By Bruce W. Martin
On December 17th, President Obama signed the Tax Relief Act of 2010, bringing to a close almost ten years of uncertainty about the estate tax and replacing it with . . . two years of uncertainty about the estate tax. Thus ends perhaps the most interesting and tumultuous period in the 95 year history of the modern U.S. estate tax.
First, a little history.
Prior to 1997, the estate tax exemption was $600,000—and it had been stuck at that level for a number of years. At that time—which in retrospect seems like boom times for estate tax planning—it seemed like every client who came in the door needed estate tax protection. A combination of a relatively low estate tax exemption and a booming economy and stock market made for a perfect storm, estate-tax wise.
However, it was not to last. The Taxpayer Relief Act (“TRA”) of 1997 was to raise the estate tax exemption in several steps from $625,000 in 1998 to $1,000,000 in 2006. However, before we could even get to the $1,000,000 in 2006, Congress struck again, this time with the so-called estate tax repeal. Like 1997’s TRA, The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) raised the estate tax exemption in several steps from $600,000 to $3,500,00 over the 8 year period from 2002 to 2009. The surprise at the end of EGTRRA’s ladder was the much-vaunted repeal of the estate tax. Of course the one little detail that your Congressperson may have failed to mention in the self-congratulating newsletter back in 2001 was the fact that the repeal only lasted for one year, 2010. Oh, that, and the fact that in 2010 the estate tax was replaced by a creature not seen since 1980: carryover basis.
The reason the repeal was only temporary was because most of the 2001 estate and gift tax law changes were scheduled to sunset (or end) on December 31, 2010. At that point we were to go back to current law, or rather what current law would have been had EGTRRA not been enacted and the scheduled increases of the 1997 Act had taken place. Thus, the estate tax exemption was scheduled to drop back to $1 million per person. Although obviously we never made it all the way through TRA 1997’s scheduled exemption increases, the highest amount it was to have reached in 2006, $1,000,000, would have been the exemption if no changes had been made to the estate tax prior to 2011.
The other sneaky thing about the 2001 act (other than the sunset provision) was that it essentially replaced the estate tax with the capital gains tax. Replacing one tax with another is not exactly what comes to mind when someone says that they have “repealed” a tax. When we had an estate tax (in other words, prior to 2010) the basis of property acquired from a decedent was the fair market value at the time of the decedent’s death. This is known as a “step up” in basis. The 2001 Act did away with this step up basis (in 2010) and instead said that the basis of property acquired from Decedent would be lesser of: a) the adjusted basis of decedent, or b) fair market value of the property at date of the decedent’s death. Under this modified carryover basis regime the heirs did have a $1,300,000 basis increase which could be allocated to any assets.
For nine years the estate tax pundits predicted imminent change. In fact, back in 2001 they predicted that this would be fixed within months, not years, and certainly well before 2010. Surely Congress would not allow the estate to actually disappear in 2010. And surely Congress would not allow the estate tax to come back in 2011 with “only” a $1 million exemption. Well, the pundits were right on one count. Though as January 1, 2010, loomed closer and closer and then finally passed, the non-pundits who practice in this area had long ago lost faith that Congress would ever fix the estate-tax aspects of the 2001 tax act.
Which brings us back to today. . .
In the waning days of 2010, just before the estate tax was set to return with a $1 million exemption, Congress and the President agreed to a slate of tax cuts that included estate tax “reform” as a compromise. This was perhaps one scenario the pundits had not expected: the Republican leadership in Congress creating a compromise with the Democratic President. The President wanted those tax cuts and the Republican members of Congress wanted the increase in the estate tax exemption. In order to make the deal work both sides had to swallow a bitter pill.
Estate Tax Exemption. The most important change in the new estate tax law, is that the estate tax exemption for 2011 and 2012 is up to $5,000,000. That means, no matter who someone leaves their assets to, if they all add up to less than $5,000,000 at the time of death, there is no estate tax at all. This is also now indexed for inflation. . . but since there will be only one “new” year, 2012, for which this will be applicable, it may not be of great concern.
Estate Tax Rate. The highest estate tax rate used to be 55%. It was down to 45% in 2009, but under the new law, the highest estate tax rate will be reduced to 35%. This is where the wealthiest families will significantly reduce their potential tax liability.
Portability. This concept, which might also be described as, “Let’s not make couples set up Credit Shelter Trusts”, is intended to give the survivor of a husband and wife the ability to carry forward any unused estate tax exemption from the first spouse’s death. This is the basic concept behind the “A-B” arrangement that creates the Irrevocable Trust B/Family Trust/Credit Shelter/Bypass Trust is a bread-and-butter estate planning technique.
For example, if there is a $5,000,000 estate tax exemption and a husband and wife have $10,000,000, under all our prior law, the planning would be to have the husband and wife establish an A-B Trust, so that when husband died, his $5,000,000 share would go into a Trust B/Family Trust/Credit Shelter/Bypass Trust for wife, and wife would have her own assets in the Trust A/Survivor’s Trust. Assuming no change in value, when the wife died she only had $5,000,000 subject to tax, the amount of the exemption, the Trust B/Family Trust/Credit Shelter/Bypass Trust was not taxed, and there was no estate tax at all. Until the brand new law, if the husband and wife hadn’t set up that arrangement, and left all the money outright to the survivor, when wife died, she would have owned $10,000,000 subject to estate tax, much more than the exemption, and there would be a significant tax of about $1,750,000!
Now, under the new “portability” provisions in the estate tax law, even without the trust arrangement, it may be possible for the surviving wife to use her husband’s unused exemption. However, it requires that the first spouse’s estate file a timely estate tax return making an election that this exemption can be used by the survivor.
Return of the Step-up in Cost Basis. The new law brings back one of the tax benefits to dying, a full step up in the income tax cost basis of most assets, to the new date of death value, so that the estate or the beneficiaries could sell highly appreciated assets without paying capital gains income tax. Under the short estate tax repeal of 2010, this step-up did not uniformly apply, though it did apply to the first $1.3 million of appreciation in an estate, with an additional $3,000,000 “step-up” available for property that went to a spouse. In other words, for anyone worth less than $1.3 million at death, they got a step-up in basis as before, but for larger estates, old cost basis had to be determined and they had to figure out how to apply their limited amount of “step-up.”
What Happens for 2010 Estates? The law also clarifies (or complicates) what happens for a decedent who died in 2010. The default application is the “new” law, a $5,000,000 estate tax exemption, with a full-step up in cost basis. So, for an individual who died with $3,000,000 in highly appreciated assets in 2010, the new law will apply, there will still be no estate tax, but all those assets will get a step-up in the cost basis.
However, for the Steinbrenners of the world, an estate can still elect to have the ORIGINAL 2010, no-estate-tax, no-step-up-in-cost-basis apply. This must be an affirmative election. Therefore, for estates UNDER $5,000,000, there is little likely reason to opt out of the new law, as it offers the full step-up in cost basis (or step-down) and the full allocation of the GST exemption. For estates under $5,000,000, without offsetting marital or charitable deductions, it may be advantageous to opt back in to full estate tax repeal. HOWEVER, looking at the overall capital gains/estate tax issues to determine the best result would be necessary.
For those in that above-$5,000,000 mark, the law requires this election be made “at such time and in such manner as the Secretary of the Treasury or the Secretary’s delegate shall provide.” The law also provides that, for someone dying in 2010 (before the new law went into effect) the due date for the estate tax return and any elections is nine months from the date of the new law.
2012. Ah, here we get a return to form. After all of this, this new law will again expire on December 31, this time December 31, 2012, meaning that, if nothing is done (again!) prior to that time, we will again revert back to the old-old estate tax law, with a $1,000,000 estate tax exemption. It is telling to note that the estate-tax portion of the 2010 tax act is entitled “TEMPORARY Estate Tax Relief.”
By Teresa D. Hall
Many people are now thinking, My estate is far less than $5,000,000, so I do not need to worry about having a trust. However, that conclusion may be premature as there may be many good reasons to still consider an A-B trust arrangement.
First, what is an A-B trust? This is a type of trust estate planners have been using for years–mainly promoted for married couples for the ability to preserve the estate tax exemption of the first spouse to die. At the basic level, when the first spouse dies, the trust splits into two parts: A and B. The AA@ Trust (also known as the Survivor’s Trust”) is the surviving spouse=s share. The AB@ Trust (also known as the “Family Trust” or the “Decedent’s Trust”) is the pre-deceased spouse=s share, which becomes irrevocable—thereby using the first-to-die’s estate tax exemption. So, if you don=t have a taxable estate why use this type of trust? The reasons are plenty.
First, as we know, tax law changes. After 2012, we do not know what the exemption will be, so a good estate plan can still be a great benefit for estate tax purposes. If you or your spouse passes away during a lower exemption year, then a properly drafted A-B Trust can potentially save your family from a substantial tax liability. For example, if you have $3,000,000 in assets, then in 2011 or 2012, your A-B Trust will not save you any estate tax under the current law. However, in 2013 and later, unless the estate tax is changed again, you could potentially save around $500,000 in estate taxes under an A-B Trust plan.
Perhaps you have read about or heard politicians talking about so-called estate tax exemption Aportability@ and you think that that will save you. However, since the tax law is ever-changing, portability itself may also change or even be eliminated. Moreover, there is very little practical experience with this law and most professionals are fairly uncertain of how effective it will be. If portability is applicable, it is very likely the tax savings will be less than with an A-B Trust arrangement. In short, relying on portability is a potentially risky and untested option.
So you are now thinking, AI most likely will not have to worry about estate tax anyway, so why go through the hassle?@ Well, there are other good reasons to consider having an A-B Trust in place.
In our day-to-day practice, the reason we find many people elect to have an A-B Trust has nothing to do with estate taxes. Often—especially in a case where there are separate children from former marriages—an A-B Trust can bring comfort to each member of a couple by ensuring him or her that a share of their funds will be protected if they die first. This is because the B Trust can be drafted to restrict a surviving spouse from changing the pre-deceased spouse=s beneficiaries. The power to change the B Trust is known as a APower of Appointment@ and it can be very restrictive or less restrictive, based on the couple=s choice. This power can range from having no authority to change the beneficiaries, to limiting the power to make changes only among the pre-deceased spouse=s beneficiaries or charities, and even to change the beneficiaries however the surviving spouse decides.
A second reason to consider an A-B Trust is asset protection. If the B Trust is appropriately drafted, it can provide the surviving spouse with creditor protection, which means that any asset in the B Trust would not be subject to the creditors of the surviving spouse. It can even, in some cases, allow the trustee to use his or her discretion and make the B Trust a Special Needs Trust so that the surviving spouse can qualify for public benefits.
There can be disadvantages to a B Trust. First, you must make sure it is properly drafted. One of the frequent problem areas in a B Trust is the authority left to the surviving spouse under the Power of Appointment. If it is a first marriage with children who are common only to that marriage, you may want this power to be broad. However, if you have separate children from former marriages, you may want this power to be narrow—so the trust has to be drafted to say what you want. Also, there is some additional administrative work involved to set-up the B Trust properly after the death of the first spouse. Lastly, the trustee will have a duty to keep beneficiaries informed of what is happening—which in some families may be an issue.
All in all, you should not rule out the need for an A-B Trust due to the increase in the estate tax exemption. There may be many good reasons to still use this form of estate plan, and it also may help ease the transition for those left after you are gone.
By Craig Hunter Wisnom
As the holidays roll through town, Arizona residents also see the hearty panoply of signs, e-mails, and correspondence from certain schools and charities, encouraging them to take advantage of Arizona’s specialized income tax credits. You will hear both charities and individuals explaining how these charitable gifts don’t cost you anything, and some even claim that you will yield a net profit by making the contribution. In this article we review WHICH charities can qualify for which credits, and how the specific contributions will ultimately affect your tax bill.
Credits Versus Deductions
The first question an individual might ask is, “What’s special about these credits? Don’t I already get a Federal tax break for donating money to any charity?”
You may get a deduction for Federal income tax return if you have enough expenses to itemize your deductions. But even if you do, there is a big difference between a charitable deduction, for Federal Income Tax purposes, and one of Arizona’s credits, in how much money it actually saves.
As a very simple example, if your marginal income tax rate is 30%, and you make a $100 qualified donation to a charity, and you deduct it on your Federal income tax return, it saves you $30 in tax. (You subtract the $100 from your taxable income, and because that number is multiplied by 30%, that’s the amount you save.) So, it actually still costs you $70 out of your own pocket to benefit the charity, although they receive the full $100.
A credit is much more direct, and gives you a “dollar-for-dollar” savings. Under that same example, if you gave $100 which qualified for an Arizona tax credit, it reduces your Arizona income tax by the full $100, saving you a full $100. That means it will cost you nothing to give that money away to a charity. And that is why these Arizona credits are such a big deal, why they are so heavily promoted, and why each individual should at least consider making these gifts for the tax credit.
There was some discussion (including among professionals) about how use of the credits could actually MAKE you money, because you saved dollar for dollar against your Arizona income tax, and then, if you itemized, you reduced your Federal income tax a bit as well by a deduction. However, this windfall doesn’t actually happen, because your Arizona income taxes are also a deduction on your Federal itemized deductions, and so, when you cut your Arizona income taxes by the amount of the credit, you also reduce your Federal itemized deductions.
All this technical analysis just boils down to the fact that, if you make a donation that qualifies for one of Arizona’s special income tax credits, it costs you nothing.
However, the qualifications for these special credits are quite specific, and because of some overlap and different operation, can be confusing, so the following explanations may help you understand how the different types of charitable giving function.
Organizations Providing Assistance to the Working Poor
One of the Arizona tax credits is available for cash contributions to organizations that provide assistance to the working poor. There is a specific list of qualifying organizations, maintained by the Arizona Department of Revenue, and it can be found here:
http://www.azdor.gov/LinkClick.aspx?fileticket=fHenh3bja6w%3d&tabid=133
But, an organization can also qualify if they are a qualified charity for federal purposes, and if the charity can confirm they spend more than 50% of their budget on qualified disbursements. Obviously, the easiest and safest way is to use an organization on the list provided by the Arizona Department of Revenue.
The maximum amount of this Organizations Providing Assistance credit is $400 for a married couple (up to one-half on each single if the spouses file separately) or $200 for a single individual.
The Arizona Department of Revenue has a published information sheet on this credit.
http://www.azdor.gov/LinkClick.aspx?fileticket=yx2LZ-ML8yI%3d&tabid=130
As always, you should get a receipt from the organization with the specifics of the cash donation to submit with your tax return.
Public School tax credit
There are also two distinct Arizona tax credits related to education. The first is the Contributions and Fees Paid to a Public School. This one is particularly unusual, because it includes fees you have paid for your own child’s extra curricular activities. (This goes against the general requirements for charitable deductions, fees paid for your own child under this credit don’t qualify for a Federal charitable deduction because they benefit you or your family.)
The maximum amount of this credit is $400 for a married couple (up to one-half on each return if the spouses file separately) or $200 for a single individual. The same limits that apply to contributions for organizations that assist the working poor.
This credit applies to either cash donations (a more typical charitable contribution), or fees paid, even for your own child, to a public school (including charter schools), for extra-curricular activities, or for character education program, defined under statute as dealing with attributes such as honesty, responsibility, compassion, and respect. The extra-curricular activities would include fees associated with athletics, band, laboratory sciences, etc.
The school must provide you a receipt for amounts that qualify for this credit, including the school name, district number, your name, amount and date paid, and the activity being supported.
The Arizona Department of Revenue has a published information sheet on both the educational credits.
http://www.azdor.gov/LinkClick.aspx?fileticket=lyMlhtowOpw%3d&tabid=240
Private School Tuition Credit
The second educational Arizona tax credit, which applies to private schools, is more of a traditional charitable donation, in that the amount has to be donated without receipt of benefits, so it would not include fees or tuition paid for your own child’s education.
The Private School Tuition Credit allows you a credit for cash donated to a “School Tuition Organization” that provides grants or scholarships to private schools. (The technical requirement is that 90% of its annual revenues must be allocated to scholarships and grants, and they must be made to more than one school.)
Like the Contributions to an Organization that assists the working poor, there is a discrete list provided by the ADR of the qualified School Tuition Organizations.
http://www.azdor.gov/LinkClick.aspx?fileticket=cSEiHcmcqPQ%3d&tabid=240
The maximum amount of this credit is $1000 for a married couple or $500 for a single individual.
Also starting in 2011 is more flexibility to the timing of the donation. As long as you make a qualifying donation before April 15, 2011, that donation can be used for a credit on your 2010 taxes. You can also opt to “save” it and use it against your 2011 taxes.
Again, getting a letter acknowledging receipt, and the qualified nature of the organization, is essential.
Conclusion
Obviously, many organizations and schools that meet these criteria would love to be the beneficiaries of your donations. Once you understand how these credits really work, and the impact on your bank account, you can make an informed decision whether you want to make appropriate donations, and to which charities.
By Craig Hunter Wisnom
George Carlin had a routine about all the tangible personal property in our lives, in which he said, “That’s all a house is, a place to keep your stuff! If you didn’t have so much stuff, you wouldn’t need a house. You could just walk around all the time.”
Many of us do have a tremendous attachment for these tangible items, and the role they have in our lives. Between individuals, interests may vary wildly regarding jewelry, clothes, books, music, artwork, motorcycles, swords, figurines, and a host of other categories, but a great deal of us find some reflection of our personality and passions through our “stuff.”
It’s no surprise that in certain estates, who gets which of these items can be of tremendous interest, and, unfortunately, sometimes great strife and disagreement. And, if full-on litigation arises, it doesn’t take long before the attorneys’ fees eclipse any possible value the items themselves might have.
The good news is, if you have the inclination, there are easy means to specify who gets your “stuff.” Rather unique among the more formal requirements of most your estate plan, Arizona law specifically provides that you can prepare a signed, written list to distribute tangible personal property, and such a list will become a legally binding part of your Will. If you have a Revocable Trust Agreement, that also can provide the ability to prepare this type of list, though the Trust Agreement must specifically allow it.
Therefore, you need not involve the attorney with divvying up your Hummel collection or library as part of your actual Will or Trust, saving time and money. If you make changes as to which nephew gets which crossbow, you do not need to spend the effort and fees to have your Will redrawn.
Some questions that frequently arise in this process:
(1) Do I have to make a list of all my stuff?
No! You can designate as many specific items as you wish, but there is no need to catalogue all your silverware or anything else. Your list, if you wish, can also just deal with broad categories, as long as they are clear – i.e., “All my furniture to Joey, all my jewelry to Jane.”
(2) Do I need to make a list saying who gets my stuff?
No! It’s up to you, and many people don’t need to take advantage of the list – it’s only if you have specific wishes for items or categories of items. Your Will or Trust should include language about what happens to the “stuff” not covered on a list.
(3) What do I do with my list?
While the list need not be notarized or prepared by an attorney, you do need to make sure it is safe and can be found. We recommend clients, for whom we typically keep their original Wills, send us the original list, so we can hold onto it for safe-keeping, and so the Personal Representative will know of its existence. One way or another, these lists should be kept with the original estate planning documents.
(4) Can I leave small amounts of money under a list?
No! The flexibility of these lists is limited, and the lists will apply only to tangible personal property, such as furniture, jewelry, pets, artwork, etc., but cannot include cash, stocks, bonds, mutual funds, or currency. So, if you want to leave $5,000 to a nephew, that monetary gift has to be included in your Will or Trust.
(5) What are the requirements of the list?
The list must be signed by you, and dated. It should be as clear as possible so people can read the document and know exactly what you intended. While we frequently provide sample forms, you may wish to type this information into the computer, and, as long as you print it out, sign it and date it, it will be valid. The most cautious approach is to sign and date each page on the list.
Ultimately, whatever your wishes, and however detailed they are, you want to make sure they are clearly provided for under your estate planning documents. If you have the desire to spell out who gets every single lead soldier in a collection, you can do so by preparing your own list, or, if you wish to leave all the decisions up to your sister, your Will or list can state that as well. If you have questions about how this is implemented in your estate plan, or if you would like a sample list, please contact your attorney at Bogutz & Gordon.
By Benjamin J. Burnside
I am frequently asked for a checklist of items to consider in making an estate plan. So I have put together a brief list of important items to consider. This list, however, is by no means exhaustive. Consider the following:
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Which persons or entities will act as your personal representative (executor) when you die? You may name one or more persons to act together, or in an order of priority. You may also name a trust company in some circumstances. This person or entity will be responsible for paying your final debts and expenses of administration, filing tax returns and distributing your property.
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Which persons will act as your agent for financial and health care matters should you become disabled? You may list persons in order of priority or together. If listed together, you may either require a majority or unanimous decision or you may give each person listed independent authority so that whomever is available makes the decisions.
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Do you want a living will? This document indicates that you do not want care that merely artificially prolongs your life should your physicians conclude there is no hope you will recover.
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To whom will your property be distributed at your death? A spouse, children, or other family members are most commonly named. Their shares may be left to them outright or in trust. Also, don’t forget the possibility of naming charity for part of your estate.
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If property is left in trust, what will the trust terms say? Will the trust beneficiaries have access to both income and principal, and for what purposes may the trustee make those distributions? Will the trust end when the beneficiary reaches a certain age? Trusts, if properly drafted, may avoid the claims of a beneficiary’s creditors, or a beneficiary’s spouse in the event of a divorce. Trusts may also avoid certain estate taxes. Trusts are also useful for underage beneficiaries or for disabled or irresponsible beneficiaries. Such trusts may be created under a person’s will or in a revocable trust.
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Is avoiding probate court an important goal? If so, using a revocable trust, beneficiary deed, joint accounts, POD (pay on death), TOD (transfer on death), or ITF (in trust for) designations may be appropriate.
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Don’t forget to make sure that beneficiary designations on life insurance, IRA accounts or other retirement accounts and annuities work properly with your will or trust.
By Bruce W. Martin
Two recent articles in the Arizona Daily Star illustrate problems in the nursing home and rehabilitative care industry. In an August 20, 2010 article the Star (“Desert Life Rehabilitation & Care Center fined” 08/20/2010) detailed a fine of $4,500 that Desert Life Rehabilitation and Care Center was ordered to pay for failing to provide supervision to a resident who sustained second- and third-degree burns while smoking.
On August 21, 2010, the Star wrote of a $10,000 fine that Kindred Healthcare paid this summer for failing to follow its own policies and procedures on caring for and preventing pressure ulcers. In one case, a patient developed a pressure sore that grew so severe it required surgery to remove the coccyx bone, a state report says (“State fines nursing home Villa Campana”, by Stephanie Innes. 08/21/2010). (Desert Life and Villa Campana are both owned by Louisville, Kentucky-based Kindred Healthcare.)
Problems with pressure sores (also known as “bed sores”) are often indicative of more serious problems at nursing facilities. If patients are not being properly turned to prevent sores, there may be other, even more serious problems with the facility that have gone undetected. For this reason, citations for pressure sores may often be a proxy for more serious issues.
How can you check on the nursing home that your loved ones are in? Nursing homes are required to make their latest state-inspection survey readily available to visitors. Southern Arizona residents were previously able to examine the public file on any home at the state’s long-term-care licensing office in Tucson, but in 2008 officials moved the files to Phoenix. They are now viewable solely at that office at 150 N. 18th Avenue on the fourth floor. Inspection records may also be viewed online at the web site of the Arizona Health Services Department’s office of long-term care at www.azcarecheck.com or www.azdhs.gov/als/ltc/index.htm. You may also call 602-364-2690.
Other states have similar resources. Additionally, you can find government ratings for nursing homes that accept Medicare/Medicaid at www.medicare.gov.
What if you want to report a violation? To file a complaint against a nursing home, call the Arizona Department of Health Services at 1-602-364-2536. If you suspect the facility or an employee of the facility of committing abuse, neglect, or exploitation of a vulnerable adult, you may file a report with Arizona Adult Protective Services (APS) at 1-877-767-2385 (1-877-SOS-ADULT) or by filing an online report at www.azdes.gov/reportadultabuse.
Finally, if all else fails, you may need to take legal action against a skilled nursing facility or adult care home. To do that you would need to retain an attorney or law firm that specializes in cases of nursing home abuse and neglect. Although we do not practice in that area we know a number of excellent attorneys in that area and would be happy to make a referral. Please contact us if you need any additional information.
By Craig Hunter Wisnom
When a married individual has separate children from prior relationships, estate planning becomes much more complicated, as the client has to balance his or her wishes to provide for their surviving spouse with the goals to protect the long term interest of their own children. While every family situation is unique, frequently tensions between step-children and step-parents become exacerbated after the client dies, especially where there is confusion or disagreement as to who gets what and when. The client has to determine how best to balance these important, competing interests, while taking into account how complicated they want to make their plan. While every situation is different, there are a few basic ways these interests can be balanced.
The individual married client, generally, has the right to determine where his or her separate property passes at death, and how his or her ONE-HALF share of community property, is distributed at death. This can be changed by premarital agreements, and sometimes IRA or qualified plan forms, or other beneficiary forms, which require a spouse to sign off if other beneficiaries are being named.
Outright to the Surviving Spouse
The simplest plan, but the plan that provides the least protection for the client’s own children, is to leave all assets directly to the survivor. Whether they pass via beneficiary designation, joint tenancy, “P.O.D.”, or under the provisions of a Will or Revocable Trust, they pass legally to the survivor. While both spouses may execute Wills providing that at the survivor’s death, assets will pass to the deceased spouse’s children, the survivor is not legally bound to that plan, and can always change it, by changing their Will. The surviving spouse has complete legal freedom and flexibility, and the children of the deceased client have no legal rights or protection.
I leave all my assets to my spouse, if she survives me, and if she does not survive me, in equal shares to my children.
Outright, But Split Between the Surviving Spouse and Children
Another relatively simple method can be to leave the surviving spouse assets outright, but also leave some share directly to the client’s children outright as well. (The children’s shares could be held in a trust for creditor protection purposes, but the important part is that the real benefits pass to them at this time.) This leaves less flexibility for the surviving spouse, because the amount they receive will be less, and even if unexpected expenses arise, they only have so much. But it effectively severs any financial interest the surviving step parents have with the children right away, so there are no continuing tensions during the survivor’s lifetime.
I leave one-half of my assets, outright and free of trust, to my spouse, if she survives me, and the remainder of my assets, or all of them if my spouse does not survive me, in equal shares to my children.
Outright, but with a Contract Not to Change
Another option is to leave the surviving spouse the assets outright, with plans to go to both spouse’s children at the survivor’s death, like the first option listed above. However, to ensure the surviving spouse does not change his or her Will, the couple can enter into a “Contract not to Change Wills” that Arizona law recognizes. The survivor owns the property outright during his or her lifetime, and could spend it all if he or she needs to. However, at least the survivor can not change his or her Will to cut out the deceased spouse’s children, so whatever is left at the survivor’s death will be distributed as both spouses originally planned out, and agreed to, together.
Will:
I leave all my assets outright and free of trust to my spouse, if she survives me, and if she does not survive me, one-half to my wife’s children in equal shares and one-half to my children in equal shares.
Contract:
We, both spouses, agree that when one of us dies, the survivor will not change his or her Will, but will leave at least half of his or her estate to the deceased spouse’s children.
In Trust for the Survivor’s Benefit
The most complex but flexible arrangement would be for the client to leave assets for the survivor’s benefit, in a continuing Trust. This could be part of the terms of a Revocable Trust, but it can also be created under a Will (Testamentary Trust), and after the person dies, how it is created does not matter.
A typical Trust could provide that the survivor is his or her own Trustee, and they receive all the income from the Trust, or a certain fixed amount each year, and they can receive principal if their own liquid assets are used up. Then, when the survivor dies, the trust assets go to the named beneficiaries, the deceased client’s own children, or maybe children on both sides. This way, the money is actually more protected, even while the survivor is alive, on top of the assurance that what is left when the survivor dies will go to the children of the first spouse to die. However, if the survivor’s needs are more than expected, they will have the availability for all the assets in the event of emergency need.
While that is a typical Trust arrangement, the client can choose all of the variables. They could require someone else be the Trustee, so the survivor is not in charge. The document can change how and when money is distributed, who will receive the assets, how they will receive the assets, and when they will receive them after the survivor dies.
I leave all my estate to my spouse, as Trustee, if she survives me. The Trustee shall pay all income from the trust share to my spouse during her lifetime, and shall distribute to her principal for health or maintenance, but only if she has no liquid assets of her own. When my spouse dies, the trust shall pass to my children in equal shares.
By Teresa D. Hall
Over the years many of us have made the remark “they can fight over it when I’m gone”. However, what you have left your children with is what you have strove to provide them all along—guidance. Even if you do not have children, you leave your family with no instructions as to what your wishes were.
Often, we do not want to think about the “D” word, and making a Will means we have to think about it. However, thinking about it can help your family pick up the pieces once you are gone.
Here are some of the benefits to having a Will:
Probate
A Will makes it more likely that your beneficiaries will be able to proceed informally with a probate. This means no one will have to appear in court and less paperwork will be needed. Without a Will, the process is more likely to require a formal proceeding, which requires a court appearance, additional paperwork and additional time to determine your heirs. Typically it is a more costly process that is more time consuming and which may require more family agreement.
Beneficiaries
Without a Will, your assets will be distributed to your “heirs at law”, who are determined according to the law in the State in which you are domiciled. In Arizona, if you are married, your assets pass to your spouse…unless you have children with a different person, in which case the law divides up assets between the spouse and children. If you are not married and have children, they will be the beneficiaries. If no children, then your parents. If no parents, then your siblings. The list extends from that point and if no heirs are found, your money will ultimately go to the State of Arizona. With a Will, you can make specific distributions to family, friends, a charity, or anyone else you may want to benefit.
Controlling the Distributions
A Will also allows you to make special provisions for your beneficiaries. For instance, if you have a family member who receives state benefits, a Will could provide that any funds left for them would be left in a Special Needs Trust. This type of Trust would prevent the beneficiary from losing their public benefits. Should that person inherit funds directly, it may cause them to lose benefits for a period of time. This is just one of many techniques that an estate planning attorney can utilize when drafting a Will.
Additional Documents
A Will is not the only document you should have in your estate planning arsenal. It is also important that you have a plan in place if you become incapacitated. A Financial Power of Attorney allows you to nominate someone to make financial decisions for you and a Health Care Power of Attorney allows someone to make health care decisions for you. Without these documents your loved ones may be left with no choice but to petition the court for this type of control. Again, that is a costly venture which is also emotionally difficult.
The most important thing any of us can do is make a plan so that we never leave our family members guessing. Loss is difficult in itself and having a clearly laid out plan is always best. An estate planning attorney can help you make the best plan for you and help avoid the fight.
By Melinda Oliver
Life changes. The house is too big. The yard work is overwhelming. Health challenges may be looming, and simpler living becomes more appealing. If you are contemplating a move to a community that caters to older residents, here are a few things to look for as you begin your search:
Explore the options before you have to move. A crisis may necessitate a quick move, and a decision made under stress may not be a good match for you. Plan on visiting different communities at your leisure. Most places welcome potential residents for meals, or even short-term stays in furnished guest apartments.
The quality of the food is a top priority, and seems to be a topic of conversation for many residents. Meeting nutritional needs in a tantalizing and tasteful way is an important part of maintaining health as we age. Be certain the food is fresh, appetizing, and suits your needs. Many places offer several choices for all meals, and usually the menu plan for the month is readily available for visitors.
As you walk into the front lobby, most elder care communities are warm, welcoming, and well appointed. Look beyond your first impressions to notice details that reflect the nature of the community. Are people out and about in public spaces? Do you hear the buzz of conversation at meal times and leisure gatherings? What type of social opportunities are available on the campus? Many places offer exercise, movie nights, happy hours, guest speakers and performers, walking and nature clubs. Ask to see the schedule of activities and plan your visit to observe classes of interest.
Are staff members highly visible? Are they interacting with residents and calling them by name? Good, consistent staff is vital for good, consistent care. People who are happy in their work and treated well by their employers tend to stay in their positions. You will benefit from this by building relationships with people who understand your needs because they know you.
What are the transportation options? Some communities offer scheduled shopping trips as well as individual transportation for personal appointments. Inquire whether there is a charge for transportation, or if it is provided as a free service to residents. Clarify the scheduling flexibility to be certain it will meet your needs.
What happens if your needs change? Will the facility allow you to “age in place” with support services coming to you, or will you be required to move? Many senior communities offer a continuum of care from independent living, to assisted, to secured living, and residents can move within the system as the need arises over time. Usually as need becomes greater, the cost of care also increases.
That leads to an unavoidable question: Cost. In addition to determining the base cost, ask what is included in that base price, and what is considered an “add on”. When needs change in some communities, the add-ons may actually double the initial baseline cost. That can be a cost-effective method of maintaining a lower cost for those residents with minimal care needs, but you have to understand the additions to price as care increases. One type of economic arrangement are Continuing Care Retirement Communities, which require a significant “buy-in” when you first move, and will then provide any care needed at a set price. As always, understanding the details is critical, and in those arrangements, you should research the financial stability of the enterprise, and how much of the facilities are already built.
Trust your intuition. If it appears the community truly will enhance your life and relieve many burdens, ask some questions, gather some knowledge, and prepare well for a new journey.
By Bruce W. Martin
What can go wrong when you choose the wrong person to serve in a fiduciary capacity? Or what if the court charged with overseeing your guardianship or conservatorship falls down on the job?
A recent article in the Denver Post http://www.denverpost.com/search/ci_14442041 (“Probate court rife with lapses in training, oversight: Who’s Protecting the Unprotected”, By David Olinger, 02/21/2010) highlights a number of things that can go wrong:
- In one case when a retired librarian needed help, the Denver probate court appointed a guardian. That guardian subsequently sold many of her belongings to himself and billed her hundreds of times for walking with her and reading poetry to her. Despite the appointment of a guardian she nearly starved to death.
- In another case the Denver probate court heard nothing from the guardian for a 50-year-old Denver man with dementia for five years.
- In a third case, the guardian and his female friend racked up $83,517 in expenses on behalf of the ward, his brother, before the Denver probate court asked why a single, elderly man was paying for frequent plane trips.
Each of these cases highlights what can happen when the wrong person is chosen to serve in a fiduciary capacity (such as a guardian, conservator, or trustee) for an incapacitated person or when the court that you think is looking out for the ward lacks the time or resources to actively “police” its fiduciary cases.
But these cases also bring to mind another interesting question: Could it happen here? Arizona is not Colorado and the results would not necessarily be the same here.
Arizona has been rather progressive fiduciary regulation and prevention of elder abuse and exploitation. In fact, Arizona is known as a national leader in elder law.
The courts and the legislature have promulgated a number of laws and regulations aimed at curbing the abuse and exploitation of the elderly and incapacitated. These rules and laws range from the simple to the complex. For instance, Pima County has long required a potential fiduciary to supply basic identifying information such as gender, race, height, weight, hair color, and eye color. The purpose of gathering this information on the probate information sheet has been alternately stated as giving information to authorities if the court issues a fiduciary arrest warrant, or simply allowing the judge to identify the fiduciary in the courtroom. Whatever the underlying reason, the form has proved so popular with the court that the new Arizona uniform probate rules requires its use statewide.
At the other end of the complexity spectrum is the fiduciary licensing program. This program began in 1994 with the well-meaning goal of curbing theft, neglect and other abuses of wards by fiduciaries. In the intervening 16 years, the program has undergone much change. Originally the program referred to Certified Private Fiduciaries. Later the certification was renamed Certified Fiduciary. And just this year the designation was renamed Licensed Fiduciary.
As originally conceived, the program consisted of both an initial training component and a continuing education requirement provided by or overseen by the Arizona Supreme Court. In the ensuing years the Supreme Court has gotten out of the initial training and continuing education business and now leaves that up to private enterprise. An applicant now takes the certification exam without first taking required courses. The Court’s role (through its Administrative Office of the Courts) is now limited mostly to the initial licensing, as well as discipline of those licensed fiduciaries accused of wrong-doing.
The fiduciary certification program was envisioned as a way of curbing some of the more egregious abuse such as those mentioned in the Denver Post article. The program was meant to do that in two ways. First, the initial training and the written examination would ensure that all licensed fiduciaries had at least some modicum of training. Secondly, the court is able to discipline those fiduciaries found guilty of wrong-doing. In these ways it was hoped that the certification could raise the bar among Arizona fiduciaries and hopefully protect the elderly and vulnerable.
Has the fiduciary certification program been successful? While the state has perhaps seen some decrease in exploitation by professional fiduciaries we still see unfortunately significant fraud and abuse in Arizona similar to that mentioned in the Denver Post article.
Why? Partly the reason lies with human nature. Despite all the controls and barriers we put in place, some bad people are still going to find a way to exploit and abuse the vulnerable. But perhaps more important is the fact that the fiduciary licensing program contains two very big loopholes. First of all, the fiduciary licensing statute specifically defines a fiduciary as: “A person who for a fee serves as a court appointed guardian or conservator for one or more persons who are unrelated to the fiduciary.” In other words, a relative is not subject to the licensing requirement. (Nor, for that matter, is someone who serves without a fee.) In our experience, relatives are just as likely–if not more likely–to steal from, exploit, or abuse a person than non-related persons. As long as relatives are exempt, the licensing requirement can never hope to curb all abuse.
The second loophole in the licensing program is that it applies to guardians and conservators (and in some cases personal representatives) appointed by the probate court. Unfortunately, most fiduciaries are not appointed by the court at all. For instance, the agent under your power of attorney and health care attorney is not appointed with court involvement at all. Also, the trustee or successor trustee of your revocable trust likewise does not (usually) need court approval. And there are far more fiduciaries serving as agents under powers of attorney and as trustees than in court-appointed roles such as guardian or conservator.
So what does this tell us? Basically, selection of a proper fiduciary–whether a personal representative under a will, a trustee, or an agent under a financial or health care power of attorney–is perhaps the most important decision that you can make when planning your estate. Your next-door neighbor may not be the best person to whom you entrust your life and your assets. Nor would it be a good idea to appoint your recovering-alcoholic nephew.
Another choice for a fiduciary is an institution such as a bank or a trust company. Another choice is your attorney or CPA–particularly if that person or firm has a large fiduciary practice. It is very important that you choose someone who is trustworthy. Despite the popular notion, serving as someone’s trustee or personal representative is not an honor, it’s a job. Be sure you treat it like one when naming fiduciaries in your estate planning documents.
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