Is a Payable on Death Account Right for You and Your Family?

Payable on death accounts, or “POD accounts” for short, have become popular for avoiding probate in the last decade or so. 

What is a POD Account?

A POD account is a type of bank account authorized by state law which allows the account owner to designate one or more beneficiaries to receive the funds left in the account when the owner dies.

A POD account allows the owner to do what he or she pleases with the funds held in the account during the owner’s lifetime, including spending it all and changing the beneficiaries of the account.  After the owner dies, if anything is left in the POD account, the beneficiaries chosen by the owner will be able to withdraw the remaining funds without the need for probating the account by presenting an original death certificate of the owner.

What Can Go Wrong With a POD Account?

POD accounts sound great, don’t they?  In general, POD accounts are easy to set up and make sense for many people.  A handful of states now even recognize POD deeds for real estate and POD designations for automobiles.   

Nonetheless, POD accounts may lead those who create them to believe that they have an “estate plan” and no additional steps will need to be taken.  This may or may not be true.  Below are a few examples of what can, and often does, go wrong with POD accounts:

1. POD accounts can be set up as joint accounts that become payable on death after all of the owners die.  This means that if a husband and wife in a second marriage set up a POD account that will go to their six children from their first marriages after both die and the husband dies first, then the wife can simply change the POD beneficiaries to her own three children and disinherit the husband’s three children. 

2. Same facts as above, except that the wife remarries for a third time.  She could change the beneficiary of the POD account to her new husband, thereby disinheriting her children and her deceased husband’s children. 

3. If there is only one POD account owner and he or she becomes mentally incapacitated, then a valid power of attorney or court-supervised guardianship or conservatorship might be needed to access the POD account to help pay for care for a sick loved one. 

4. If a POD beneficiary is a minor under the age of 18 or 21 (this depends on state law), then a court-supervised guardianship or conservatorship may need to be established to manage the minor’s inheritance. 

5. If all of the named POD beneficiaries predecease the account owner, then the account may have to be probated.

These are just a few examples of why POD accounts should not be a primary asset transfer mechanism in your estate plan. You need to have a will, a revocable living trust, a power of attorney, and a health care directive in place to insure that you and your property are protected in case you become mentally incapacitated and to make sure that your property goes where you want it to go after you die.

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.

How to Easily Integrate Asset Protection Trusts into Your Estate Plan

Asset protection has become a common goal of estate planning.  Asset protection trusts come in many different forms and can be used to protect property for your use and benefit as well as for the use and benefit of your family. 

What is An Asset Protection Trust?

An asset protection trust is a special type of irrevocable trust in which the trust funds are held and invested by the Trustee and are only distributed on a discretionary basis.  The purpose of an asset protection trust is to keep the trust funds safe and secure for the benefit of the beneficiaries instead of having the funds be an available resource to pay a beneficiary’s debts. 

Asset Protection Trusts Equal Inheritance Protection

Leaving an inheritance outright to your child or grandchild without any strings attached is risky in this day and age of high divorce rates, lawsuits, and bankruptcies.  Aside from this, your beneficiaries may not have developed the financial skills necessary to manage their inheritance over the long run.  There is also the very real risk that an outright inheritance left to your spouse will end up in the hands of a new spouse instead of in the hands of your children or grandchildren.  Finally, a beneficiary may be born with a disability or develop one later in life that will end up rapidly depleting their inheritance to pay for medical and other bills.

There are a number of different types of asset protection trusts that you can establish to insure your hard earned money is used only for the benefit of your family:

·         Trusts for minor beneficiaries – Minor beneficiaries cannot legally accept an inheritance, so a discretionary trust for a minor is a necessity.

·         Trusts for adult beneficiaries – Adult beneficiaries who are not good with managing money, are in a lawsuit-prone profession, have an overreaching spouse, or have an addiction problem will benefit from a lifetime discretionary trust. 

·         Trusts for surviving spouses – If you are worried that your spouse will not be able to manage their inheritance, will remarry, or will need nursing home care, you can require your spouse’s inheritance to be held in a lifetime discretionary trust.

·         Trusts for disabled beneficiaries – Disabled beneficiaries who receive an inheritance outright run the risk of losing government benefits and will need to spend down the funds to requalify, but an inheritance left to a special needs trust can be used to supplement, not replace, government assistance.

Drafting an Asset Protection Trust Your Way

Asset protection trusts designed for inheritance protection can be as rigid or as flexible as you choose.  For example, a beneficiary can be added as a co-trustee at a certain age or after the beneficiary reaches a specific goal such as graduating from college.  Another option is to name a corporate trustee, such a bank or trust company, but give the beneficiary the right to remove and replace the corporate trustee with another one. 

You can also make trust distributions as limited or as broad as you choose.  For example, you can state that the funds can only be used to pay medical bills or for education, or the Trustee can be given broad discretion to make distributions in the best interests of the beneficiary.  You may also want to require the Trustee to take into consideration the beneficiary’s income and other assets before making distributions.  Alternatively, the Trustee can be given the authority to deplete the trust for one of the beneficiaries to the detriment of the remainder beneficiaries.  If there are multiple beneficiaries, such as a trust for the benefit of your spouse and your children, the Trustee can be directed to give preferential treatment to one or more beneficiaries over the others.

The Bottom Line on Asset Protection Trusts

Asset protection trusts offer a great deal of planning opportunities for people of even modest means.  We are available to answer your questions about asset protection trusts and help you integrate this type of planning into your estate plan.

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.

Five Changes Proposed in President Obama’s 2016 Budget

The Obama administration recently released its budget proposal for the 2016 fiscal year.  As in past years, this budget proposes changes to the laws governing federal estate, gift and generation-skipping transfer (GST) taxes.  Several of these changes would raise revenue by limiting the tax benefits achieved by using certain estate planning techniques, while others would decrease exemptions and increase rates.  In addition, the fifth proposal discussed below is a brand new one that has raised some eyebrows:

1.      Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009.  The 2016 budget calls for the estate and GST tax exemptions to decrease from $5.43 million to $3.5 million, the lifetime gift tax exemption to decrease from $5.43 million to $1 million, and the top estate, gift and GST tax rate to increase from 40% to 45%.  While portability of the estate and gift tax exemptions between married couples would remain in effect, the exemptions would not be indexed for inflation.  If President Obama’s budget is enacted as proposed, these changes would go into effect on January 1, 2016.

2.      Modify Transfer Tax Rules for Grantor Retained Annuity Trusts (GRATs).  A GRAT is a sophisticated estate planning tool that can be used to reduce or eliminate the estate tax’s impact on your estate. The 2016 budget calls for GRATs to have a minimum term of ten years and a maximum term equal to the life expectancy of the annuitant plus ten years.  In addition, the remainder interest in a GRAT would be required to have a minimum value equal to the greater of 25% percent of the value of the assets contributed to the GRAT or $500,000 (but not more than the value of the assets contributed).  Finally, any decrease in the annuity during the term of the GRAT and tax-free exchanges of assets held in the GRAT would be prohibited.  These changes would apply to GRATs created after the date of enactment.

3.      Limit Duration of Generation-Skipping Transfer (GST) Tax Exemption.  The 2016 budget calls for limiting the time period that multi-generational, dynasty trusts would remain estate and GST tax free to 90 years.  This limitation would apply to trusts created after the date of enactment and to the portion of a pre-existing trust attributable to additions to the trust made after that date (subject to rules substantially similar to the grandfather rules currently in effect for additions to trusts created prior to the effective date of the GST tax).

4.      Simplify Gift Tax Exclusion for Annual Gifts.  The 2016 budget calls for the elimination of the so-called present interest requirement for gifts that qualify for the annual gift tax exclusion (which is currently $14,000 per donee).  Instead, a new category of transfers would be created, and an annual limit of $50,000 per donor would be imposed on the donor’s transfers of such property. This new category would not require the existence of any “Crummey” withdrawal or put rights.  This new category would include transfers in trust, transfers of interests in pass-through entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee.  These changes would go into effect for gifts made after the year of enactment. If enacted, this would significantly change the way that gifts to family members would need to be planned.

5.      Reform the Taxation of Capital Income.  The 2016 budget calls for the highest long-term capital gains and qualified dividend tax rate to increase from 20% to 24.2%.  This would increase the maximum capital gains and dividend tax rate when including net investment income tax to 28%.  In general most transfers of appreciated property would be treated as a sale of the property, including when an appreciated asset is gifted during lifetime or bequeathed at death.  Certain exemptions and exclusions would apply.  These changes would go into effect for capital gains realized, dividends received, gifts made, and deaths occurring after December 31, 2015.

Where Do We Go From Here?

The federal government is in constant need of raising more revenue.  The proposed changes to gift and death tax laws in the Obama 2016 budget will only affect a limited number of taxpayers but would result in billions of dollars in new tax dollars.  Therefore, it is important to monitor these revenue-generating proposals to avoid missing a change that will affect your estate planning goals.  In addition, if you have been on the fence about creating a GRAT or implementing another type of gifting strategy, then now is the time to move forward before the benefits of these techniques might disappear.

Constant change seems to be the rule in Washington and the last few years have seen significant change to laws affecting your estate plan. If your estate plan hasn’t been professionally reviewed recently, you should schedule a meeting with us so we can get you up to date with recent laws that have been enacted.

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.

It’s Not Just About Death and Taxes: The Essential Legal Documents You Need for Incapacity Planning

Comprehensive estate planning is about more than your legacy after death, avoiding probate, and saving on taxes. It must also be about having a plan in place to manage your affairs if you become mentally incapacitated during your life. 

 What Happens Without an Incapacity Plan?

Without a comprehensive incapacity plan in place, a judge can appoint a guardian or conservator to take control of your assets and health care decisions.  This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship.  Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship or conservatorship proceeding.

What Happens to Your Finances During Incapacity?

If you are legally incapacitated, you are legally unable to make financial, investment, or tax decisions for yourself. Of course, bills still need to be paid, tax returns still need to be filed, and an investment strategy still needs to be managed.

So, you must have these two essential legal documents for managing finances in place prior to becoming incapacitated:

1. Financial Power of Attorney.  This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document.  

Financial Powers of Attorney come in two forms:  “Durable” and “Springing.”  A Durable Power of Attorney goes into effect as soon as it is signed, while a Springing Power of Attorney only goes into effect after you have been declared mentally incapacitated.

2. Revocable Living Trust.  This legal document has three parties to it:  The person who creates the trust (you might see this written as “Trustmaker” or “Grantor” or “Settlor” – they all mean the same thing); the person who manages the assets transferred into the trust (the “Trustee”); and the person who benefits from the assets transferred into the trust (the “Beneficiary”).  In the typical situation you will be the Trustmaker, the Trustee, and the Beneficiary of your own revocable living trust, but if you ever become incapacitated, then your designated Successor Trustee will step in to manage the trust assets for your benefit.

Health Care Decisions Must Be Made Too

If you become legally incapacitated, you won’t be able to make health care decisions for yourself. Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis situation and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years). 

So, you should have these three essential legal documents for making health care decisions in place prior to becoming incapacitated:

1. Medical Power of Attorney.  This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives your agent the authority to make health care decisions if you become incapacitated.

2. Living Will.  This legal document gives your agent the authority to make life sustaining or life ending decisions if you become incapacitated.

3. HIPAA Authorization.  Federal and state laws dictate who can receive medical information without the written consent of the patient.  This legal document gives your doctor authority to disclose medical information to an agent selected by you.

Is Your Incapacity Plan Up to Date?

Once you get all of these legal documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them.  Instead, your incapacity plan must be reviewed and updated periodically and if certain life events occur - such as moving to a new state or going through a divorce. If you keep your incapacity plan up to date, it should work the way you expect it to if it’s ever needed.

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.

How to Choose the Right Agent for Your Incapacity Plan

A common misconception is that estate planning equates to death planning.  But planning for what happens after you die is only one piece of the estate planning puzzle.  It is just as important to make a plan for what happens if you become mentally incapacitated.

What Happens Without an Incapacity Plan? 

                                                                                                                                         

Without a comprehensive incapacity plan, a judge can appoint an agent (known as a guardian or a conservator) to take control of your assets and make all personal and medical decisions for you under a court-supervised guardianship or conservatorship.   The guardian or conservator must report all financial transactions to the court either on an annual basis or at least every few years.  The guardian or conservator is also typically required to obtain court permission before entering into certain types of financial transactions (such as mortgaging or selling your real estate) or making life-sustaining or life-ending medical decisions.  The court-supervised guardianship or conservatorship will then continue until you either regain capacity or die. 

Who Should You Choose as Your Financial Agent and Health Care Agent?

As you can see from the above discussion, a guardian or conservator has an important and involved role if you become incapacitated.

Creating an incapacity plan can help you order to avoid a court-supervised guardianship or conservatorship. 

Rather than having a judge decide, your incapacity plan will have you appoint one or more agents to carry out your wishes. There are two very important decisions you must make when putting together your plan:

1. Who will be in charge of managing your finances if you become incapacitated (your financial agent); and
2. Who will be in charge of making medical decisions on your behalf if you become incapacitated (your health care agent).

Factors to consider when deciding who to name as your financial agent and health care agent (who do not have to be the same people) include:

·         Where does the agent live?  With modern technology, the distance between you and your agent should not matter.  Nonetheless, someone who lives nearby may be a better choice than someone who lives in another state or country.

·         How organized is the agent?  The agent will need to be well organized to manage your health care needs, keep track of your assets, pay your bills, and balance your checkbook, in addition to being able to manage their own finances and family obligations.

·         How busy is the agent?  If the agent has a demanding job or travels frequently for work, then the agent may not have the time required to take care of your finances and medical needs.

·         Does the agent have expertise in managing finances or the health care field?  An agent with work experience in finances or medicine may be a better choice than an agent without it.

What Should You Do?

If you choose the wrong person to serve as your financial agent or health care agent, your incapacity plan is likely to fail and land you and your assets in a court-supervised guardianship or conservatorship. 

In order to create an incapacity plan that will work the way you expect it to work, you need to carefully consider who to choose as your agent and then discuss your decision with that person to confirm that they will in fact be willing and able to serve. 

Our firm is ready to answer your questions about incapacity planning and assist you with choosing the right agents for your plan. 

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.

Five Things You Need to Know About the Recently Enacted ABLE Act

On December 19, 2014, President Obama signed the Achieving a Better Life Experience Act (ABLE Act) into law.  The ABLE Act will allow certain individuals with disabilities to establish tax-free savings accounts that can be used to cover expenses not otherwise covered by government sponsored programs. These accounts can be a great alternative or supplement to special needs or supplemental needs trusts.

Here are five important things you need to know about the ABLE Act.

1.      What is an ABLE account?  An ABLE account is similar to a 529 education savings account that helps families save for college.  It is a tax-free, state-based private savings account that can be used to pay for the care of people with disabilities.  Although income earned in the account will not be taxed, contributions to the account will not be tax deductible.

2.      Who is eligible for an ABLE account?  Eligibility will be limited to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. If an individual meets these criteria and is also receiving benefits under SSI and/or SSDI, they are automatically eligible to establish an ABLE account.  If the individual is not a recipient of SSI and/or SSDI but still meets the age of onset disability requirement, they will still be eligible to open an ABLE account if the SSI criteria regarding significant functional limitations are met.  In addition, the disabled individual may be over the age of 26 and establish an account if the individual has documentation of their disability that shows the age of onset occurred before the age of 26.

3.      What are the limits for contributions to an ABLE account?  Each individual state will determine the total limit that can be contributed to an ABLE account over time.  Although we’ll need to wait for regulations to know the exact amount that can be contributed, the Act states that any individual can make annual contributions to an ABLE account up to the gift tax exemption limit (which is $14,000 in 2015).  If the disabled individual is receiving SSI and Medicaid, the first $100,000 held in an ABLE account will be exempted from the SSI $2,000 individual resource limit.  If an ABLE account exceeds $100,000, the account beneficiary will be suspended from eligibility for SSI benefits but will continue to be eligible for Medicaid.  Upon the death of the account beneficiary, assets remaining in the ABLE account will be reimbursed to any state Medicaid plan that provided assistance from the day the ABLE account was established.

4.      What types of expenses can be paid from an ABLE account?  An ABLE account may be used to pay for a “qualified disability expense,” which means any expense related to the beneficiary as a result of living with their disability.  These expenses may include medical and dental care, education, employment training, housing, assistive technology, personal support services, health care expenses, financial management, and administrative services. 

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.