Skyrocketing Probate Fees – Another Reason to Avoid Probate Court

As of July 1, 2015, Connecticut probate courts earned the dubious distinction of charging the highest probate fees in the U.S.  Amazingly, the Connecticut legislature voted to completely cut general fund support for the state’s probate courts for the next two fiscal years, thereby creating a $32 million deficit.  In order to cover the shortfall, the fees charged for settling a deceased person’s estate in Connecticut were significantly increased and the $12,500 cap on probate fees was eliminated.  To make matters worse, these changes apply retroactively to all deaths dating back to January 1, 2015.  As a result, it is estimated that a handful of Connecticut estates will owe in excess of $1 million in probate fees and at least a dozen will owe in excess of $100,000.

Which Other States Also Charge High Probate Fees?

Connecticut’s new fee structure assesses a 0.5 percent fee on estates worth more than $2 million and most probate court filing fees were also increased from $150 to $225.  While both North Carolina and New Jersey assess probate fees of 0.4 percent, North Carolina’s fee is capped at $6,000, but New Jersey does not have a cap.  In Maryland the probate fee for an estate valued between $2 million and $5 million is $2,500 and for estates valued over $5 million the fee is $2,500 plus .02 percent of the excess over $5 million.

How Can Your Loved Ones Avoid Paying Probate Court Fees?

Even if you don’t live in a state that charges high probate fees now, budget shortfalls and fee changes could occur at any time. Also, in most situations it’s easy to keep your estate out of probate court and avoid all of the fees and costs associated with it:

·         Gift your estate while you’re still alive.  While it really isn't practical to give all of your assets away during your lifetime, it is possible to gift assets into a special type of trust or a family business entity of which you can be a beneficiary or stakeholder. 

·         Own property jointly with others.  If an asset such as a home is owned by two people as joint tenants with rights of survivorship and one of the owners dies, the surviving owner will become the sole owner of the home outside of probate.

·         Use beneficiary designations.  By design, life insurance and retirement accounts (such as IRAs, 401(k)s and annuities) avoid probate through the designation of a beneficiary.  In addition, you can name a beneficiary for your bank accounts using a payable on death account and for your investment accounts using a transfer on death account.

·         Create and fund a revocable living trust.  When you create a revocable living trust and transfer the title of your assets into the name of the trust, you will no longer hold title to your assets in your individual name.  Instead, your assets will be converted into property under the control of the Trustee (which can be you while you’re alive and a spouse, child, friend or bank after you die).  After you die, the property held in the trust will pass to the beneficiaries you name in the trust agreement outside of probate. 

Final Thoughts on Avoiding Probate Court

While probate is easy to avoid using any of the methods described above, there are pros and cons that need to be considered for each method.  Please contact our office if you are interested in determining the best way for your estate to avoid probate court and all of the fees and costs associated with it.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

What You Need to Know About the Final Estate Tax Portability Rules

Recently the IRS issued the final rules governing the “portability election” as it relates to the federal estate tax exemption.  Married couples need to understand how these final rules may affect their existing estate plans, while recent widows and widowers need to understand how these finals rules may affect their deceased spouse’s estate.

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.  Since in 2015 the federal estate tax exemption is $5.43 million per person (the exemption changes every year since it is indexed for inflation), this means that a married couple can potentially pass on $10.68 million to their heirs free from federal estate taxes.

To properly make the portability election, the surviving spouse must timely file a federal estate tax return, known as the “United States Estate (and Generation-Skipping Transfer) Tax Return,” or “Form 706” for short.  Form 706 is due on or before nine months after the deceased spouse’s date of death, but an automatic six-month extension of time to file the return can be requested by filing an “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,” or Form 4768 for short, on or before the due date of the estate tax return.

Which Estates Are Subject to the Final Estate Tax Portability Rules?

The portability election first went into effect for the estates of decedents who died on or after January 1, 2011, and in response the IRS issued temporary regulations to guide taxpayers and their advisors through properly making the election.  The final regulations that were recently released replace the temporary regulations for the estates of decedents who die on or after June 12, 2015, while the temporary rules still apply to the estates of decedents who died on or after January 1, 2011, and before June 12, 2015.

What Do the Final Rules Provide?

The final rules clarify that a regulatory extension of time to make the portability election will only be granted to estates that have a gross value below the estate tax exemption in effect in the year of death.  In other words, in 2015 the gross estate must be valued less than $5.43 million in order for a request for a regulatory extension to be made. 

The final rules also make it clear that the administrator of the estate of a decedent who was not a U.S. citizen at the time of death may not make a portability election on behalf of the non-citizen decedent.

Unfortunately the IRS ended up rejecting a recommendation made by the American Institute of CPAs for the creation of a shorter version of Form 706 that would be used solely for the purpose of making the portability election.  The IRS cited problems it has had with other types of abbreviated forms and the difficulties and costs associated with maintaining alternate forms as the reasons for rejecting this recommendation.

How Do the Final Rules Affect Existing Estate Plans?

Married couples who already have an estate plan should consult with their estate planning attorney to determine if any changes need to be made to their plan in view of these final rules.  Things to consider include the potential for an estate to be subject to state estate taxes, whether the portability election is a viable option in view of second or later marriages, the projected value of the couple’s estate over their life expectancies, and the loss of the step up in basis when traditional AB Trust planning is used.

How Do the Final Rules Affect Recent Widows and Widowers?

Surviving spouses of decedents who died within the past eight months should immediately consult with an estate planning attorney to determine if the portability election can and should be made with regard to their deceased spouse’s estate.  Failure to timely make the election or seek an extension may end up shortchanging heirs and putting the estate administrator at risk of being sued.

Please do not hesitate to contact our office if you have any questions about the final estate tax portability rules.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

Financial Firms Roll Out Form Aimed at Stopping Financial Elder Abuse

With cases of financial exploitation of the elderly on the rise, advisors who work with older clients are looking for ways to head off the abuse before it happens.  Enter the “Emergency Contact Authorization Form,” a document in which clients can list a trusted person who should be contacted if an advisor suspects a client is starting to lose their mental capacity or, worse yet, being financially abused or scammed.

How Does an Emergency Contact Authorization Form Work?

The Emergency Contact Authorization Form is a document which allows you to identify someone your financial advisor can contact if your advisor becomes concerned about your ability to continue to manage your finances or believes you are being taken advantage of financially by a relative, friend, caregiver, or even a complete stranger.

The Emergency Contact Authorization Form does not take the place of your “Durable Power of Attorney,” which is a legal document in which you give a person you trust the authority to make financial decisions and carry out financial transactions on your behalf.  Instead, the form allows you to designate an individual your advisor can contact to discuss concerns they have about your slipping mental capacity, unusual activity in your accounts, requests for transfers of large sums of money to an unknown person or a foreign bank account, and the like.  This designated individual could be the same person as the agent named in your Durable Power of Attorney or some other trusted person in your life. The idea is that once your advisor makes your emergency contact aware of the issues, your contact can reach out to you to determine if the advisor’s concerns are legitimate.

What Should You Do?

Since your financial advisor is in a unique position to know your financial history (for instance, you take a trip to Europe every June, you have been helping your grandkids with their college tuition, you like to make your charitable donations in October to avoid the year-end rush), your advisor is also in a unique position to spot unusual activity and requests.  Thus, when your advisor asks you fill out an “Emergency Contact Authorization Form,” carefully consider who you should name, discuss your choice with your advisor, complete the form, let the person you’ve chosen know that they have been designated, and give that person your advisor’s contact information.

Nonetheless, keep in mind that while an Emergency Contact Authorization Form is a good start, it will only work at the institution where it is on record.  To insure that all of your financial accounts will continue to be managed and your bills will get paid if you become mentally incapacitated, you will need to sign a Durable Power of Attorney. 

Please contact our office if you have any questions about Emergency Contact Authorization Forms, Durable Powers of Attorney, or if you suspect a family member or friend is being financially exploited or abused. 

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

5 Reasons Why Uncle Bill May Not Make a Good Trustee

If you have created a dynasty trust that you intend to last for decades into the future, choosing the right trustee is critical to the trust’s longevity and ultimate success.

Initially you may think that a family member, such as a sibling (“Uncle Bill” to your children, who are the initial beneficiaries of your Dynasty Trust), will be the best choice as trustee.  After all, Uncle Bill understands the personalities and varying needs of your children, and since Bill has always been frugal, he will surely keep the costs of administering the trust down. These are good reasons to possibly select a family member, like Bill, to serve as trustee.

However, Uncle Bill may not make a good trustee for a long-lasting dynasty trust since he will probably not be equipped to handle all of his fiduciary obligations on his own.  Instead, he will need to hire legal, investment and tax advisors to insure that the trust is being distributed, managed and invested as you have intended.  All of these expenses will add up and may ultimately cost much more than the fees of a corporate trustee, such as a bank or trust company. Many corporate trustees can meet all fiduciary obligations under one roof for one comprehensive fee. 

Below are five reasons why you should consider choosing a corporate trustee for your dynasty trust instead of Uncle Bill:

1. A Corporate Trustee Doesn’t Have a Potentially Disruptive Personal Life.  A corporate trustee won’t become ill or die, get married or divorced, have children or grandchildren, go on an extended vacation, move to a foreign country, or get distracted by day-to-day life that can get in the way of properly administering your trust.
2.  Corporate Trustee is Unbiased.  A corporate trustee won’t favor one of your children over another (unless that’s what you intended) and will act in an unbiased manner in making distributions that will benefit both the current and remainder beneficiaries.
3. A Corporate Trustee Avoids Conflicts of Interest and Self-Dealing.  A corporate trustee won’t sell the family company or a vacation home (that you intended to eventually go to your grandchildren) to him or herself or a friend at less than fair market value.
4. A Corporate Trustee Invests Appropriately.  A corporate trustee won’t invest all of the trust assets in a money market, real estate, or hedge fund but will diversify the portfolio to benefit both the current and remainder beneficiaries (subject to any specific instructions you list in the trust agreement).
5. Corporate Trustee Has Expert Knowledge.  A corporate trustee won’t need to hire a slew of attorneys and accountants to interpret the trust agreement and will keep current on changes in the laws governing trusts, fiduciaries and taxes.

Final Considerations

The duties and responsibilities of a trustee are extensive:  From managing the requests and expectations of the current and remainder beneficiaries, to providing periodic reports of the trust assets, liabilities, receipts and disbursements to the current and remainder beneficiaries, to prudently investing the trust assets, to preparing and filing all required tax forms, the work of a trustee seemingly never ends. 

Because of the breadth of duties and responsibilities, a corporate trustee rather than Uncle Bill may be the best option for your dynasty trust.  Please contact our office if you have any questions about the selection of a trustee generally or the use of corporate trustees, so that we can assist you in selecting the right individual or entity to serve as your trustee.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.