The Zombie Tax

Years ago, Hawaii had an estate tax, but it was a “pickup” tax – the amount of the tax was offset by an equal credit against Federal tax, so it was not “felt” by the heirs as a separate tax. Then, the credit was eliminated, and the tax went with it.  But in 2010, it rose from the dead, like a zombie, and while it’s not hungry for brains, it IS hungry for a nice, juicy piece of the estate you were hoping to leave to your kids and other beneficiaries.  Here are a few tidbits about this ‘zombie tax’:

– The tax ‘kicks in’ when your total estate (which includes all of the property and assets you leave behind, including your retirement accounts and often the full proceeds of life insurance payable on your death) is valued at $3.5 million or more.

– Although Hawaii has no gift tax, due to a quirk in the way the law is written, your heirs may still end up paying Hawaii estate tax on your lifetime gifts, after you die. So you may have to include those gifts when determining whether the tax will apply to your estate.

– The Federal estate tax now has an exemption of $5 million per person (until 12/31/2012).So, you may not have an estate that is taxable by the IRS, but it may still be taxed by the state of Hawaii.

– Although (until 12/31/2012, if not extended) you may be able to use your deceased spouse’s unused FEDERAL exemption (that is, if he or she used less than the full $5 million exemption when he or she died, before you), there is no such “portability” of the Hawaii exemption. So if a couple does not plan properly, some of their total $7 million Hawaii exemption ($3.5 mil/spouse) could be wasted, and tax paid unnecessarily.

– If you (and your spouse together, if you’re married) have property worth more than $3.5 million, and you have will(s) or trust(s) that were prepared before 2010, your heirs may end up having to pay a hefty Hawaii estate tax if you don’t have your documents REVIEWED and UPDATED to plan for this ‘zombie’ tax.

– Properly drafted documents can help you to avoid any tax (even the zombie tax) when the first spouse dies, and to use both exemptions fully, to avoid paying any unnecessary tax.

– There are ways to avoid or minimize the taxes paid (both Federal and State), even you have a very large estate.

So, if you have not had your documents reviewed by an experienced estate planner in the past two years, you should do it now – or the Zombie Tax may devour your estate!

Published in: on August 15, 2011 at 7:35 am  Leave a Comment  

Hawaii Asset-Protection Trusts, Rev. 2.0

Well, despite having royally screwed it up the first time, it seems the state legislature has finally put together asset-protection trust legislation for Hawaii that is not altogether horrible. Although not quite in the league of Nevada, Alaska or South Dakota, Hawaii’s new domestic asset protection trust will no doubt be appealing to many who would like to have some home-grown protection for their local real property, and perhaps for other assets as well.

The new, improved “Permitted Transfers in Trust Act,” effective July 1, 2011, provides a welcome alternative for Hawaii residents, and non-resident owners of Hawaii real property, who are looking to shelter some of their assets from future creditors. Unlike the prior version of the law (which had much in common with many “1.0” versions of software, i.e., lots of bugs), the new law allows real estate to be put into a Hawaii asset-protection trust; eliminates the requirement that the trust property comprise no more than 25% of the settlor’s net worth; and – most significantly – repeals the 1% tax imposed on transfers into these trusts, which had rendered the prior law “dead on arrival”.

The new law allows the creation of an irrevocable trust, the corpus of which will, after two years, be protected from all new claims against the settlor except for  specified exceptions: alimony or child support; property division on divorce, IF the transfer into trust was made during the marriage or in some cases, within 30 days prior to it; personal injury or property damage claims arising from acts that occurred before the transfer into trust; debts secured (expressly or impliedly, not exactly sure how that will be interpreted) by trust property; and tax liabilities.

The settlor may retain significant powers and rights, including the power to veto distributions, to serve as investment advisor, to replace a trustee or advisor, a testamentary limited power of appointment, the right to all income (or to a unitrust amount not to exceed 5% annually), and the right to distributions in the discretion of the trustee, without losing the desired creditor protection.

Even if creditor protection is not required or desired, a trust that conforms to the statute may be of perpetual duration – thus, obtaining all of the benefits of a trust structure for multiple generations (i.e., a dynasty trust).  Specific allowance is made for the necessary provisions of a QPRT or GRAT, so that those types of trusts can also take advantage of the benefits conferred by the new statute. And, property held by a married couple as ‘tenants by the entirety’ will not lose the benefits of that tenancy when it is put into one of these trusts.

If you are concerned about the vulnerability of your property – including what we all hold so dear, that “little piece of Hawaii” that is our home or our living, in the form of business or rental property – to potential, future claims of creditors, OR if you would like to create a permanent legacy for your family in the form of a dynasty trust, that can carry the benefits of your hard work or good fortune through many generations, you might want to consider setting up a Hawaii asset-protection trust.   It is never too soon to get that two-year ‘statute of limitations’ running!

Published in: on August 15, 2011 at 7:09 am  Leave a Comment  

Is the IRS your favorite charity?

(… or, How to save some of those pesky taxes on IRA conversions, while also benefiting the charities of your choice.)

If you converted some or all of your IRA accounts to Roth IRAs in 2010, or plan to do so this year or in the future, you will be looking at a hefty add-on to your income tax bill in the near future. If you converted in 2010, and accepted the default of deferring the income recognition to 2011 and 2012, you may not have been thinking about those checks you will have to write to the IRS in 2012 and 2013.  But alas, time marches ceaselessly forward, and you’ll soon be feeling that deferred pain.

So, what if I told you that instead of paying all that cash over to the IRS, you could donate a chunk of it to your favorite charity instead?  That you could send it to the Red Cross to help with the Japan relief efforts, to the SPCA to save little puppies and kittens, to an organization that fights cancer, AIDS, or another nasty disease? Now maybe with our deficit being what it is, you might feel OK about sending your check to the IRS. But if you’d rather support your church, school or another tax-exempt charity over the next several years, while getting a hefty income tax deduction now to offset that pesky Roth income, read on. (more…)

Published in: on June 27, 2011 at 10:59 pm  Leave a Comment  

Death and Taxes

Two things you can’t avoid, or so they say.  We’ll all deal with death someday, and most of us will deal with some kind of tax – if only sales tax. But what’s worse than having them both come together?  First, you lose someone you love; then you have to write a big check to the government because your parent, spouse or other relative actually cared enough to leave you something to help you get by, or to make your life a little easier.

Fortunately, most of us haven’t had to worry about estate or inheritance taxes – for years now, they have only affected those who are pretty well-off.  In 2009, only those with taxable estates over $3.5 million had to pay a tax, and for several years before that, the limit was $2 million. In Hawaii, there has been no estate tax at all since 2005, and even then it didn’t “hurt,” because there was a Federal credit that offset the entire tax paid.  But all that is going to change in 2011. (In fact, some of it has changed already.)

If Congress doesn’t act before the end of the year, beginning on January 1, 2011, a Federal estate tax will be owed by anyone leaving a taxable estate of just (more…)

Published in: on August 29, 2010 at 12:32 am  Leave a Comment  

Planning with Retirement Accounts

In recent years, classic pensions (with benefits based on years of service and salary levels only) have become less popular, often being replaced by tax-deferred “defined contribution” plans, such as 401(k) plans, deferred-compensation plans and Individual Retirement Accounts (IRAs).  With regular contributions and smart investment, these accounts can help to ensure a comfortable retirement.  And, unlike a traditional pension, the benefits do not end with the worker’s death; anything left in the account can be passed on, fairly easily, to one or more beneficiaries.

Naming Beneficiaries

Beneficiaries are typically named on a form that you fill out when you first get the account, and you can usually change them later on by filling out a similar form. If you are married, your spouse may have to sign also if you want to name someone else as beneficiary. You may be able to name more than one beneficiary, and indicate the portion of the account that will go to each (so you could split an account between several children, equally or unequally, or give a portion to charity).

If you have completed the forms necessary to name a beneficiary for the account, it’s easy for the beneficiary to claim the account after you die, simply by providing the plan administrator with proof of your death and proof of his or her identity. (For this reason, you should keep copies of your beneficiary designations, and the name and phone number of the plan administrator, in a place where your beneficiaries will be able to locate it quickly after you are gone. If you don’t have this information, you may be able to get it from your employer’s human resources department.)  If you have not named a beneficiary at all (or if the named individuals have died before you), the account will pass to your heirs, but it will take longer and could require a costly probate proceeding.

Even after you have named beneficiaries, it is important to review that information periodically. If your family situation changes (someone dies, marries, divorces, etc.), it is very important to check the beneficiaries of all your accounts (not only retirement accounts, but also “pay on death” bank and investment accounts, and life insurance), and make any necessary changes.  For example, if you divorce but don’t remove your former wife or husband as a beneficiary, he or she may still get the account when you die.

Maximizing the Financial Benefit of Tax Deferral

One of the biggest financial benefits of these retirement accounts is that no tax is paid on the money before it is put in, or on the interest it earns, until a withdrawal is made.  Consider an IRA with a balance of $100,000, earning 5% per year; if no withdrawals are made, after 30 years the balance will have grown to over $430,000.  (By way of comparison, (more…)

Published in: on August 23, 2010 at 10:07 pm  Leave a Comment  

Worm food… or ‘crispy critter’?

OK, I admit, these terms are our mom’s perennial attempt at humor whenever we bring up the subject of what we want to happen to our mortal remains once we have shaken them off. In other words, burial or cremation?  And more interesting, from the lawyerly perspective, WHO gets to decide, and what if there’s a dispute?

I recently set out to find Hawaii’s answer to that question, since it differs from state to state. In NY, for example, as in many states, there is a specific statute that determines who has the right to determine the disposition of a dead body. I had a chance to become very familiar with that statute when working on a case (Maurer v Thibeault) where the decedent’s husband – who was under suspicion of having murdered her – wanted her body cremated and scattered on “their” farm, while her mother insisted that she would have wanted to be buried in the family plot, with her father, and as far away from the ‘estranged’ husband as possible.  The court found that this situation provided an exception to the general rule (in NY) that one’s spouse gets the final say, and allowed the mother to carry out her plans. (The husband was later convicted of having murdered his wife, and sentenced to 25 years to life; an appeal was taken and the conviction was affirmed.)

Back to Hawaii – where, my research revealed, there is no statute governing this issue. Nor does there seem to be much (if any) Hawaii case law on the subject. So where does that leave us?

Well, it leaves us with the general common law, which Hawaii courts tend to follow in the absence of other precedent. In this case, before states began to enact statutes governing the issue, there does seem to have been a general consensus that (more…)

Published in: on July 19, 2010 at 2:22 am  Leave a Comment  

What’s a trust, and why you might want one

A will determines ‘who gets what’ after you die, who is ‘in charge’ of handing it out (and paying your debts, taxes, etc., and all the other things that have to be done to tie up your affairs), and sometimes, who will be guardian of your children. A trust can do much more than that.  A ‘living trust’, which is a trust set up while you are still alive, can give someone the right and authority to manage your affairs while you are still alive (if you can’t, or don’t want to), and can make the transition of wealth and control easier and less costly when you die.  A living trust or a ‘testamentary trust’ – one set up by your will, that doesn’t come into existence until your will is probated after your death – can control not only who gets what, but WHEN they get it, and under what circumstances. Trusts can be used to transfer wealth while you are still alive, or upon your death.  They can provide for ongoing management of funds by skilled, careful individuals, for the benefit of others who might not possess the ability or control to act prudently. Some kinds of trusts can be used to save taxes, or to protect someone’s right to receive government benefits such as Medicaid or SSI. Trusts can sometimes be used to protect assets from creditors, including ‘involuntary creditors’ such as future ex-spouses, and lawsuit plaintiffs.  Trusts may avoid court involvement in the transfer of wealth, making it easier and less expensive.

So what IS a trust?

A trust is an arrangement whereby one person or entity, the “trustee,” is given title to and control over some assets (the “trust property”), which are to be invested, used, and distributed for the benefit of one or more other people (the “beneficiaries”). The trust document lays out the “rules” for how the trustee is to hold, invest, manage, and distribute the trust property. The trustee has a “fiduciary duty” – a very strict, (more…)

Published in: on June 26, 2010 at 10:55 pm  Leave a Comment  

You can’t fix the roof when it’s raining…

… and you can’t do much to protect your assets from creditors after you’re already in financial trouble. But just like the fellow who never thought about his leaky roof when the sun was shining, many of us never consider our potential vulnerability when things are hunky-dory.  With a little planning during sunny times, though, your assets can be made much less vulnerable to judgments resulting from unanticipated lawsuits, downturns in the market leaving you “upside down” in real estate investments (and thus subject to deficiency judgments), or unexpected medical bills.

There are some viable asset protection mechanisms available, but the key is to take steps to protect your assets when you are not in, or even anticipating, any financial trouble.  If you are already in trouble with the tax man, falling behind in your payments, or have just been involved in a car accident, it’s probably TOO LATE to obtain any substantial protection.  Any attempt to shift ownership or control of assets at that point can probably be set aside by a creditor as a “fraudulent transfer”.  In most states, it is safest to take asset protection steps at least (more…)

Published in: on June 20, 2010 at 9:40 am  Leave a Comment  

Add up your stuff

It’s the end of another beautiful weekend day here on Kauai, and I’m looking for a reason to kick back with a glass of wine and watch the sun go down behind the palm trees. So just for fun, let’s add up our stuff and see what we’ve got. Then we can pop a cork to celebrate, if it looks good, or go drown our sorrows if it looks bad.

(Of course, it is undoubtedly true that “real wealth” and “riches” encompass much more than just physical or financial ‘stuff’, and most of us here in Hawaii have a surfeit of things that many people would consider “true riches” – beautiful surroundings and weather, delicious food, flowers, music and culture, our kupuna and keiki (and all of our ohana), a laid-back lifestyle, and so much more. But this post is about the boring ‘stuff’ we all have: money, property, and debts. We can get back to that other stuff later, particularly if we’re needing something to help us forget the financial realities.)

So add up your stuff.

First, there’s any real property (houses and land) that you own. Your house (if you own it, not if you rent), any ‘vacation’ homes, and any investment (more…)

Published in: on June 20, 2010 at 3:55 am  Leave a Comment  

Do I need a will?

People often ask me things like this. “Do I need a will?” “Should I set up a trust?” “Do I need to do anything so my husband/wife/kids will get my stuff after I’m gone?”

Beats me.   I dunno.   Maybe, maybe not.

The fact is, these questions simply can’t be answered without knowing a lot of details about the questioner’s circumstances, desires, and plans. And when all is said and done, the only person who can really answer them is YOU.

But to do that, you have to really understand your current estate plan, and all of the other options that are available. And an experienced estate planner can help you get that information.

“My estate plan? But I don’t have an estate plan!”

Everyone has an estate plan. If you haven’t made a will or set up a trust, State law will determine who gets your things, how a guardian is selected for your children, and how much is paid in taxes. If you don’t have a power of attorney, advance health care directive, or living trust, State law will determine (more…)

Published in: on June 20, 2010 at 2:46 am  Leave a Comment  
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