.
Sharing the Living Will with other loved ones also can give everyone a chance to discuss the issues and give family members some comfort, if the time comes when the document must be used, that the document expresses your true intent. Family members and/or the person chosen to carry out your wishes won’t be left wondering whether the decision to, say, withhold life support, was simply part of the attorney’s boilerplate language and was never read. In addition to your health care wishes, your medical agent should know whether you have a funeral or burial plan.
For your financial power of attorney, the agent’s job will be easier if you make sure he or she knows where to find information regarding bill paying, where your accounts are, and who your financial advisor is if you have one. You need not disclose any particular details of your financial situation, however.
If you think your family would benefit from a more in-depth discussion, here are some resources that can help you get the conversation started: quick tips from Forbes, more meaty ideas from Fidelity, and an article on using formal mediation techniques.
Contributing: Teresa Lancaster, Ana Perez-Arrieta, Benjamin J. Burnside, and Craig Wisnom
Attention snowbirds or frequent travelers – or anyone who travels. Your health-care power of attorney and living will might not be recognized everywhere you go. A recent article in the National Academy of Elder Law Attorneys Journal looked at health care power of attorney and living will laws. It found that while every state, plus the District of Columbia, recognizes a person’s right to have such documents, many states’ laws are different.
Two types of documents are in play: (1) a health care power of attorney, which names an agent to make health-care decisions in the event you are unable to do so, and (2) a living will, sometimes called an advance health care directive, which spells out the type of care you would like to have – or not have – in the event you cannot communicate such desires.
If you have an Arizona health-care power of attorney and living will, then travel to a state that has a different law, the visiting state may disregard your documents altogether. Although most states have reciprocity provisions that require out-of-state documents be honored, there are limits. Some states limit reciprocity only to the degree the out-of-state documents are consistent with their own laws. Some states do not have reciprocity at all. (Kentucky, Michigan, and Missouri are three.)
Problems may arise, obviously, if an out-of-state document is deemed invalid. Statutes often provide priority for who can make decisions for you, usually: (1) guardian, (2) spouse, unless you are divorced, (3) adult child, (4) parent, (5) adult sibling, or (6) any other relative in descending order of blood relationship. In many states, court intervention is required to appoint the person. An agent or family member could be left with the delay, expense, and inconvenience of a court proceeding or find that someone other than the principal’s intended person may have the power to make the decisions. This is particularly true with unmarried partners; domestic or same-sex partners may not be on the priority list at all. (In Arizona, “domestic partner” comes after spouse, adult child, and parent.)
There are many areas that could cause problems; some may render documents invalid; others may create confusion. One difference among states is the nature of the documents. In some states, the health care power is separate from the living will. Other states merge the two. Some, including Arizona, allow the option of melding the two. It is important to review your documents to determine exactly what you have.
Some state statutes provide that health care powers become effective only upon incapacity, which, according to the article, is generally defined among states as “the ability to make and communicate an informed decision.” But in some states, an individual must have a specified condition, such as “terminal illness” or “persistent vegetative state,” before the agent may have decision-making power or the living will provisions be considered. The author points to Hawaii, which allows the agent to make decisions in the “best interest” of the patient, and Oklahoma, which specifies that the agent cannot act until the “final stage” of an illness, when the patient “will die within a reasonably short period of time.” (Arizona law limits the agent’s power only by the document itself or court order.) These differences could cause confusion if the agent finds he or she has no authority because the illness has not reached the stage at which the power is triggered.
Another difference among states is the response to pregnancy. Not all states have addressed this issue (Arizona has not), but those that have appear to place the life of the unborn child over a woman’s wishes spelled out in a living will. Generally, statutes provide that if a pregnancy could result in a live birth, a living will provision to withhold life-saving treatment will not be honored.
Perhaps the biggest differences are the requirements for execution–the number of witnesses and who can serve as witness. Some require two witnesses, some require one, and some none. While the number of signatures seems like a small thing, if the number required falls short, the document may be deemed invalid.
- Who can execute a living will. In all states, an “adult” qualifies, but in some states, 18 is “adult”; in others, it’s 19. Oregon, Rhode Island, and Oklahoma require the principal to be a resident at the time of execution.
- Agent’s acceptance. Most, including Arizona, do not require the agent to be notified of his or her appointment, but some require that the agent accept in writing. If you are traveling to Alabama, Michigan, Oregon or North Dakota, make sure your agent has consented to serve in writing.
- Divorce. Most states revoke a spouse named as agent upon divorce or separation, unless specified otherwise in the document.
As the article states, “[T]here are a myriad of differences between the states’ laws with regard to advance health care directives. Any one of the differences in the witnessing requirements, language used, or triggering events that make the operative could cause an out-of-state directive to be deemed invalid.”
To be clear, hospitals and doctors frequently do not scrutinize the details of these documents, but if you frequently travel and care about your end-of-life decisions being honored, it’s probably best to play it safe. Consider executing documents in your visiting state or ensure that your home-state documents conform to the laws of your second home or vacation hot spot.