Estate Planning

For best results, your estate plan will require periodic attention. Generally, any significant change in your family, financial, or health status should prompt a review of your estate plan. The following is a list of examples:
 
Personal and family changes:

• You marry, separate or divorce;
• Your health, or the health of your spouse, declines;
• Your spouse passes away;
• A child is born or adopted;
• A beneficiary gets married or divorced;
• A family member develops special needs or requires extra care;
• A minor becomes an adult;
• A beneficiary’s attitude toward you changes;
• A beneficiary develops a substance abuse problem;
• A beneficiary displays poor financial management skills;
• The health of a parent or other beneficiary declines;
• A family member dies.

Family finance changes:

• The value of your assets changes significantly;
• You anticipate the sale or transfer of a family business;
• You buy real estate in your own or another state;
• The value of a family member’s assets changes dramatically;
• A beneficiary gets into financial difficulties;
• A parent or other relative becomes financially dependent upon you.

Other Changes:

• Federal or state tax laws change;
• You move to a different state;
• You change your mind about a trustee, guardian, or administrator you selected;
• A successor trustee, guardian, or administrator moves, becomes ill, or changes his/her mind about serving.

Some of the most generous provisions of the tax code are those that permit beneficiaries of IRAs and other qualified retirement plans to defer income tax on the plans until time of withdrawal. This allows the IRA or qualified plan to grow significantly more than if it were subject to tax on gains each year.
 
Another equally generous provision of the tax code permits beneficiaries to withdraw only a minimum amount from IRAs or qualified plans each year. By taking only these “required minimum distributions” a beneficiary can stretch out distributions over the better part of his or her lifetime, resulting in further deferral of income tax on the amount remaining in the plan.
 
Unfortunately, most beneficiaries fail to take advantage of this latter provision and withdraw all of the IRA or qualified plan funds immediately, thereby losing the significant tax advantages of tax-deferred growth.
 
A common misconception is that one should not name a trust as beneficiary because it is overly complicated and doesn’t permit a stretch out. While naming a trust does add a thin layer of complexity, a properly drafted trust not only permits the stretch out, but it is the only approach that ensures maximum income tax deferral, if that is your objective.
 

Naming the right beneficiary for tax-deferred retirement accounts is critical. Most people want to continue the tax-deferred growth for as long as possible, pay the least amount in income taxes and get the maximum stretch-out. Required distributions after the owner dies will be based on the new beneficiary’s age and life expectancy, so the younger the beneficiary (like a child or grandchild), the longer the stretch out.
 
However, naming a beneficiary outright has several disadvantages. If the beneficiary is a minor, distributions will need to be paid to a guardian; if no guardian exists, one will have to be appointed by the court. An older beneficiary may be tempted to take larger distributions or even cash out the entire account, destroying your plans for continued tax-deferred growth. The money could be available to the beneficiary’s creditors, spouse and ex-spouse(s). There is the risk of court interference if your beneficiary becomes incapacitated, and the extra income could cause a beneficiary with special needs to lose government benefits. If your beneficiary is your spouse, he/she will be able to name a new beneficiary and is under no obligation to follow your wishes.
 
Naming a trust as beneficiary provides more control over, and protection for, these tax-deferred accounts. Ideally it is a separate trust designed specifically for this purpose. It must meet certain IRS requirements, and it is best if it is not part of a revocable living trust or other trust. For this reason, these trusts are often called “stand-alone retirement trusts.”
 
Required minimum distributions will be paid into the trust for the benefit of your beneficiary. The trust can either be mandated to then pay these distributions directly to the beneficiary (called a conduit trust) or it can accumulate these distributions (called an accumulation trust) and pay out trust assets according to your instructions (for example, for higher education expenses, down payment on a home, etc.)
 
Because a trust is the named beneficiary instead of the individual, no guardian is needed for minor children and there is no risk of court interference at the beneficiary’s incapacity. An accumulation trust will allow the trustee to receive the required distributions and use discretion to provide for a special needs beneficiary without jeopardizing government benefits.
 
Your beneficiary is prevented from cashing out or taking larger distributions, assuring the continuation of tax-deferred growth. If a conduit trust is used, distributions that are paid to the beneficiary (but not the account itself) would be subject to creditor claims. Thus, for maximum creditor protection, an accumulation trust is preferable.
 
Finally, successor beneficiaries can be named in the trust document, allowing you to keep control over who will receive the proceeds if your initial beneficiary should die before the account is fully paid out.
 
For more information about stand-alone retirement trusts, please contact my office.

Most professionals know that DIY estate planning can be very dangerous. While completing the forms may seem easy and straightforward, a single mistake or omission can have far reaching complications that only come to light after the person has died. The heirs could end up disappointed and confused, and could end up paying much more in legal help to try to sort things out after the fact than it would have cost in the first place.
 
Those contemplating the DIY route should consider the following:
 

• Legal Expertise: Experienced estate planning attorneys have the technical expertise to draft documents correctly. They understand the technical terms and legal requirements in your state. Laws vary greatly from state to state, and a DIY program or kit may not tell you everything you need to know to prevent your plan from being thrown out by the court.

• Counseling: Attorneys are called “counselors at law” for a reason. Most estate planning attorneys have counseled many families and they have seen the results of proper and improper planning. An experienced attorney can guide you with delicate decisions, including who should be the guardian of your minor children; how to provide for a child or elderly parent who has special needs without interrupting valuable government benefits; how to provide for your children fairly (which may not be equally); and how you can protect an inheritance from creditors and irresponsible spending.

• Explanation of Intentions: If there is any confusion as to what your intentions were after you are gone, the attorney who counseled you will be able to explain them. This unbiased interpretation from someone who does not stand to benefit from your plan can help to avoid costly litigation by your beneficiaries and even maintain the validity of your documents.

• Coordination of Assets: A will only controls assets that are titled in your name. You probably have other assets that are controlled by a contract, joint ownership and/or beneficiary designations; these include IRAs, 401(k)s, joint bank accounts, real estate and life insurance. A will does not control these assets. An experience estate planning attorney will know how to coordinate these so that your assets are distributed the way you want to those you want to have them.

• Unmarried Cohabitants: Because laws are frequently changing and vary greatly from state to state, it is vital to have updated advice from a competent professional. Without proper planning, many rights may be limited for unmarried cohabitants. Providing for your pets may also be very important to you.

• Complexity and Cost: Most people think their estate planning will be simple. But the reality is, most of us discover we do need some personalized planning…and you may not know that without the guidance and counseling of an experienced attorney. It is far better to spend a little more now and make sure your plan is created correctly than to try to save a few dollars and have things turn out badly later. You won’t be around then to straighten things out. Don’t you think you owe it to those you love to do this the right way?

Here are some things all of us can do to help keep costs down:

• Become educated consumers. The more we learn and understand about estate planning, the less time an attorney will need to spend educating us as to the process.
• Prepare a list of assets and liabilities; gather relevant documents (deeds, titles, beneficiary designations, etc.); consider beneficiaries and any special needs they may have.
• Shop around a bit. Ask friends and acquaintances for referrals. If costs are a concern, let the attorney know up front that you are concerned about costs; he/she may be willing to work with you to keep them as low as possible.

While approximately 10,000 cases are appealed to the U.S. Supreme Court each year, only 75 to 80 make it to oral argument. Of those cases, only a handful attract the media’s attention. Below is a summary of three landmark decisions handed down in 2015 that could affect how you are taxed, pay for healthcare, and plan your estate.
 
Comptroller v. Wynne – A State Can’t Double Tax Income Earned Outside of the State
 
Legal Issue: Does Maryland’s state income tax scheme violate the U.S. Constitution by “double taxing” a resident’s income earned from economic activity in another state that also taxes the same income?
 
Decision, 5 – 4: In a taxpayer-friendly ruling, the Supreme Court ruled that, yes, Maryland’s “double taxation” scheme violates the dormant Commerce Clause.
 
The Wynne case involved a Maryland couple who owned stock in a Maryland S corporation that did business in 39 states. Since income generated by an S corporation is passed through to its shareholders, the Wynnes paid income taxes in Maryland as well as their pro-rata share of taxes on the income the corporation earned in the other states.
 
In Maryland, residents are subject to a state income tax as well as a “local tax” based on the city or county in which they live. Prior to the Wynne case, the state allowed residents to take a credit against the Maryland state tax to offset a similar tax paid to another state, but it did not allow a credit to be taken against the local tax. Thus, income of a Maryland resident earned outside of the state was “double-taxed” by being subject to (1) out-of-state taxes, and (2) the local city or county tax. The Court struck down this “double taxation” scheme, holding that because the dormant Commerce Clause gives Congress power over interstate commerce, Maryland could not hinder interstate commerce by offering a credit against state income taxes but not against local income taxes.
 
Planning Tip: The Wynne decision will potentially affect hundreds of cities, counties and states other than Maryland, including Indiana, New York, and Pennsylvania. If you pay income taxes in your home state and other states, you should seek qualified tax advice regarding filing protective claims (such as amended returns or requests for refunds) for tax years in which the statute of limitations has not run.
 
King v. Burrell – Obamacare Subsidies Are Available to All
 
Legal Issue: Can the IRS provide tax-credit subsidies to healthcare coverage purchased through the federal healthcare exchange under the Patient Protection and Affordable Care Act (the “ACA,” commonly referred to as “Obamacare”)?
 
Decision, 6 – 3: Yes, Obamacare subsidies are available to individuals who obtain their healthcare coverage through a federal exchange.
 
Buried in the 2,700-page ACA is a provision which states that tax-credit subsidies are available to individuals who sign up for healthcare coverage “through an exchange established by the state.” After the ACA was passed, 34 states did not establish exchanges, leaving their residents to use the federal exchange to obtain their coverage. The King case challenged the validity of federal subsidies given to these residents since the ACA appeared to limit subsidies only to individuals who relied on a state-established exchange. Writing for the majority, Chief Justice John Roberts stated, “We doubt that is what Congress meant to do.” Thus, the validity of subsidies claimed by residents of the 34 states that use the federal healthcare exchange was upheld.
 
Planning Tip: Despite the King decision, the Obamacare debate will continue to be hashed out in the political arena as the 2016 presidential election fast approaches.
 
Obergefell v. Hodges – Same Sex Marriage is Legal Everywhere in the United States
 
Legal Issue: Does the Fourteenth Amendment of the U.S. Constitution require a state to license same sex marriages and recognize same sex marriages that are legally licensed and performed in another state?
 
Decision, 5 – 4: Yes, same sex marriages are legal and must be recognized everywhere in the United States.
 
The Obergefell case consolidated four cases that challenged state-banned same sex marriages in Kentucky, Michigan, Ohio and Tennessee. Relying on the Due Process and Equal Protection Clauses of the Fourteenth Amendment, the Court held that marriage is a fundamental liberty and denying the right of same sex couples to wed would deny them equal protection under the law.
 
Planning Tip: Same sex couples who are considering marriage need to decide if commitments regarding how to handle money, debt, and related matters should be formalized in a prenuptial agreement. Same sex couples who are already married need to determine if their prenuptial agreement should be fine-tuned and if their estate planning documents need to be amended in view of the King decision.
 
The Bottom Line on the Wynne, King and Obergefell Decisions
 
There are constant changes in the law from judicial, legislative, or regulatory action. These selections from the recent Supreme Court session are just a small example of the numerous changes that occur every year. How the Wynne, King and Obergefell decisions will affect your planning options has yet to be fully determined. My firm is available to answer your questions about these landmark cases and how they may affect you and your family.

Due to the increased volume of federal estate tax return filings in order to make the “portability election,” the IRS has announced that estate tax closing letters will only be issued upon request by the taxpayer. This change in IRS policy started on June 1, 2015.
 
What is the “Portability Election” and How is the Election Made?
 
The “portability election” refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. The portability election went into effect for deaths occurring on or after January 1, 2011.
 
To properly make the election, a surviving spouse must file a federal estate tax return within nine months of the date of a spouse’s death, although a six-month extension of time to file the return can be requested. Filing an estate tax return is required to make the election even if the value of the deceased spouse’s estate does not exceed the federal estate tax exemption.
 
A Portability Example
 
The easiest way to understand how portability works is through an example. Let’s say Carol and Bob are married, all of their assets are jointly titled with rights of survivorship, their total estate is valued at $4 million, and neither spouse made any taxable gifts during their lifetimes. If Bob dies in 2015, none of his $5.43 million federal estate tax exemption will be needed since Carol will automatically inherit the entire estate through rights of survivorship. In addition, a federal estate tax return will not otherwise be required for Bob’s estate since it is valued under $5.43 million.
 
Nonetheless, if Carol wants to pick up Bob’s unused $5.43 million exemption and add it to her own exemption so that she can pass on up to $10.86 million when she dies, she can timely file an estate tax return for Bob’s estate and make the portability election with regard to Bob’s unused exemption.
 
What is an Estate Tax Closing Letter?
 
An estate tax closing letter is a document issued by the IRS after it determines that an estate tax return has been accepted as filed or that all required adjustments have been completed. In other words, the closing letter provides written proof from the IRS that all federal estate tax liabilities have been satisfied. An estate tax closing letter is often necessary to sell or distribute property.
 
New Rules for Issuance of Estate Tax Closing Letters
 
Prior to June 1, 2015, the IRS automatically issued estate tax closing letters. However, the IRS recently announced the following on its website in response to the increased number of federal estate tax return filings for the sole purpose of making the portability election:
“For all estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. Please wait at least four months after filing the return to make the closing letter request to allow time for processing. For questions about estate tax closing letter requests, call (866) 699-4083.”
 
The portability election provides another strategy that estate planning attorneys can use to lessen the burden of death taxes on your family. Like any other tax or legal strategy, you should seek competent advice to select the strategies that will work in your situation. If you have any questions about federal estate tax returns, the portability election, or the new rules regarding the issuance of estate tax closing letters, please contact our office.