estate

GOP Tax Reform Proposal

The GOP has released its “Unified Framework for Fixing Our Broken Tax Code”.  Unfortunately, the framework is heavy on generalities and light on specifics, so there is still a long way to go.  Nonetheless, I wanted to take this opportunity to discuss the proposals, and provide some observations, as follows:

Standard Deduction/Personal Exemptions.  The plan roughly doubles the existing standard deduction – making it $24,000 for married taxpayers filing jointly (as compared to $12,700 under current law), and $12,000 for single taxpayers ($6,375 under current law).  In doing so, however, the former personal exemptions for the taxpayers (currently $4,050 per person) are eliminated.  The idea behind this increased deduction is to exclude more income, thus reducing the tax burden and even reducing the number of taxpayers required to file a tax return.

Observation 1 – By eliminating the personal exemptions and increasing the standard deduction, the plan results in only a modest increase in the aggregate deduction, shown as follows:

                                                                     Single Taxpayers                   Married Filing Jointly 

                                                                   Current       Proposed               Current           Proposed

Standard Deduction                           $   6,350       $ 12,000              $ 12,700          $ 24,000

Personal Exemptions                          $   4,050       $          0              $   8,100          $          0

Total Deduction/Exemptions           $ 10,400       $ 12,000              $ 20,800          $ 24,000

Observation 2 – The above example assumes no children or other dependents. If you include one dependent in the above example, the Personal Exemption amounts would go to $8,100 and $12,150 respectively. Thus, the Total Deductions/Exemptions for a single person with one dependent would be $14,450; and for a married couple with one dependent it would be $24,850. Therefore, with only one dependent, under the current law the amount of the aggregate deduction would be higher than the new standard deduction under the proposed law.

Observation 3 – The standard deduction benefits only those taxpayer who do not itemize their deductions.  In other words, if a taxpayer does not have itemized deductions in excess of the standard deduction, then they can claim the standard deduction.  If, on the other hand, the taxpayer’s itemized deductions are in excess of the standard deduction, the taxpayer would forego the standard deduction and choose instead to itemize.  Under current law, a taxpayer who itemizes deductions would nonetheless still receive the benefit of the personal exemptions (although taxpayers with adjusted gross incomes in excess of $313,800 for MFJ and $261,500 for individual saw those exemptions phased out).  Taxpayers who itemize under the proposed law will no longer receive the benefit of the personal exemptions, thus lowering their aggregate deduction.

Planning Idea – Taxpayers whose itemized deductions in any given year are close to the standard deduction amount will want to consider doubling up the payment of itemized deductions every other year.  The idea would be to itemize in year one, take the standard deduction in year two, itemize again in year 3, and so on.  This will maximize the total deductions benefitting the taxpayer.

Individual Income Tax Rates.  Under current law, the income tax rates on individuals consist of seven brackets – 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.  The proposal is to reduce this to three brackets – 12%, 25% and 35%.  The lowest bracket is higher under the proposal than under current law; however, the idea is that the increased standard deduction and the increased child tax credit (discussed later) will offset any additional cost.

The proposal also leaves open the possibility of an additional top tax rate on the highest-income taxpayers, although there is no indication of a proposed tax rate or the income threshold over which that rate would apply.

Observation 4 – There is no indication of the income thresholds to which each of the newly-proposed brackets would apply.  As a result, there is no way to compare the tax burden under the current law versus the proposed law.

Observation 5 – There is also a provision whereby the individual income tax rate on business income from small businesses operated as sole proprietorships, partnerships, or S corporations would be limited to a maximum of 25%.  This is to reduce the tax burden on the owners of small businesses that operate as pass-through entities.  It is unclear how the proposed law will define the distinction between business income and non-business income for this purpose.

Child Tax Credit.  The proposal is to increase the amount of the refundable and non-refundable child tax credit for low and middle-income taxpayers, and to increase the threshold of income levels at which this credit is phased out.  However, the plan proposal specifies neither the amount of the credit, nor the applicable income threshold.

Middle Class Tax Relief.  The proposal contains a sentence stating “the committees will work on additional measures to meaningfully reduce the tax burden on the middle-class.”  The proposal provides no specifics in this regard, nor what will be considered “middle-class.”

Alternative Minimum Tax.  The alternative minimum tax (AMT) has become an increasing problem for many taxpayers over the last couple of decades.  The AMT was originally designed to ensure that high income taxpayers pay at least a minimum amount of tax.  With much tinkering over the years, the AMT now impacts many more taxpayers than it was ever designed to do.  The proposal would repeal the AMT.

Observation 6 – The AMT effectively disallowed the deduction of certain itemized deductions for those taxpayers who were subject to the AMT.  Many of these taxpayers have been deferring the payment of itemized deductions because the AMT disallowed  deductions such as state income taxes, investment fees, etc., and there was the hope of a repeal.  The repeal of the AMT might benefit those persons who have been deferring these payments; however, many of these itemized deductions are now on the chopping block under the proposal anyway (see below).

Itemized Deductions.  The proposal indicates it will eliminate most itemized deductions, retaining only the deductions for home mortgage interest deduction and charitable contributions.  Most notably, the deduction for state income taxes paid would be eliminated.

Observation 7 – The proposal does not specify an effective date for the repeal of the itemized deductions.  I believe it is unlikely this change would be retroactive to January 1, 2017.  However, it could be effective as of the date the proposal was released (September 27, 2017), or perhaps prospectively from the date of passage of a new law, or some specified date thereafter.

Planning Idea – It may be beneficial to accelerate the payment of the itemized deductions that will be repealed, in order to obtain a tax benefit in 2017 for those deductions.  There is a risk, however, that those deductions may be of no benefit if the effective date of the repeal is prior to their payment.

Work, Education and Retirement.  The proposal says it will retain tax benefits that encourage work, higher education, and retirement security, and that the committees are encouraged to simplify these benefits.  There are no further specifics in this regard.

I have, however, heard other proposals regarding retirement accounts, specifically Individual Retirement Accounts (IRAs). Under current tax law, if a beneficiary inherits an IRA, then that beneficiary may be able to “stretch” that IRA out over that beneficiary’s lifetime, thereby allowing tax deferral of that IRA. However, I have heard that there is a proposal to eliminate this “stretch out” and require the beneficiary to instead liquidate the IRA within five years of the original IRA owner’s death, thereby accelerating recognition of the IRA within that five year period. This could have a significant impact on IRA beneficiary planning in the future.

Estate Tax Repeal.  The proposal is to eliminate the estate tax and the generation-skipping transfer tax.  It does not, however, eliminate the gift tax (the proposal is silent on the gift tax). I plan to expand on the impact of this in a later Blog Post.

Observation 8 – Under current law, an asset held by a decedent at death, and included in the decedent’s estate, is allowed a step-up in the cost basis of that asset to its fair market value on the date of death.  This effectively erased any pre-death appreciation on these assets that would otherwise be subject to capital gain tax. There is no mention in the proposal whether this step-up in basis would still be allowed, or whether the basis of the decedent would instead carry over to the beneficiaries, or whether there would be a forced recognition of gain at death.

Observation 9 – Under current law, the gift tax and estate tax enjoyed a lifetime exemption effectively precluding tax on the first $5,490,000 of transfers (in excess of annual exclusions and indexed for inflation each year).  While it appears the gift tax would remain in effect, there is no indication whether the amount of annual exclusion (currently $14,000 for 2017) or the lifetime exemption would remain the same, or become an entirely different amount.

Tax Rate Structure for C Corporations.  The proposal is to reduce the maximum tax rate on “C” corporations to 20%.  This is below the average tax rate for the industrialized world and is intended to keep companies from moving operations overseas.

Expensing of Capital Investments.  The proposal is to allow the immediate expensing of capital investments (other than structures) for depreciable assets purchased and placed in service any time during the five year period following September 27, 2017.

Repatriation.  There are also some proposals to encourage the repatriation of money currently held overseas by U.S. companies, as well as to discourage U.S. companies from leaving the U.S.  There is little specificity with regard to these proposals.

I had hoped, by this time this year, we would have a more specific idea of the proposed tax laws, such that we could begin the implementation of some tax planning ideas.  Unfortunately, it appears we have a long way to go before these proposals become law.  It is likely some of these proposals will be tweaked, others deleted, and still others added.

To read the Tax Proposal yourself click Here.

I hope this helps!

-Matt

 

© 2017 Matthew D. Brehmer and Crummey Estate Plan.

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2017 Estate and Gift Tax Update – A Quick Snapshot

Every year I like to post a quick Estate and Gift Tax update for you to reference throughout the year. This way, if you’re anything like me, you won’t find yourself constantly “Googling” different estate and gift tax thresholds at the beginning of the year for a quick refresher on the updated thresholds. The purpose of this post is to provide a snapshot of some of the most common 2017 estate and gift tax thresholds, tax rates, exemptions, elections, etc. Feel free to use this how you see fit. Additionally, if you have any other commonly used 2017 estate and/or gift tax updates that I may have left off the list, please feel free to leave them in the comments.

Federal Gift Tax

  • Lifetime Exemption: $5,490,000
  • Annual Exclusion: $14,000
  • Gift-Splitting: Yes, if married and spouse consents (i.e., annual exclusion is $28,000 for married couples)
  • Rate: 40% on gifts above the lifetime exemption (plus the annual exclusion)

Federal Generation-Skipping Transfer Tax

  • Exemption: $5,490,000
  • Portability: No
  • Rate: 40% on generation-skipping transfers above the exemption

Federal Estate Tax

  • Exemption: $5,490,000 (exemption is decreased by lifetime gifts)
  • Portability: Yes (i.e., surviving spouse may elect to use deceased spouse’s unused exemption, in effect, giving married couples an exemption of $10,980,000)
  • Rate: 40% on the value of the estate above the exemption amount

Federal Income Tax for Trusts and Estates

  • Tax Brackets: see chart below
  • Tax Rates: see chart below
  • Net Investment Income Tax: A 3.8% surcharge tax on net investment income applies to trusts and estates that are above the $12,500 income threshold (i.e., the marginal tax rate on net investment income above that threshold is then 43.4%)
  • Distributable Net Income: Net income that is distributed to beneficiaries of a trust or estate is taxed at the beneficiaries’ level and not at the trust or estate’s level
Chart: Federal Income Taxation of Trusts and Estates
If Taxable Income is: The Tax is:
Not over $2,550 15% of the taxable income
Over $2,550 but not over $6,000 $382.50 plus 25% of the excess over $2,550
Over $6,000 but not over $9,150 $1,245.00 plus 28% of the excess over $6,000
Over $9,150 but not over $12,500 $2,127.00 plus 33% of the excess over $9,150
Over $12,500 $3,232.50 plus 39.6% of the excess over $12,500


State Taxes

Each State has its own set of rules when it comes to estate tax, gift tax, inheritance tax, and income taxation of trusts and estates. Be sure to check with a professional in your State for an update.

For a complete summary of all 2017 Federal tax-related inflation adjustments see Rev. Proc. 2016-55, available here: https://www.irs.gov/pub/irs-drop/rp-16-55.pdf.

I hope this helps!

-Matt

 

© 2016 Matthew D. Brehmer and Crummey Estate Plan.

When do Powers of Attorney Start and End?

One common estate planning misconception is when Powers of Attorney start and end. A Power of Attorney is a tool used to grant authority to someone to act on your behalf in case they need to. Powers of Attorney can start or be effective either immediately or springing.

Health care Powers of Attorney, which allows someone to make health care decisions on your behalf, are effective only if you are not able to make decisions for yourself, whether that is because of a physical ailment, such as being unconscious, or a mental illness.

A financial Power of Attorney on the other hand can be effective immediately or springing. A financial Power of Attorney allows someone to make financial decisions on your behalf. If effective immediately, that means the moment it is signed the person can start making decisions on your behalf. If it is springing, the person can only make decisions on your behalf if you are unable to, again such as if you are unconscious or have a mental illness.

Whether to make it effective immediately or springing is an important decision. Most people choose to make if effective springing because they only want someone to make decisions on their behalf if they are unable to; however, some people do decide to have it effective immediately so their agent can make decisions right then and there and going forward. A lot of times this may be in the case of a person who is elderly or travels a lot.

When the Power of Attorney ends is another misconception. The Power of Attorney ends immediately upon death. That means your agent no longer has authority to make financial decisions on your behalf, whether that means writing checks, paying bills, or getting funds out of your account. As soon as you pass away, that authority transfers to the personal representative or executor under your Will or the trustee under your trust. If not planned properly, that could mean that the personal representative or executor may not have access to any of the decedent’s funds until a probate process is opened and the court grants that personal representative or executor with the proper authority to access those funds to pay your bills and final expenses, meaning weeks if not months of delay. Thus, proper planning can solve all of these issues.

If you have any questions regarding your Powers of Attorney or you do not have any please contact me.

-Matt

© 2016 Matthew D. Brehmer and Crummey Estate Plan.

2016 Estate and Gift Tax Update – A Quick Snapshot

Last year it dawned on me that a lot of us out there, including myself, find ourselves constantly “Googleing” different estate and gift tax thresholds throughout the beginning of the year for a quick refresher on the updated thresholds. The purpose of this post is to provide a snapshot of some of the most common 2016 estate and gift tax thresholds, tax rates, exemptions, elections, etc. Feel free to use this how you see fit. Additionally, if you have any other commonly used 2016 estate and/or gift tax updates that I may have left off the list, please feel free to leave them in the comments.

Federal Gift Tax

  • Lifetime Exemption: $5,450,000
  • Annual Exclusion: $14,000
  • Gift-Splitting: Yes, if married and spouse consents (i.e., annual exclusion is $28,000 for married couples)
  • Rate: 40% on gifts above the lifetime exemption (plus the annual exclusion)

Federal Generation-Skipping Transfer Tax

  • Exemption: $5,450,000
  • Portability: No
  • Rate: 40% on generation-skipping transfers above the exemption

Federal Estate Tax

  • Exemption: $5,450,000 (exemption is decreased by lifetime gifts)
  • Portability: Yes (i.e., surviving spouse may elect to use deceased spouse’s unused exemption, in effect, giving married couples an exemption of $10,900,000)
  • Rate: 40% on the value of the estate above the exemption amount

Federal Income Tax for Trusts and Estates

  • Tax Brackets: see chart below
  • Tax Rates: see chart below
  • Net Investment Income Tax: A 3.8% surcharge tax on net investment income applies to trusts and estates that are above the $12,300 income threshold (i.e., the marginal tax rate on net investment income above that threshold is then 43.4%)
  • Distributable Net Income: Net income that is distributed to beneficiaries of a trust or estate is taxed at the beneficiaries’ level and not at the trust or estate’s level
Chart: Federal Income Taxation of Trusts and Estates
If Taxable Income is: The Tax is:
Not over $2,550 15% of the taxable income
Over $2,550 but not over $5,950 $382.50 plus 25% of the excess over $2,550
Over $5,950 but not over $9,050 $1,232.50 plus 28% of the excess over $5,950
Over $9,050 but not over $12,400 $2,100.50 plus 33% of the excess over $9,050
Over $12,400 $3,206 plus 39.6% of the excess over $12,400

State Taxes

Each State has its own set of rules when it comes to estate tax, gift tax, inheritance tax, and income taxation of trusts and estates. Be sure to check with a professional in your State for an update.

For a complete summary of all 2016 Federal tax-related inflation adjustments see Rev. Proc. 2015-53, available here: https://www.irs.gov/pub/irs-drop/rp-15-53.pdf.

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

Lamar Odom: A Lesson to Learn

Currently the news is packed with stories about Lamar Odom’s recent “long weekend” and resulting medical problems (just Google it, you’ll find plenty of stories). The pertinent facts, however, are this: 1) Lamar Odom is unable to make healthcare decisions for himself; 2) he does not have a Living Will specifying what his healthcare wishes are; 3) we are unaware if he has a health care power of attorney; and 4) his recent divorce has not yet been finalized because of a backlog in the courts. Whether he has a healthcare power of attorney that just hasn’t been updated or he does not have one at all (and, thus, the law controls), his soon-to-be ex-wife, Khloe Kardashian, is responsible for making his healthcare decisions.

Having an Estate Plan (and an up-to-date estate plan) is essential to ensure that your wishes are carried out – whether it be who receives your assets after you pass, who controls your finances if you are unable, who makes your health care decisions if you are unable, etc.

When a major life event occurs, you should ALWAYS make sure to discuss the impact that life event may have on your estate plan with an experienced professional. Otherwise, like in the case of Lamar Odom, your soon-to-be ex-spouse may be making healthcare decisions for you (and possibly inheriting part of your estate if you pass away without an estate plan or an up-to-date estate plan)!

While there are plenty of lessons to learn in the recent news concerning Lamar Odom (again, just Google it), not having an estate plan or an up-to-date estate plan is definitely one that most people are guilty of themselves and can easily be remedied by speaking with an experienced professional.

For more thoughts on this issue, check out this article written by David H. Lenok and titled “Odom and Kardashian: Why Living Wills Matter

I hope this helps!

-Matt

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

Medicaid Planning: The Fundamentals

Below is a one page summary regarding Medicaid Planning in Wisconsin that we provide our clients with when discussing Medicaid Planning (the laws regarding Medicaid Planning may be different in your State). It should be noted that, much like tax and estate planning, an experienced professional should be consulted if you are thinking about engaging in any Medicaid Planning. It is an extremely complex set of rules and requires up-to-date knowledge (all of the below information is only current and accurate as of September 2015; after such date the information may no longer be current and accurate).

Prior to Applying for Medicaid: The Lookback Period

  • 5 years prior to the date of the Medicaid application
  • All gifts (or divestments) during that lookback period will cause a penalty
  • Penalty calculation:
    • Total amount of gifts (or divestments) divided by average cost of care
      • Average cost of care is $252.95/day
    • Example: You make a $20,000 gift to your child and apply for Medicaid 4 years later.
      • Penalty period: $20,000 divided by $252.95
      • Penalty period = 79.067 days (or just over 2½ months)
    • Therefore, you will not qualify for Medicaid assistance for at least 79 days from the date of application and will have to arrange for care or payment for care yourself.

While Receiving Medicaid: The Resource Limits

  • Resource Limits for Single Persons (or if both spouses apply for Medicaid):
    • Asset Limit: $2,000
    • Irrevocable Burial Trust: $3,000
    • Life Insurance – Face Amount: $1,500
    • Income: $45/month
  • Resource Limits for Couples (if only one spouse is applying for Medicaid and the other spouse remains in the community):
    • Assets: One-half of total countable assets
      • However, not less than $50,000 nor more than $119,220
    • Income: Minimum Monthly Needs Allowance (MMNA) is $2,655/month
  • Exempt Assets:
    • For the Medicaid Applicant –
      • A vehicle
      • Primary residence (if plan to return home or if spouse lives in home)
      • Burial space
    • For Community Spouse (non-Medicaid applicant) –
      • All of the Community Spouse’s retirement assets

After You Pass Away: Estate Recovery – Under certain circumstances, the State of Wisconsin can place liens on your assets and/or recover remaining assets from your Estate after your death.

Planning Opportunities:

  • Self-insure
  • Long-term care insurance
  • Gifting (or divestments) either outright or in trust
  • Other planning opportunities (for example, purchasing annuities, life care agreements, etc.)

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

The Foundation – Part 2: Probate Avoidance

Continuing with Part 2 of this three part series, I am going to briefly cover some of the most popular probate avoidance strategies. As a refresher, the purpose of this series is to cover the fundamentals and foundation of estate planning and some of what I typically go through with a client during an initial estate planning consultation, including the following topics:

Part 1 – Last Wills & Testaments and Powers of Attorney
Part 2 – Basic Probate Avoidance Strategies
Part 3 – Joint Revocable Living Trusts

For purposes of this post, it is extremely important to remember that if any of the following probate avoidance measures are used with respect to any of your assets, the distribution of those assets upon your death will NO LONGER be controlled by your Last Will & Testament. The designation or form you used to avoid probate will now control the distribution of that asset upon your death. This is one of many reasons why it is important to talk to an experienced professional when drafting your estate plan; the experienced professional can work with you to ensure that your entire estate plan (i.e., your Will, your beneficiary designations, etc.) works together to achieve your desired goals and results.

Example: The “Average” Estate

A significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property (e.g., your household furnishings, antiques, collectibles, etc.). By implementing a few of the probate avoidance strategies below, most individuals will have the peace of mind in knowing that a significant portion of their estate, if not all of it, will avoid probate.

And, even if not all of the assets avoid probate (e.g., like the car and the tangible personal property), if those remaining probate assets are below a certain threshold amount, your State may still provide a way to transfer those assets without the need for probate after your death (e.g., in Wisconsin, if you probate assets are under $50,000, they can be transferred by affidavit and probate can be avoided). This should be a goal for almost all estate plans – to at least have the value of your probate assets below the probate threshold amount in your State.

Joint Ownership

Generally, any assets held and titled as joint ownership property pass to the survivor of the joint owners outside of probate. Common assets that can be held jointly include bank accounts and real estate. However, keep in mind that the asset will pass fully to the survivor, even if you wish it to go to someone else.

Beneficiary Designations

Any assets where you can and do designate a beneficiary will pass to the beneficiary outside of probate. Common assets where beneficiary designations are used include retirement accounts (e.g., pension plans, 401(k)s, IRAs), life insurance policies and brokerage accounts. If you wish to designate a beneficiary to any of these types of accounts, you can do so by requesting a beneficiary change form from your account administrator.

Payable on Death Accounts

Similar to beneficiary designations, payable on death accounts allow you to designate a beneficiary of that particular account. If such a beneficiary is designated, that account will pass to the beneficiary outside of probate upon your death. Payable on death accounts are particularly useful when it comes to your bank accounts. Most banks (if not all) will allow you to name a beneficiary to your bank account, you just need to speak to your banker.

Transfer on Death Designations

Again, similar to beneficiary designations, transfer on death designations are used to pass interests in property upon your death to a named beneficiary without the need for probate. The most common use of transfer on death designations are for real estate and business interests. This type of probate avoidance strategy will usually involve seeing an attorney to draft the transfer on death designation.

Marital Property Agreements (with Washington Will provisions)

For married couples in some States, marital property agreements with Washington Will provisions can be used to pass all of the decedent spouse’s property to the surviving spouse upon the death of the first spouse without the need for probate. If otherwise consistent with your estate plan, this can make the time and expenses involved at the first spouse’s death much easier to cope with. However, only some States allow for this type of probate avoidance strategy. This will also require you to see an attorney to draft the agreement.

Trusts

Any assets held in trust will also pass to (or be held for) the beneficiary of the trust without the need for probate. Generally, almost any asset can be held in trust; thus, this can provide a lot of flexibility and the most overall probate avoidance. Additionally, this will also require an attorney to draft the trust agreement. In Part 3 of this series I will focus solely on trusts so be sure to check that out once I post it.

Recap: The “Average” Estate

Above I stated that a significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property. The following is a recap of the probate avoidance strategies that can be used to pass those assets to your heirs without the need for probate:

  • House – joint ownership, transfer on death designations, and trusts.
  • Bank accounts – joint ownership, payable on death accounts, and trusts.
  • Retirement/brokerage accounts – joint ownership, beneficiary designations, and trusts.
  • Life insurance – beneficiary designations and trusts.
  • Automobile and tangible personal property – joint ownership and trusts.

Conclusion

As you can see, there are multiple ways to avoid probate in regards to a particular asset and among your entire estate. The strategy and combination of strategies chosen will be different for every individual; some strategies may provide more advantages than other strategies depending on your individual circumstances. Additionally, many of the above probate avoidance strategies can be achieved for relatively little cost and time while saving your estate and your heirs A LOT of time and expense after you pass.

However, like I stated in Part 1, any plan starts with a good and solid foundation, and that includes your estate plan. That means that even if you engage in the above probate avoidance strategies, you still need to have a Last Will & Testament to “catch” those assets that you may have missed or that could have fallen outside the probate avoidance measures you took. Probate avoidance strategies must be integrated into an already existing solid estate plan; otherwise, the benefits and advantages such strategies provide will be diminished.

Make sure to check out Part 3 (Trusts) of this series when I post it. And, lastly, like with any topic I blog about, I am only scratching the surface of these topics, you must contact a professional in order to fully consider how these estate planning strategies will play out in your individual circumstances.

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

The Foundation – Part 1: Wills and Powers of Attorney

Many of my posts so far have focused on what some may consider “higher level” estate planning; but, what about the estate plan foundation that everyone needs? In this three part series, I am going to briefly cover the fundamentals and foundation of estate planning and some of what I typically go through with a client during an initial estate planning meeting:

Part 1 – Last Wills & Testaments and Powers of Attorney
Part 2 – Basic Probate Avoidance Strategies
Part 3 – Joint Revocable Living Trusts

There are three fundamental and “foundational” estate planning documents that every single person age 18 and older should have: 1) a Durable Power of Attorney; 2) a Healthcare Power of Attorney; and 3) a Last Will & Testament. The two Powers of Attorney govern your affairs prior to your death, while the Last Will & Testament governs your affairs after your death.

Before Death

Generally speaking, as soon as a person turns 18 years old they no longer have a designated person to make decisions for them. That is why it is important, no matter if you are 18 or 80 years old, to have both a Durable Power of Attorney (DPOA) and Healthcare Power of Attorney (HCPOA) to designate an individual(s) to make decisions for you if you are unable to do so yourself.

You designate a person(s) to handle your financial affairs in a Durable Power of Attorney. Most DPOAs are very broad, giving the person you designated broad authority to handle your financial affairs – for instance, managing your bank accounts, paying your bills, managing your assets, filing your tax returns, etc. However, you can limit this authority if you wish to. Additionally, a DPOA can either be immediate or springing. An immediate DPOA is effective immediately, while a springing DPOA is effective only after you are determined to be incompetent or incapacitated and unable to handle your own financial affairs.

You designate a person(s) to handle your healthcare decisions in a Healthcare Power of Attorney. It is important to understand that, like the springing DPOA, a HCPOA is only effective if you are incapacitated and unable to make decisions for yourself; if you can make decisions for yourself, those decisions will control. Generally, a HCPOA grants your healthcare agent with a general authority to make healthcare decisions for you; for example, that you have shared your wishes with this person and that this person will honor those wishes and do what is in your best interests. However, typically some of the more “hot button” issues are covered specifically in the HCPOA. For instance, whether your agent may consent to mental health treatment, long term nursing home care, removing your feeding tube, and if you are pregnant, whether or not they may still make decisions for you.

Also, typically included in a HCPOA is a Living Will and HIPAA consent; although, these may be in separate documents as well. The Living Will is where you detail your wishes if you are in a coma, vegetative state, etc.; for example, whether or not you want every life saving measure taken to prolong your life or if you want the proverbial so-called “plug pulled.” HIPAA consent is where you consent to certain people having access to your medical records.

Without either or both of these Powers of Attorney, if you are determined to be incompetent or incapacitated and unable to handle your own affairs, a court will have to be petitioned to appoint someone to handle your affairs. This is time consuming, costly and the person appointed may not be the person you would have chosen to handle your affairs. Take for instance the Terri Schiavo case. Most people remember this case; it is where Terri Schiavo’s husband and parents argued for nearly 15 years on what she may or may not have wanted. Terri was in a vegetative state and her husband had petitioned the court to remove her feeding tubes, while her parents petitioned the court to keep her alive. Terri had no living will; therefore, it was up to a court to make the decision for her based on what they thought she would have wanted. It took 15 years! And, who knows if the court got it right. This is not the only case like this, it happens more often than you think. Save your family the trouble and burden of having to petition the court to make these decisions for you, contact a professional today to draft you the necessary Powers of Attorney.

After Death

Your Powers of Attorney will no longer be effective once you die. This is where your Last Will & Testament comes in and governs who handles your affairs (in some instances). I want to take this opportunity to clear up one of the biggest misconceptions I hear when it comes to Wills – A Will governs your estate, meaning that it details how your estate is going to be settled in probate, for instance, who is going to manage and administer your estate, who your estate is going to be divided among, who you want to be appointed guardian of any minor children, etc. The key word there was “probate.” Many people think that if you have a Will, you avoid probate. That is not true. Additionally, many people believe that all of your assets will be governed by or “go through” your Will when you die. That is also not true. In Part 2 of this series I will talk about the different strategies to avoid probate. And, if you implement one of these probate avoidance strategies, your Will will NOT control who inherits those assets when you die, the document you used to avoid probate will. This is very important to remember.

It is important for you to have a Will for many reasons. The three primary reasons for most individuals are: 1) you designate the person you want to administer your estate, 2) you designate the people or organizations that you want to inherit your estate (and how they inherit it) and 3) you designate the individuals you want appointed as the guardian of your minor children. If you do not have a Will, the court will have to designate a person to administer your estate and to be guardian of your minor children. This is not only time consuming and costly, the court may choose someone who you may not have chosen. And, the State, via its intestacy statute, will choose who will inherit your estate and when and how they inherit it. The intestacy statute is based on who the State thinks you would have wanted to inherit your estate if you had a Will. Again, this may not be the individuals you wanted to inherit your estate, and even if it was, you may have wanted to put some restrictions on and/or have some control over when and how they inherit it. The probate process can be long and costly enough with a Will, save your family the extra trouble and burden of having to probate your estate without a Will, contact an attorney today to draft your Last Will & Testament.

Conclusion

Any plan starts with a good and solid foundation, and that includes your estate plan. The estate planning documents that every person needs for a good and solid foundation is a Durable Power of Attorney, a Healthcare Power of Attorney and a Last Will & Testament. Until you have these, any other estate planning strategies may be fruitless and/or supported by a weak foundation. Make sure to check out Part 2 (Probate Avoidance) and Part 3 (Trusts) of this series when I post them. And, lastly, like with any topic I blog about, I am only scratching the surface of these topics, you must contact a professional in order to fully consider how these estate planning strategies will play out in your individual circumstances.

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

Charitable Remainder Trusts – Lifetime income for you, tax control now, and a gift to charity at the end

Recently, Appleton Group LLC partnered with our Firm, Remley & Sensenbrenner, to produce a brief informational video on a powerful estate planning tool called a Charitable Remainder Trust (CRT). A CRT can help you accomplish three goals: provide lifetime income for you and your family, control taxes now and fund your favorite charities at the end of the trust. Check out the video below…

2015 Estate and Gift Tax Update – A Quick Snapshot

It recently dawned on me that a lot of us out there, including myself, find ourselves constantly “Googleing” different estate and gift tax thresholds throughout the beginning of the year for a quick refresher on the updated thresholds. The purpose of this post is to provide a snapshot of some of the most common 2015 estate and gift tax thresholds, tax rates, exemptions, elections, etc. Feel free to use this how you see fit. Additionally, if you have any other commonly used 2015 estate and/or gift tax updates that I may have left off the list, feel free to leave them in the comments.

Federal Gift Tax

  • Lifetime Exemption: $5,430,000
  • Annual Exclusion: $14,000
  • Gift-Splitting: Yes, if married and spouse consents (i.e., annual exclusion is $28,000 for married couples)
  • Rate: 40% on gifts above the lifetime exemption (plus the annual exclusion)

Federal Generation-Skipping Transfer Tax

  • Exemption: $5,430,000
  • Portability: No
  • Rate: 40% on generation-skipping transfers above the exemption

Federal Estate Tax

  • Exemption: $5,430,000 (exemption is decreased by lifetime gifts)
  • Portability: Yes (i.e., surviving spouse may elect to use deceased spouse’s unused exemption, in effect, giving married couples an exemption of $10,860,000)
  • Rate: 40% on the value of the estate above the exemption amount

Federal Income Tax for Trusts and Estates

  • Tax Brackets: see chart below
  • Tax Rates: see chart below
  • Net Investment Income Tax: A 3.8% surcharge tax on net investment income applies to trusts and estates that are above the $12,300 income threshold (i.e., the marginal tax rate on net investment income above that threshold is then 43.4%)
  • Distributable Net Income: Net income that is distributed to beneficiaries of a trust or estate is taxed at the beneficiaries’ level and not at the trust or estate’s level

Chart: Federal Income Taxation of Trusts and Estates

If Taxable Income is: The Tax is:
Not over $2,500 15% of the taxable income
Over $2,500 but not over $5,900 $375 plus 25% of the excess over $2,500
Over $5,900 but not over $9,050 $1,225 plus 28% of the excess over $5,900
Over $9,050 but not over $12,300 $2,107 plus 33% of the excess over $9,050
Over $12,300 $3,179.50 plus 39.6% of the excess over $12,300

State Taxes

Each State has its own set of rules when it comes to estate tax, gift tax, inheritance tax, and income taxation of trusts and estates. Be sure to check with a professional in your State for an update.

For a complete summary of all 2015 Federal tax-related inflation adjustments see Rev. Proc. 2014-61, available here: http://www.irs.gov/pub/irs-drop/rp-14-61.pdf

I hope this helps!

-Matt

© 2015 Matthew D. Brehmer and Crummey Estate Plan.