Palo Alto Estate Planning Blog

It's summer time! I'm off for a two week vacation, and taking the kids (for better or worse). But, if you are planning to go away and leave the kids behind (because you are smarter than I am), please remember to leave a Parental Medical Release Form behind as well. You've signed a milion of these for school field trips, but it's easy to forget this item on your endless pre-vacation to-do list.

However, you, as parents, have legal authority to authorize medical and dental care under California law, and may authorize, in writing, an adult into whose care you've placed a minor, to consent to medical or dental care, or both. Without such consent, a doctor cannot treat a minor, which explains why you've signed so many school field trip forms.

Please click on the link above to get a Parental Medical Release From. Print it out and put it on your fridge. And have a nice trip.

I can't help myself, I see estate planning angles everywhere. Welcome to a new, recurrent, feature of this blog: Lessons from Literature. Whenever I read a good book with an estate planning angle, I'll share it with you here.

Recently, as I listened to Tolstoy's masterpiece, War and Peace, on the way to work, I was struck by the story of the dying Count Bezukhov. As the Count lingers, seriously ill from a series of strokes, in his palace, the family intrique starts. The Count's illegitmate son, Pierre, comes to visit the dying man, at the urging of another noblewoman, Princess Drubetskyaya, (who is scheming on behalf of her own son, Boris). It turns out that the Count has made a new Will, leaving his entire fortune to Pierre, and has left a letter requesting that PIerre be made legitimate by the Czar. This Will and the letter is in a box underneath the dying man's pillow.

The Counts' daughters, however, believe that the fortune will go to them because Pierre is illegitimate, regardless of the Count's new Will. Evil Prince Kuragin, however, informs them that the Count has written a letter to legitimize Pierre. He urges them to destroy this Will and this letter to secure their own fortunes (and his). The daughters decide to steal the new Will, rip up the letter that will make Pierre legitimate, and inherit the estate themselves.

In the end, there's almost a wrestling match between the Princesses trying to destroy the new Will and the older, scheming Princess who intends to preserve it. It's all done with the best of taste of course, but it's still a cat fight. In the end, the Will is secured, the Count dies, and Pierre becomes the new Count Bezukhov, one the richest and most eligible bachelors in all of Russia.

Here's the lesson: if you write a new Will, DESTROY THE OLD ONE. Don't leave multiple versions of your Will laying around which may confuse your heirs, or worse, lead to a Will contest, or, perhaps, a wrestling match. Make sure to store your Will somewhere safe and make certain that your family will be able to find it when the time comes. Many of our clients store their Wills in a safe deposit box at the bank, but many others store them at home, in a fire-resistant safe. Wherever you store it, just make sure that it is in a safe place and that you do not keep your outdated documents there, too. Please feel free to ask us if you're not sure what to keep and what to shred.

It's mother's day and I'm thinking about the fact that my daughter goes to college soon. She also turns eighteen years old in November, and, in addition to the new camera she thinks that she wants for a present, I'm going to surprise her with something else--a Durable Power of Attorney and Authorization for Release of Confidential Health Care Information. I guess that's what comes from being a mom and an estate planner. But once my daughter (and your children, too) turn eighteen, doctors are not going to release confidential health care information about them to you without the consent of your child.

By signing a Durable Power of Attorney your child can name you as an Agent to take care of his or her financial matters if they become incapacitated, and by signing an Authorization for Release of Confidential Health Care Information they are giving doctors permission to answer your questions should your child become ill or injured.

I am fully aware that my daughter would prefer the camera, and would prefer, honestly, not to have to think about the fact that turning eighteen is a big deal, legally, but pretending like she's not growing up isn't going to be sufficient if she ends up in the hospital and I can't find out why.

It's that time of year! We are all thinking about taxes, but here's a tax you may not have given much thought to: the Kiddie Tax. This is a tax that was imposed as a way to prevent high tax bracket parents from shifting income to their lower bracket children by placing investments in the child's name, not the parent's name (a practice that was once relatively common)--I know, I once came home from college, answered the phone, and my mother's accountant actually said, by way of introduction, "you don't know me, but I certainly know you!"

The kiddie tax currently falls on investment income (interest, dividends, capital gains and other unearned income, such as from a trust) earned by children that is over $2000 annually for children aged nineteen or younger (or 24 if the child is a full-time student). Once a child's income reaches that threshold amount, it will be taxed at their parent's highest tax rate. If your child is actually working and getting paid, that income will still be taxed at the child's lower tax rate.

This is relevant to estate planning if you have established an annual gift trust for your children, since income from that trust falls within the definition of 'unearned income.' To minimze income taxes on such a trust, the Trustee could invest in assets that appreciate over time, but don't generate much (if any) taxable income until they are sold (when your children will be older and taxed at their own tax rates).

Here are a few examples: tax exempt muni bonds or Treasury bills that mature after a child turns 24, growth stocks or growth mutual funds that do not pay dividends, index funds or other funds that are managed to generate little taxable income.

As of 2013, the annual gift tax exclusion amount is $14,000. That means that you can give up to $14,000 per year to any one person without having to report that gift on a gift tax return by April of the year following the gift. But that gift has to be completed--if you write someone a check, they have to cash it. If they don't have use of the money in 2013, that's not going to qualify as an "annual gift."

But what if you want to give an annual gift to your five year old? You don't really want to give her the money now.....ideally, you'd like to make those annual gifts to her but keep the money in trust until she grows up, when she can spend it, you hope, responsibly. Can you do that? If you give her a gift in 2013, that she can't spend until 2034, is that really an "annual" gift in 2013?

Yes! As a matter of fact, you can create a trust that can hold those annual gifts for years, provided that trust has what's called "Crummey Powers" (named after the attorney who came up with the idea.) A Crummey Trust provides for something called a 'withdrawal power.' If your Trustee sends your daughter's guardian (that's you) a notice, letting you know that $14,000 has been deposited into her trust, and that she has thirty days to withdraw the money (or whatever your trust says, provided that it's a reasonable amount of time to withdraw the money), but if she does not withdraw the money (which she won't, of course) it will stay in trust until 2034, that WILL qualify as an "annual" gift.

Why? Well, the IRS has decided that if the trust's beneficiary has a real opportunity to withdraw that gift in the year in which it was given, but chooses not to do so, the gift will qualify as an annual exclusion gift, despite the fact that in real terms, that beneficiary will not be able to use that money in that year.

Crummey Trusts make it possible for parents, grandparents, and others, to leverage the use of annual gifts over years to build up a trust for children that will be useful to them as those children mature. Crummey Trusts can be limited in scope or broad--they can be used as college education trusts, or limited to the purchase of a home. They can terminate when a child is eighteen or eighty.

Virtually every estate plan we do for clients includes an Advance Health Care Directive, which is a legal document that allows you to name agents who can act on your behalf with respect to medical decisions if you are unable to communicate your wishes directly. One of the other questions on that form is whether or not you want to be an organ donor.

I've found that, of all the things we discuss during an estate planning meeting, that question tends to evoke a strong response--often negative. And that's too bad. In California alone, there are more than 19,000 peple currently waiting for organ transplants, and more than 92,000 people waiting nationally, according to Donate for Life, the California Donor Registry. According to the California Transplant Donor Network, of those waiting for a transplant, one in three will die due to a shortage of organs.

I'm not saying that people shouldn't be free to make that choice, but I thought I'd take some time here to respond to some of the most common concerns that are raised by people who have a negative response.

1. If I sign up to be an organ donor, doctors won't treat me aggresively, or, worse, they'll hasten my death to get to the organs. Actually, two doctor must make a determination that a patient is brain dead before a donor's family is consulted about transplantation. These doctors are not the doctors involved in organ transplantation. Also, aggressive medical treatment is the best way to preserve the organs, not neglect.

2. I'm too old, no one would want my organs. Actually, people of all ages can be organ donors. According to the Organ Donation Network, two-thirds of individuals waiting for organ transplants are over fifty. The issue isn't your age, it's how healthy you are when you die. Don't rule yourself out.

3. Donation is against my religion. Actually, almost all major religions support organ donation as a personal choice.

Whatever you choose to do, take a moment to educate yourself first.

Until now, estate planners have primarily focused on reducing the potential estate tax bill for their clients. This was a sensible approach, since the estate tax rate has traditionally been quite high and the exemption from federal estate tax has been relatively low.

All this began to change in 2001, and now, with the 2012 Taxpayer Relief Act, the landscape is completely different: the estate tax rate is capped at 40%, and the exclusion is set at $5 million, and indexed for inflation ($5.25 million in 2013). Also, married couples will be able to use the unused exclusion of the first spouse to die, as long as the survivor files an estate tax return requesting it, which is called portability.

What this means for most families (who don't have $5 million, let alone $10 million), is that reducing estate tax may not be the most important financial estate planning goal any more. Instead, families may want to focus instead on minimizing their exposure to capital gains taxes. Capital gains taxes are levied upon the difference between what someone buys an asset for (called 'basis') and what they sell that asset for--the lower the basis, the higher the gain, and the higher the tax. In 2013, the maximum tax rate for long-term capital gains (for assets held longer than one year) is 23.8% for high income families.

When a person dies, though, their assets receive what's called a 'stepped-up basis.' If your mother owned stock in a company that she bought for $1 in 1964, and that stock was worth $100 dollars in 2013, you will inherit that stock at a basis of $100--its basis is stepped up to the value it had on the day your mother died. If you then sell that stock, you will be subject to capital gains taxes only on the difference between $100 and the sales price.

Here's the trade-off: Your mother's estate will be subject to estate tax on the stock at that stepped up basis, $100/share, too. Until now, most estate planners would have tried to use tools to remove, or reduce, the value of your mother's taxable estate. Those tools would have reduced her estate, but they would also have limited that step up in basis. Because estate taxes have traditionally been close to twice the rate of capital gains taxes, this seemed like a reasonable trade off: reduce potential estate tax, even if it meant that your heirs would pay more in capital gains taxes when they sold the assets in the future.

Today, however, the logic is different--if your mother doesn't have a taxable estate, retaining that appreciated stock in her estate has no estate tax consequence, and inheriting it at a stepped up basis saves you a lot in capital gains taxes.

For familes who do not have taxable estates under the current law, capturing this step-up in basis will represent a huge potential tax savings. Keeping assets in the older generation's estate now means that the younger generation will escape paying capital gains upon the sale of highly appreciated assets. Suddenly, estate planners are trying to figure out what are the best assets to keep in an estate, rather than trying to get assets out of that estate.

As we head into tax season, now is an excellent time to take a moment to make sure that your assets are correctly titled to your family's living trust (if you have one). Assets held by your trust should say something like "Joe Smith,Trustee of Smith Family Trust," or "Joe and Jane Smith, TTE" on the top. If you see your name alone on the top of the statement, that account probably isn't in the trust yet.

What accounts should be in your trust? You should have your house and your large bank and brokerage accounts in the trust. Most people leave their everyday bill paying account out of the trust because you can easily transfer small accounts (up to a total of $150,000 currently) into a trust after the death of the account holder. Cars are also generally not put into trusts, unless they are valuable collector's items that will appreciate in value. Finally, your retirement accounts (IRA's, 401-k's, 403-b's, and their Roth cousins) are not held by your trust. Instead, your retirement accounts will pass to those named as beneficiaries of such accounts.

To transfer an account into your trust, you will need to get a form from the financial institution holding that account. Sometimes this is called a Trust Transfer Form, sometimes it's called a Trust Account Application, and sometimes it's called a Change of Title form. Whatever it is called, its purpose is to tell the institution that you used to own the account as yourself, and now you want the trust to own it. If you can't find the form online, call and tell the person who answers the phone that you want to transfer your account into a living trust.

These forms generally ask you the following things:

1. The name of the trust.
2. The date the trust was signed.
3. The name of the Grantors (the people who created the trust).
4. The name of the Trustees (the people who manage the trust).
5. The state law that governs the trust.
6. Who has the power to amend and revoke the trust (these are the Grantors).
7. The trust's taxpayer identification numbers (this is the Social Security Number of one of the Grantors, if they are boh still alive).
8. Whether the trust has been amended or restated.

Lots of people own their homes as joint tenants. Usually, this is because when they bought their house the title company suggested that they hold title this way. Sometimes, two people who aren't married buy propery together and hold it as joint tenants as well.

Joint tenancy, though ubiquitous, isn't always the right way for two people to own property together and sometimes it can have really unfortunate consequences. If you are a married couple, holding property as joint tenants can result in unnecessary capital gains taxes if the property is sold after one person dies. If you are two unrelated parties, holding property as joint tenants may mean that the property won't pass as you intended it to pass after your death.

What joint tenancy means, legally, is that both tenants own an undivided fifty percent of the property and that if one joint tenant dies, the surviving joint tenant owns the entire property by right of survivorship. This right of survivorship happens automatically by operation of law upon the death of the first joint tenant. No probate is required to transfer the property, which is why title companies encourage home owners to take title in this way.

But if two people buy property together and either own unequal shares of that property or would like the right to leave their share of that property to someone else at their death (or both) joint tenancy is not the right way to hold title. In that case, they need to own the property as tenants in common. This means that, upon the death of one owner, his or her share will pass by will or trust to another person. In the case of a will, a probate will be required to pass the property to the beneficiary; in the case of a trust, no probate will be necessary, and a trust transfer deed will be what's needed to transfer the property.

If you own property as a joint tenant and discover that you do not want the other joint tenant to own the whole property at your death, you can sever that joint tenancy and create a tenancy in common by recording a deed that changes the way your interest is held, even without the consent of the other party.

If you are a married couple and would like to avoid extra capital gains upon the sale of your property after one person dies, you can hold title as community property with right of survivorship. When held in this way, the property will still automatically pass to the surviving person, but he or she will get a full step-up in basis on the property after the first death.

A provision in the American Taxpayer Relief Act of 2012, the fiscal cliff deal passed by Congress and signed by the President in January, 2013, provides people 70 1/2 years and older the ability to donate up to $100,000 per year directly from their IRA's to charities. This provision will last until December 31, 2013.

Until February 1 of this year, people who took out their required minimum distributions in December 2012 or January 2013 can donate cash to charity and elect to count that distribution as a 2012 charitable IRA rollover. For donations during the rest of 2013, you need to ask the plan administrator to send the cash directly to the charity. To read more, here's a good article from the National Council on Nonprofit.

Happy New Year! As you have no doubt heard, on January 1, 2013, Congress passed a compromise bill to avoid the 'fiscal cliff.' Here's what that bill does with respect to the estate and gift tax, as currently reported:

1) It raises the maximum estate tax rate to forty percent (40%) from the thirty-five percent (35%) rate of 2012.

2) It maintains the exemption from both estate and gift tax at $5 million, indexed for inflation from 2011, which means $5.25 million is excluded from lifetime gifts or estates of those dying in 2013.

3) It extends the portability provisions of the last law, which means that the surviving spouses of those who die in 2013 and after may make use of the unused exemption from estate tax left by the first spouse to die, provided they file a timely estate tax return claiming portability. This means that couples can make maximum use of both available exemptions for their families.

As I write this on Sunday, December 30, 2012, Congress has not yet made a deal to avoid the 'fiscal cliff' and the estate and gift taxes look certain to revert to their 2001 levels, at least until Congress and the President do make a deal. For those of you considering a very last minute gift, by check, before the year's end, the check should be written, delivered, and cashed (or at the very least presented to the bank for cashing) by the recipient before the end of the year to qualify as a 2012 gift.

In these waning days of 2012, when so many of our clients are working to give assets to their children or grandchildren to take advantage of the $ 5.12 million federal estate tax exclusion, I wanted to take a moment to warn against the accidental gift--something I've seen a lot of these last few months as well. What's an accidental gift? It is the transfer of an asset for less than fair market value. Even though it may not have come with a ribbon, such a transfer still qualifies as a gift under our tax code,and, if it is worth more than $13,000 (in 2012, and will rise to $14,000 in 2013) that's a taxable gift. A client will sometimes come to our office already having made such a transfer, and they are often quite surprised (also not happy) when I tell them that they have to report that gift on a gift tax return by April of the year following the gift.

Here's a list of the most common accidental gifts that I've seen this year.

1. Putting a child's name on a parent's deed. That's a gift of one-half the value of the house to that child. Here's a better idea: create an estate plan that allows your child to inherit that house at your death. This avoids any lifetime gift and they'll inherit the house at a stepped-up basis.

2. Lending a child money with no interest. That's a gift to your child of the value of the interest that you are not charging. Here's a better idea: lend your child money at an interest rate equal of the applicable federal rate (afr), which is published monthly. Also, put the loan in writing.

3. Paying off a loan to your child before the end of the term. That's a gift to your child of the amount you've paid off on the note. (This may be a great idea, and I don't have a better one to offer. I just want you to realize that you've made a taxable gift.)

4. Giving your child money for college tuition in excess of the annual exclusion amount, which is currently $13,000. That's a gift to your child of the amount of the gift over the annual exclusion. Here's a better idea: pay the institution for that tuition directly--that payment is excluded from the gift tax as long as you make it directly to the institution.

5. Giving your child money to pay a medical expense in excess of the annual exclusion. That's a gift to your child of the amount of the gift over the annual exclusion. Here's a better idea: pay the medical provider directly--that payment is excluded from the gift tax as long as you make it directly to the medical provider.

Many of our clients have significant assets invested in their retirement accounts. Sometimes these accounts were established years ago, requiring little thought as month after month retirement savings went in automatically. Such low maintenance is sort of a good news/bad news piece of the estate planning process-- it makes it all too easy to forget how you set those accounts up. But it's really important to review your accounts periodically to make sure that you've designated the right beneficiaries to inherit those accounts.

Regardless of how carefully you've structured your Will or Living Trust to manage your assets for those you love, it's those beneficiary designations that determine who will inherit your retirement assets, not your estate plan. If long ago, you designated your first born to inherit that IRA, then had several more children---guess what? Only that one designated child will inherit those assets, not the rest of your kids. If you've spent time and money working with a lawyer to plan your estate so that it won't pass through probate, then write the wrong thing down on a beneficiary form (or nothing at all), you may very well have to probate your retirement account, despite all of your careful planning.

Whenever you update your estate plan, please take the time to contact your retirement plan administrators and confirm your most current beneficiary designations. And have them send you a copy of those designations that you can place with your other estate planning documents. You want that written confirmation for two reasons: 1) to help your heirs know who you have designated as beneficiaries and 2) to confirm that the company has the proper designations on file--just in case they lose their records in a merger or sale.

Here are some things to know about beneficiary designations for retirement assets:

1. Name your spouse as the primary beneficiary. Your spouse will be able to roll the plan over into their own IRA, and defer required minimum distributions until they are 70 1/2. That's a huge benefit that only your spouse can get.

2. Name individuals as your secondary beneficiaries if they are adults. If your children are adults, name them as secondary beneficiaries directly--for example 50% to each of your two children, rather than naming your trust. Naming individuals gives each beneficiary maximum flexibility to do what's called 'stretch out' planning -- withdrawing the assets slowly, over that person's estimated lifespan, so that they only have to pay tax on the withdrawals while the balance of the account can continue to grow.

3. Don't name your estate as a beneficiary. If you write down 'my estate' on a beneficiary designation form, you are going to have to transfer those assets via a probate proceeding (if the account exceeds the limit for small estates, which is currently $150,000 in California). That will mean unnecessary time and expense, since if you actually name a beneficiary, the whole account can be transferred without a probate at all.

4. Don't leave the form blank. If you don't name a beneficiary at all, you will be subject to that institution's default rules, which vary. Sometimes, they'll assume you meant to name your spouse (which is good; sometimes they'll assume you meant to name your estate (that's bad). Don't take the chance, fill in the blanks for them.

5. If you leave your account to minor children, get advice. If you want to name your grandchildren as secondary beneficiaries, or if your children are young, get some advice. You may be able to designate an adult as a custodian for that plan, which would allow an adult to manage the account for your children until they reach the age of twenty-five. It may make sense to name your living trust (if that trust establishes a trust for children) as the secondary beneficiary.

6. Don't make it too complicated. If you have special plans for your retirement assets, and want to split them up among many people, or want to designate some assets to a trust for the benefit of a certain beneficiary, don't try to use a company's form to write that down. If you are doing anything more complicated than designating a few people in equal shares, it probably makes more sense to designate your Living Trust as the beneficiary. This may limit the flexibility the beneficiaries will have in planning their withdrawals, but it may accomplish your ultimate objectives. The Trust can set out your plan for the assets--don't make a large financial institution serve as your estate planner.

Somehow, it's October tomorrow and that means that 2012 is drawing to its end. If you have been thinking that this would be a good year to make a gift to your children, you'd better act soon, not just because the holidays will soon be upon us, but because making a gift that's larger than $13,000 requires that you take certain steps before the gift is made.

Unless you've been living an unusually sheltered life, you are probably aware of the fact that until December 31, 2012, each of us is able to give up to $5.12 million dollars away, free of gift tax. That's not just an incredibly large exclusion from the gift tax -- that's the largest exclusion that there's ever been from the gift tax. Unless Congress acts before the end of this year, the current law will expire in 2013, and the gift tax exclusion will return to what it was in 2001, $1 million. Not only that, but the top gift tax rate will return to its 2001 level, 55%, up from the current rate of 35%,

For this reason, we've had a lot of inquiries from clients about making major gifts before the end of the year, either outright, in trust, or via gifts of percentage interests in a limited liability company (LLC) or family limited partnership (FLP). We love to help our clients achieve their goals, and, of course, we love hearing from them, but what some of them don't know is that even though a major gift this year is free of the gift tax, it still must be reported on a Gift Tax Return (Form 709) by April 15th of the year following such a gift.

The IRS requires that you adequately disclose each gift that you make that exceeds the annual gift tax exclusion amount (currently $13,000) on the Gift Tax Return. Adequate disclosure means that you describe what you transferred, and, most importantly, properly determine the fair market value of the gift. Gifts of cash and securities are easy to value. Gifts of other items, like jewelry or valuable art, must be appraised by someone qualified to determine that item's value--such as an auction house.

For gifts of real property, which are the ones we've been asked about the most, you must attach an appraisal by a qualified appraiser. A 'qualified appraiser' is not your friend down the street who dabbles in real estate and is willing to do a quick set of comps for you--- it means an appraiser who is qualified to appraise the kind of property you are giving (residential v. commercial v. farm land or undeveloped land) and who can prepare an appraisal in accordance with generally accepted appraisal standards. And guess what? Appraisers are really busy right now! So if you want to make a gift before the end of the year, now would be the time to get that appraisal done.

If you are reading this and thinking that you had the mountain cabin appraised two years ago as part of your last re-fi, that won't be sufficient. The IRS wants the appraisals to be accurate and timely. We advise our clients that, if possible, they get the appraisals done within 60 days of making the gift--a deadline which comes from the IRS requirements for a charitable donation, but one that we think is an excellent rule of thumb for non-deductible gifts as well.