COVID-19: Emergency Estate Planning

In these uncertain and disrupted times, it may not always be possible to do careful, professionally-guided estate planning for yourself or your loved ones, at least in the short term. While we’re all hoping for the best, we just don’t know how we, and our families and loved ones, might be affected by this sometimes deadly disease, which can sweep through communities very quickly, or by the ‘lockdowns’ and extreme distancing measures that are needed to stop or slow its acceleration.

We are ready and willing to help to the extent possible, via telephone or video conferencing, and even to conduct emergency signing meetings where practicable and desired. However, there may be circumstances where you need or want to put something important in writing, but can’t get it done in the usual manner. For those situations, I have gathered some resources that might be helpful. During this COVID-19 emergency time, I will be happy to review any documents that you might create on your own, using these resources and guidelines, before or after you sign them, to advise of any glaring problems or issues. Please call the office at 808-245-9991 or e-mail me at ‘info [ at ] kauaiestatelaw [dot] com’ to arrange a remote document review for a small fee.

Please NOTE: I do NOT recommend that you engage in “do-it-yourself” estate planning, without sound professional advice, unless it is absolutely necessary, and even then, only until you are able to seek competent and personally tailored advice from a skilled professional who will be able to ensure that your planning documents really do work as you intend them to, that they are appropriate for your situation, and that they will create the outcome that you desire.

But until you are able to do that, something MAY be better than nothing. To that end, consider the following:

Health Care Directive form (Hawaii)

Five Wishes Living Will form

Statutory (Financial) Power of Attorney form (Hawaii)

What Happens if I Don’t Have a Will or Trust (in Hawaii)

How to Make a Valid (typed/printed and witnessed) Will in Hawaii

How to Make a Valid Holographic (Handwritten) Will in Hawaii

When Death Do Us Part

This one is for married folks (or those who may be married, or re-married, some day). It’s a topic that comes up every time we prepare an estate plan for a married couple. For some people, it’s the main reason they have sought out an estate planner; for many, it’s something they didn’t even think about until we brought it up during the planning session. But for ALL married couples, it’s something (and often, the most difficult thing) that must be decided as part of crafting the estate plan.

What happens when ONE spouse dies, and the other survives? And particularly, how much control should the surviving spouse have over the couple’s assets – particularly the jointly built and preserved assets, but also any assets that the deceased spouse may consider his or her “own” or “separate” property (for example, things that the deceased spouse brought to the marriage, or inherited from his or her family members) – after the other spouse has died? Do you think the surviving spouse should have COMPLETE control over all assets remaining in your combined “estate” (and by this, I mean everything that both or either of you own), or do you want the survivor to be constrained in some way(s) regarding the use or disposition of those assets?

Many people’s initial response is,

Should I Have a Trust?

This has to be one of the most common questions posed to me. And the answer is not necessarily simple, but there are definitely some guidelines that I use to determine whether I should recommend trust-based planning. We’ll start with the revocable living trust, the most common type of trust – this is the trust that is basically used to avoid probate; the trustmakers can revoke or change its terms at any time, they generally remain the trustees and in full control of the trust assets for as long as they are alive and competent. My guess would be that 99% of the trusts in existence in the U. S. are (or were, before the trustmaker(s) died) this kind of trust.

First, a caveat. Although one of the main reasons that people create trusts is to avoid probate, in at least half of the cases that I have been called upon to help settle a trust after someone has died, a probate was necessary even though there was a trust! Why is this? Usually, because the deceased person had some substantial assets that they hadn’t put into their trust (this is called “funding” the trust). This can happen for many reasons. Sometimes people just forget, or don’t want to go to the trouble of transferring an asset. Sometimes people inherit assets and die before they can receive the asset and transfer it to their trust. Sometimes people are involved in litigation when they die, and don’t receive a settlement or award until after death.  Trusts can be useful even if not funded, but obviously if the purpose is to avoid probate, having substantial assets (including ANY real estate, even a timeshare) that is not in the trust will frustrate this purpose. I have put a purple “F” by each reason that requires that the trust be fully funded in order to meet the specified objective. If there is no “F”, the objective may be met by creating a trust that is funded only through a will, which would need to go through probate in order to get the assets into the trust.

So, when should you definitely consider creating, and funding, a revocable living trust?

The A/B Tax Trap (Basis Step-Up, Part II)

Welcome back! So last week we reviewed the basics of basis. This week, I’ll explain how your fancy trust, well-crafted to save you lots of estate tax back in the 1990s or 2000s, could actually end up costing your heirs money, due to changes in the law over the past few years. It all comes down to basis (which is why we went over how that works, in the last post.)

You see, a few years back, the federal Estate Tax ‘kicked in’ when someone died leaving a relatively modest estate (in 2001, $675,000; even less before that).  The amount that each person could pass at death without paying tax (what we call the “Exemption Amount”) increased a few times from 2001-2008 (when it was $2 million), but of course real estate values also increased dramatically over that time period, and many people built up substantial retirement accounts such as 401(k)s and IRAs.  Remember, too, that for estate tax purposes, we count not only your real estate and investments, but also any retirement accounts and the proceeds of life insurance payable on your death.  While there was (and still is) usually no tax on assets passed to a surviving spouse,* if all of the dying spouse’s assets (and the dying spouse’s half of joint assets) go to the surviving spouse, then when that survivor dies, his or her estate will include ALL of the couple’s assets.  This could easily cause the survivor’s estate to exceed the lower tax thresholds in effect in the 1990s and early 2000s. And the tax – with a maximum rate of 55% in 2001, declining to 45% in 2009 – was nothing to sneeze at!

So to be sure to minimize these taxes for couples who might be subject to them, estate planners came up with something called an “A/B Trust Plan,” which works like this: When the first spouse dies, instead of their entire estate passing to their surviving spouse, a portion of the estate equal to the Exemption Amount in effect in that year (for example, $675,000 if they died in 2001) is placed into a “B” (or “Bypass” or “Credit Shelter”) Trust, and the rest passes to the surviving spouse (or into an “A” or “Marital” Trust, hence the “A/B” designation). The “A” property would be included in the surviving spouse’s estate (this is necessary to avoid paying tax on it at the first spouse’s death), but the property in the “B” trust, though available for the surviving spouse to use, is NOT included in his or her estate at death (this is accomplished by the design of the “B” trust). This helped to keep the survivor’s estate below the Exemption Amount (or if that’s not possible, as low as possible), by having some of the assets of the first dying spouse “bypass” the estate of the second spouse to die.

Now, however, with the “Exemption Amount” much higher – for 2014, it’s $5.34 million per person – and the ability to increase it further, even DOUBLE it, for a surviving spouse using something called “portability,” the “bypass” procedure is almost always unnecessary, since there will be no estate tax on the second spouse’s death even without it.  But, you may ask yourself, if the assets are simply taken out of the surviving spouse’s estate for tax purposes, then what’s the harm? Why do we have to mess with it?

Well, consider this: anything that is NOT in the surviving spouse’s estate when he or she dies (which, for most couples today with an A/B Trust Plan, will be one-half of their joint assets – perhaps more if the spouse who owned the bulk of the property died first), does NOT get a ‘step-up’ in tax basis at the surviving spouse’s death!  So if the couple had a home, or other assets, that have appreciated in value, and are likely to continue to appreciate in value after the first death, and half of those assets are owned by each spouse, then on the first spouse’s death, his or her half of the assets will go into the “B” Trust. If the surviving spouse then lives for 10 or 20 more years, when he or she eventually dies, the children or other beneficiaries will get a ‘step-up’ in basis on only HALF of the couple’s assets – the half that was in the “B” trust will get no step up. Since it is often more likely that the family home will be sold by the children (or other recipients) after BOTH spouses have died – and also that the children will not have lived in the home for a sufficient time to be able to exclude gain using the ‘primary residence’ exclusion – this could result in a large capital gains tax bill for the children, when the home is sold after both parents have died.

Bottom line: in many cases, the sole reason for using an “A/B” trust plan, back in the 1990s and early 2000s, was to avoid estate taxes at the second spouse’s death. Now, due to changes in the tax laws and increases in the exemption amount, the “A/B” split is often not needed to avoid estate taxes, and it can actually cause a substantial increase in income taxes for the beneficiaries after the second spouse’s death. (It can also create unnecessary administrative complexity for the surviving spouse; however, an A/B Plan can nevertheless be warranted if the estate is fairly large, and/or for certain non-tax reasons.) So if you have an old trust plan (whether a single, joint trust, or two separate, individual trusts), you should have it reviewed TODAY to see if a change could save your beneficiaries a LOT of money!

* If the survivor is a U.S. citizen; different rules apply to non-citizen spouses.

Step right up…

… to understanding one of the most powerful tools we can use in estate planning, to save your loved ones lots of money. The great thing is, because this is an income tax savings, not an estate tax savings (which only helps multi-millionaires), this can work for almost everyone – not just the very wealthy. The key concept is something we call “basis step up.”  In this post, we’ll cover WHAT is “basis” and WHY it’s important. Next time, we’ll explain how and why your old trust could be unnecessarily costing your beneficiaries some, or all, of this ‘step-up’, and how to fix the problem.

What is “basis”? Well, if you buy something for $10, and sell it for $35, you have made a gain of $25, which you have to report on your income tax return, and which usually results in extra taxes, called capital gains taxes. The amount you put into the item you sold is called your “basis” or “tax basis.” This includes what you paid for it initially, and also what you paid to improve it (so, if you buy land for $10,000 and spend $50,000 to build a house on it, your basis in the property would be $60,000). Your gain – what you are taxed on – is arrived at by subtracting your basis from the amount you get for the property when you sell it.  So, if two people sell properties for the same price (say, $100), the one with the lower basis will have a higher gain, and therefore will usually pay more tax.

How does this work, though, with property you get by gift, or inheritance? Since you paid nothing for it, is your basis zero? Nope! If someone gives you a gift, then you get what we call a “carryover” basis – your basis is the same as theirs was. If I buy something for $10 and give it to you, then no matter what it was worth when I gave it to you, or how long you keep it, your basis will be $10. If you sell it for $100 – even if that was its value when I gave it to you – you will have a $90 gain. (Of course this gets more complicated if you pay just a little for something, so it’s really a “partial gift,” but that’s beyond the scope of this overview.)

BUT, it’s different (most of the time) when you inherit property – that is, you get it because someone died and left it to you. It doesn’t matter if you get it because they made a Will leaving it to you, because you were their natural heir, or because their  revocable living trust said that you get it when they die.*  Most of the time, if you get something when someone dies, your basis will be the market value on their date of death. So if they paid $10, but the property was worth $100 when they died, you will have a basis of $100! If you turn around the next day and sell it for $100, you will have zero gain (and thus, nothing to pay income tax on).

This basis step-up can be a great boon to your heirs or beneficiaries. Let’s say you paid $10,000 for a vacant building lot, and spent $40,000 to build a house on it (this was back in the ’60s, when money went a lot further). Your basis in the property is $50,000. But now, in 2014, thanks to inflation and the housing market boom, the property is worth $550,000, and rising. If you sell it, you will have a gain of $500,000. If it’s your home, you may be able to shelter some or all of that gain from tax; but if it’s not your primary home, or if you give it to someone else, such as your children, and THEY sell it, they will have a tax bill of over $100,000. If you leave the property to them when you die, though, they will probably have little or no taxable gain!

Now there are some exceptions to this. For example, you can’t just give someone something the day (or month) before they die, have them will it back to you, and get the higher basis. Also, the basis adjustment works both ways, so if the value goes down between purchase and death, you are stuck with the lower (date of death value) basis, which can mean more taxable gain.

Stay tuned for more about the basis ‘step-up’, and how to get the most out of it for your loved ones when you pass on.

*Some special kinds of trusts do not work this way, but here we are talking about the most common trusts, revocable trusts, which many people create to avoid probate and keep their affairs private when they die or become incapacitated.

Where there’s a will…

… there’s a way (or so they say). And, in fact, it’s true – almost everyone should have a will. Even if you have a trust. And even if you are young, of modest means, and perfectly happy with the state’s “default” plan for distribution of your property. Here’s why:

What if you have a fully-funded trust, but are killed by a drunk driver, or by medical malpractice? Your estate (NOT your trust!) could become the plaintiff in a multi-million dollar lawsuit, or the recipient of a large settlement or insurance payout. Even if you have a trust, those proceeds would be coming to YOU – and hence, to your estate – not your trust. This is just one example of why the ‘pour-over’ will is an important part of a trust plan.

Or what if you learn that you were named as a beneficiary of someone else’s estate, such as a distant relative or long-lost friend? And then, by a twist of fate,

‘Worm Food or Crispy Critter’ Revisited

One of my first posts on here, a few years ago, discussed the issue of legal responsibility and authority for disposition of one’s remains. My conclusion was that the rules and governing law here in Hawaii were less than crystal clear, but that some general principles from other states’ laws, and general common law, might be applicable.

Well, Hawaii has recently enacted new legislation in this area (apparently becoming the 49th state to do so), so now we (and the courts and funeral homes) have clear legal guidance for dealing with potential disputes in this important and emotionally-charged realm. The statute lays out who has the legal priority to make the necessary decisions regarding disposition of a deceased individual’s remains, and – more importantly – also provides a legislatively-sanctioned form that YOU can use to both name an individual of your choice to make such decisions (in lieu of the default priority list, which might give the power to someone you would not elect) and to indicate any specific wishes you may have regarding disposition.

We have the form available and will be happy to help you to complete it. If you are already a client of ours, we will help you make this important addition to your existing estate plan for a nominal charge. (If you are enrolled in our Maintenance Program, the service is FREE. Yet another reason why the Maintenance Program is the best deal in town.)  If you are not already a client, give us a call and we’ll be happy to help you with all of your estate planning needs.

A Trap for the Unwary

A tax trap, that is. If you (1) are married, (2) have a small or moderate-sized estate (under $10 million), and (3) created a trust-based estate plan at any time in the past several decades, chances are that plan could end up costing your children or other beneficiaries a LOT in unnecessary taxes after you die.  Now, this probably does not apply to you if you live in one of a handful of states that imposes a state estate tax with a low exemption amount (CT, DC, ME, MD, MA, MN, NJ, NY, OR, RI, and TN all have exemption amounts for 2013 that are $2 million or less), in which case your planning has probably been designed to minimize those taxes, as well as the Federal estate taxes, and that may save you more in the long run.  But if you live in one of the many states that has no state estate tax (a list of states with an estate tax can be found here), or has an exemption greater than the value of your estate, keep reading to find out why your plan may be in need of a critical update.

Five Things to Consider Now

The end of the year approaches, and pretty soon we’ll all be busy with entertaining, shopping, and other holiday pursuits. So now’s the time to think about things that you might want to set in motion to provide a little fiscal relief for the rest of 2012 and 2013.

1. Look at your income for 2012. Is this a slow year? If so, think about things that you might have been putting off or avoiding because of their negative tax consequences. If your income is low this year, or you have a lot of deductions, maybe now is the time to take the tax hit from converting some IRA funds to Roth-IRA status, or withdrawing them entirely (if  you would be needing those funds in the near future anyway). If your income is looking low for 2012, consider shifting some deductions into 2013, by putting off expenditures until after the first of the year. Conversely, if it’s looking high for the year, think about additional deductions you might be able to squeeze into 2012, by purchasing items or pre-paying for rent or services in November or December.

2. Consider using the huge estate and gift unified tax exemption that is going to expire at the end of this year. If your estate is over $5 million, or likely to be that large when you die, then now is the time to shift some of those funds out of your estate to your children or other beneficiaries. You don’t have to give them a big check – you can place the funds into irrevocable trusts, that will protect the assets and allow them to be prudently managed, with not only their current value but all future appreciation out of your estate permanently.

3. Update your estate plan, if it hasn’t been done lately. With the extreme uncertainty over what the estate and gift tax laws will look like for 2013, you want to be sure that your planning is flexible enough to adapt to changing laws and rules, and still provide the best results for you and your family.

4. Plan to have a ‘heart-to-heart’ with your family. Why not take time over the holidays, when everyone is together and in a relaxed frame of mind, to discuss your estate planning with family members? It can be a difficult subject to broach, but a pleasant family gathering can be the perfect time to spend a little time explaining to your children the steps you’ve taken to ensure that things go smoothly if something should happen to you. Everyone’s catching up, so make sure they’re caught up on this aspect of your life too. (One way to bring up the subject is to tell your adult children that you’ve made plans for them, and ask if they’ve done the same for their families. Children can use this approach with their parents as well.)

5. Read up on the new 3.8% ‘surtax’ on certain kinds of investment income, and determine the effect it will have on your overall tax bill. Consider whether shifting some of your assets to a different investment vehicle, or converting some assets to a Roth IRA, might eliminate or reduce the ‘bite’ of that extra tax. Here’s one article that provides some ideas, to get you started.

Zombie Tax – Update

Good news on the “Zombie Tax” front. This summer, the Legislature passed a new law changing the Hawaii death tax laws. Honestly, I haven’t read the law in its entirety (watch this space for a more in-depth update), but basically it changed the amount that can be passed free of Hawaii state estate tax from a fixed, $3.5 million, to a figure that tracks the Federal exemption (which is now $5.12 million, set to return to $1 million on January 1, 2013). So while the Zombie Tax is still (un)dead, at least it is a little easier to figure out, and plan for – you will either have a taxable estate (under both Federal and State law) or you won’t.

Unless you are in a civil union, of course – in which case you can’t claim the unlimited Federal marital deduction, but can claim an unlimited marital deduction for the purpose of calculating the Hawaii estate tax. Hopefully they’ll fix that soon, too – I heard that DOMA was just declared unconstitutional by the Second Circuit, looks like it’s headed to SCOTUS.