September, 2013 | Shah & Associates, P.C. Estate Planning & Business Law Blog
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Plan to Avoid Inheritance Tax

September 26, 2013

Filed under: Beneficiaries,Estate Taxes,Inheritance,Taxes — Neel Shah @ 2:57 pm

Although taxes may be one of the items furthest from an individual’s mind when a close friend or family member passes away, a large amount of people will unfortunately face death tax issues at what is already an extraordinarily difficult time. A recent article discusses how individuals can plan their estates to shield their beneficiaries from this fate.

It is first important to understand how common tax issues are in estate planning and administration. According to chief fiduciary officer at Bank of the West in San Francisco, “One in 10 estates have some tax issues . . . There’s nothing worse than being in your worst grieving moments and having to deal with financial chaos.” There are a variety of state or federal taxes that may plague a family after a death.

In order to plan for and avoid these taxes, it is important to create an estate plan that takes them into account. One tax issue may be an unpaid federal or state tax liability. This often occurs when a person faces a long illness before his or her death and no one took charge to see that financial obligations were met. There may also be unforeseen federal or state taxes due. Although federal estate taxes don’t kick in until the estate is worth $5.25 million, some state estate taxes apply at much lower levels. For example, New Jersey’s estate taxes apply at $675,000 while New York’s estate taxes apply at $1 million.

The Phases of Retirement

September 25, 2013

Filed under: Retirement Planning — Neel Shah @ 9:00 am

Too many individuals find themselves altogether unprepared for retirement. The difficulties that this unpreparedness creates are compounded by the fact that, with longer life expectancies, retirement is longer than individuals had originally anticipated. A recent article discusses how people can plan for the three phases of retirement.

Retirement

Retirement (Photo credit: 401(K) 2013)

The Early Years

Because Americans are living longer than ever, many will have to avoid pulling benefits from social security until it is absolutely essential. A person who delays taking his or social security withdrawals beyond his or her full retirement age will receive a benefit increase from 6% to 8%. Importantly, those who delay accepting social security benefits may need to sign up for Medicare at age 65 to reduce the cost of long-term health insurance down the road.

The Middle Years

After a person reaches age 70 ½, traditional IRAs and employer-sponsored retirement plans will require that person to begin taking annual withdrawals. Often, these plans have a steep penalty for those who do not take the withdrawals. Conversely, Roth IRAs don’t require individuals to make withdrawals during their lifetime. Therefore, for those who do not anticipate needing such withdrawals, a Roth IRA is a good option.

The Later Years

In the later years of retirement, estate planning becomes paramount. It is important to review all financial documents to ensure that they still align with your wishes. Moreover, many people experience changes in their circumstances as they age. It is important to be sure that these changes are accounted for in your estate plan.

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Considerations for Charitable Giving

September 24, 2013

Filed under: Charitable Giving,Finances — Neel Shah @ 9:00 am

The United States is home to thousands of charitable organizations that benefit everything from diabetes research to stray cats. These charities provide unlimited opportunities for people to contribute to organizations that support the causes that align with their philanthropic goals. A recent article describes how to plan for charitable giving.

An important part of charitable giving is balancing your philanthropic goals with your financial goals. Consider how to make your personal goals for charitable giving align with your overall financial plan. This consideration will help you determine how much you can realistically give.

Once you know what you can give, it is time to evaluate your giving options. Research various charitable organizations to find the one that best promotes your charitable goals. Realize that the best charity for you may be outside of your state, or even country, of residence. If you do not want to give funds directly to a charity, consider setting up your own foundation, donor-advised fund, or charitable trust.

It is also possible to donate your experience rather than money. Donations of time and human capital include serving on the board of a non-profit organization or sharing your professional expertise.

Double Your Estate Tax Exemption

September 19, 2013

Filed under: Estate Planning,Estate Taxes — Neel Shah @ 10:00 am

When a person dies, not all of his or her estate will be subject to federal estate taxes. A base amount of his or her estate, an amount equal to or less than the federal estate tax exemption, will not trigger any federal estate tax liability. A recent article discusses how an individual may be able to double his or her federal estate tax provision to $10.5 million.

This estate-planning maneuver utilizes the portability provision. This provision, which is only available to married spouses, allows one spouse to transfer any unused portion of his or her federal estate tax exemption to the other. For example, if the first spouse to die has an unused estate tax exemption of $3 million, the surviving spouse can add that $3 million to his or her $5.25 million estate tax exemption to enjoy a total exemption of $8.25 million.

Therefore, if the first-to-die spouse does not utilize his or her $5.25 million exception amount, it may pass directly to the remaining spouse, giving him or her a federal estate tax exemption of $10.5 million. Portability is not automatic, however. If you would like to utilize this feature, you must timely file IRS Form 706. In order to be considered timely, this form must be completed within nine months of the first-to-die spouse’s death.

Knowing When it is Time to Hand Over the Car Keys

September 18, 2013

Filed under: Elder Safety — Neel Shah @ 9:00 am

There are no state laws that deal directly with elderly drivers when they begin to pose a risk to other drivers. Therefore, family members are often left to step in. A recent article discusses how you can determine when your loved one should hang up the keys. 

Pressing a button on the key unlocks all of th...

(Photo credit: Wikipedia)

The record for the highest rate of fatal crashes per mile driven belongs not to teens, but to seniors over the age of 80. This is because many seniors continue driving after it becomes obvious that it is no longer safe for them to do so. The most common ailments among seniors that increase their risk factor on the roads are vision problems, slower reaction times, and various other effects of aging.

If you believe that an older member of your family is no longer fit to drive, test your assertion by taking a short car ride with him or her. Look for telltale signs of hindered driving, such as a failure to be able to judge gaps in traffic, follow traffic signals, remember directions, or maneuver and park the car.

If you believe, after riding with your loved one, that he or she can no longer drive safely, it is important to address the matter head on. Select the person in your family that your loved one is most likely to listen to, and have him or her express that your loved one may not be safe on the road. Prior to this conversation, research alternative transportation options available in your loved one’s area, and the cost of each. This will help create a smoother transition for your loved one when they stop driving.

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Pass on the Bypass? Is a Bypass Trust Necessary?

September 17, 2013

Filed under: Asset Protection Planning,Estate Planning,Estate Taxes,Trusts — Neel Shah @ 9:00 am

Many people wonder whether bypass trusts are still necessary for asset protection. Even after the 2013 unified credit changes have been implemented for estate planning, making the transfer of assets between spouses easier, a recent article explains why bypass trusts may still be a good idea for certain estate plans.

One benefit of a bypass trust is that it protects assets from creditors and lawsuits. The provisions of a bypass trust that offer this protection depend on the state that the trust was created in and the state that the surviving spouse currently resides in.

Bypass trusts are also a good tool because they can transfer assets to more than one generation. A bypass trust can be set up to benefit the surviving spouse for the remainder of his or her life, then provide assets for his or her children and grandchildren. Bypass trusts can be written to include various other special benefits. These benefits can include professional management, provisions to limit spending, and provisions to avoid probate.

Finally, bypass trusts are helpful in avoiding estate taxes on appreciating assets. For example, imagine that a person put $5.25 million worth of assets in a bypass trust. Further, imagine that the $5.25 million grows to a value of over $10 million while in the trust. In this scenario, the entire $10 million will avoid estate taxes. As a result, bypass trusts may still be essential for particular estate plans.

Long-Term Care for Your Cat

September 12, 2013

Filed under: Caregivers,Estate Planning,Long Term Care,Pets,Wills — Neel Shah @ 9:00 am

All too often, cats are surrendered to animal shelters because their owner either died or had to enter a long-term care facility where the cat was not allowed. In order to avoid this fate, a recent article argues that cat owners need to have a long-term care plan in place for their pet. Importantly, this care plan can be simple and easy to create.

The first step in creating a long-term care plan for your cat is selecting a trusted friend or relative who may be willing to care for the cat in your absence. Discuss your designation with that person to make sure that he or she is up for the task. If you have an estate plan, you can insert a clause that gives your cat, and some money for its care, to the designated caregiver. If you do not have an estate plan, you can simply make a care arrangement with that person.

English: Portrait of a female feral cat (Felis...

(Photo credit: Wikipedia)

In your will or care arrangement, be sure to outline your cat’s routine. This may include feeding and exercise habits. Also include all medical information, including your cat’s veterinarian, where his or her medical records are located and any current medications.

Importantly, provide the designated caregiver with a spare key to your home or apartment. This will allow the person to enter your home if you suddenly become incapacitated. Finally, be sure to set some money aside for your cat’s care. When determining how much money to provide, consider that your friend will need to pay for food, veterinarian bills and any other necessary care expenses.

Avoiding the Financial Crisis of Long Term Care

September 11, 2013

Filed under: Insurance,Long Term Care,Medicaid — Neel Shah @ 9:00 am

Many elder Americans are not prepared for the high costs of long-term care. This is causing a financial crisis, as too many Americans are relying on the federal and state governments in order to provide for this care. As a recent article explains, one way to avoid this crisis is by purchasing long-term care insurance.

According to the article, the two biggest fears of the baby boomer generation are (1) outliving the finances they have saved for retirement, and (2) being forced to depend on another person for care. Unfortunately, many seniors do not understand how the Medicare/Medicaid systems work, and believe that the federal programs will pay for any long-term care that becomes necessary.

In fact, Medicare has many limitations. For example, Medicare will only cover a stay in a skilled nursing facility if the stay is 100 days or less and is medically necessary. Of course, determining whether a stay is medically necessary will depend on Medicare standards that may be confusing.

Long-term care insurance, therefore, can fill in where Medicare leaves off. Long-term care insurance allows policy-holders to select which types of care they would like to receive. And what if long-term care insurance is not an option? Then it may be time to consult with an Elder Law attorney to discuss options, such as Medicaid “spend-down”, that can help with payment of long-term care.

Protecting the Nest Egg: Asset Protection for Retirement

September 10, 2013

Filed under: Asset Protection Planning,Retirement Planning — Neel Shah @ 9:00 am

By the time a person retires, he or she should have created an asset base that is sufficient to allow him or her to retire without dramatically reducing his or her standard of living. Moreover, most individuals would also like to pass down assets to the next generation. As a recent article explains, those who succeed in creating a sufficient asset base for retirement need to be careful to protect it from any liability that may arise down the road.

Asset protection strategies cannot fully protect all assets from all claims. However, a good asset protection strategy can effectively reduce threats to many assets, such as real property, investments, businesses, and various other assets.

Nest egg

Nest egg (Photo credit: Gemma Garner)

One common asset protection strategy is holding property under Tenancy by the Entirety. This is a type of co-ownership that is available exclusively to married couples. Couples who own asset(s) through Tenancy by the Entirety each have a right of survivorship, meaning that the surviving spouse automatically takes the deceased spouse’s share. In certain states, assets held in this form are protected from lawsuits that fail to name both spouses as defendants.

Another common asset protection strategy is transferring the ownership of assets to a limited partnership. Limited partnerships are popular for holding investments and liquid assets. In order to form a limited partnership, you need one or more general partners, and one or more limited partners. These particular strategies will allow for the effective protection of assets for retirement. 

Make Sure Your “S” Is Covered: Estate Planning Considerations for S Corporations

September 5, 2013

Filed under: Asset Protection Planning,Business Succession Planning,Distribution of Assets,Estate Planning,Trusts — Neel Shah @ 2:52 pm

It is important for those who hold shares in an S Corporation to carefully plan for the distribution of those shares. The stakes for these transfers are high, as a faulty transfer may result in the inadvertent termination of the corporation’s S status. A recent article discusses several considerations to make when planning for the transfer of S Corporation shares.

Individuals or entities such as estates or certain types of trusts may hold shares in an S Corporation. The types of trusts that are qualified to hold S Corporation shares include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. All other trusts are considered to be non-qualifying shareholders.

If a shareholder’s estate plan inadvertently transfers his or her S Corporation shares to a non-qualifying shareholder, not only will the S Corporation be inadvertently terminated, but corporate level taxes may be triggered on the other shareholders. To avoid this fate, it is important to review your estate plan to ensure that your plan does not transfer S Corporation shares to a non-qualifying trust. On the other hand, the right kind of trust can be a powerful tool to achieving Estate Planning, Asset Protection & Business Succession Planning goals.

S Corporations can also work to avoid costly missteps by employing shareholder agreements, which provide that the shares may only be transferred to qualified shareholders. Additionally, S Corporation shareholders should carefully monitor shareholder trusts to ensure that the trusts remain eligible to hold S Corporation shares.

When You Aren’t Sure Where to Start: Having an Estate Planning Discussion with an Elderly Parent

September 4, 2013

Filed under: Estate Planning,Finances,Long Term Care,Power of Attorney,Trusts,Wills — Neel Shah @ 2:38 pm

A majority of adults find it difficult to discuss financial issues with their aging family members. Although these are often difficult and uncomfortable conversations to have, they are often necessary. Moreover, it is important to have these conversations with your parents early, before they become unable to handle their financial lives. A recent article discusses how to start this conversation, and what topics to cover.

One way to ensure that you bring up this topic is to make an appointment with yourself to do so. A good idea is to plan the discussion for after a family gathering such as a birthday party. This way, other family members can join in the conversation. If you believe that your parents and family members will be receptive to the idea, select a date and time and then invite them to join in on the conversation.

During the conversation, it is important to discuss several different aspects of your parent’s estate. The first aspect is legal. Determine whether your parent has done any estate planning. If yes, ask where the legal documents are and what estate planning tools are employed, such as wills or trusts. Your parent may also wish to explain any distributions.

Another important aspect to discuss is healthcare. Determine what types of health coverage your parent has aside from Medicare. This may include long term care insurance, or simply some money set aside for anticipated health care costs. Finally, determine whether your parent has executed a health care power of attorney. If he or she has not, encourage him or her to do so. This will be an essential step should the time come when your parent is unable to make their own decisions on their healthcare.

Applying the K.I.S.S. Principle: – Simplifying Estate Planning

September 3, 2013

Filed under: Baby Boomer Generation,Distribution of Assets,Estate Planning,Power of Attorney — Neel Shah @ 2:17 pm

For members of the baby boomer generation, estate planning is about more than organizing their financial affairs. Many Boomers wish to create estate plans that leave a legacy and make a difference in the world. However, when considering these estate planning goals, Boomers might quickly become overwhelmed with the task at hand. A recent article offers simple tips for Boomers to get started on their estate plan and create their legacy.

The first step in creating an estate plan is making a list of all of your assets. This list should include all real estate, valuable personal property, insurance accounts, retirement accounts, the value of any trusts, and any amounts you expect to receive before you pass on. When making this list, be sure to note if any of these assets are tied to debt, such as a mortgage or lien on a home. After you list your assets, consider how you would like to distribute them, and who you would like your beneficiaries to be.

Next, consider who you would like to serve as your financial power of attorney. This is the person who is tasked with managing your financial affairs should you become incapacitated. Remember that incapacity can take many forms, such as mild dementia or an intensive hospitalization after an accident. You may limit this power if you wish. For example, you could provide a limited power of attorney to only handle your small business. With these important decisions, creating an estate plan will be essential in detailing your wishes should you become incapacitated.

Planning for Blended Families: Part I – Intake Process

Filed under: Family Limited Partnerships — Tags: , — Neel Shah @ 12:20 pm

The “blended family” comprises a fast-growing segment of U.S. households. Whether you arean attorney or investment advisor, there is an advantage in taking some time to fine-tune your intake or initial interview process to determine the desirability of representing a blended-family client.Once you assess the accepted client to determine your counseling strategy, you canbegin strategy planning with your newly acquired information.

As noted, attorneys face different client engagement issues than advisors and CPAs.  This content seeks to illuminate the client-discussion topics but not to precisely define the boundaries between the planning perspectives.

Takeaways:
*  Blended families have unique and complex planning needs
*  Planning for blended families may be an important growth area for your business
   –  Blended families continue to grow in number
   –  Blended families often require advanced planning strategies
*  Extending an engagement letter to a blended-family couple warrants careful consideration
*  Your intake interview is an important professional relationship tool

How a “Blended Family” Is Different from a “Traditional Family”
A “traditional” family is one in which any child is a child of both spouses. A “blended family” includes at least one child for whom only one of the spouses is the parent. Money-related discussions for any family can be challenging, but the dynamics of a blended family can make these discussions even more difficult and more critical.

Disparity in Age
Age differences between spouses may be more significant in a remarriage. As a result, age differences between children in a blended family may also be more significant.

These wider age differences mean guardianship issues and planning issues will be unique to each child. In some family situations, older stepsiblings may be willing to be named as guardian for their younger stepsiblings.

In addition to contributing to the potential for conflict, age similarity between the spouse and a stepchild must be considered in a planning strategy.

Disparity in Wealth
Any significant disparity in net worth between the spouses can make estate planning more critical early in the remarriage.

Conflict and Animosity
Bringing two families together can lead to animosity between spouse and stepchildren, between stepchildren, and between parent and children—this animosity can damage or destroy the relationship between the spouses. Aside from contributing to unpleasant living situations or family gatherings, the conflict and animosity that can exist in a blended family can prevent communication. However, effective communication is key to identifying potential issues and creating a sound financial and estate plan for the unique needs of a blended family.

Because of the increased potential volatility and the different legal status afforded blended families, advanced planning strategies may be important tools to implement.

What you need to know
Review your intake interview to ensure it’s designed to fully explore these unique aspects of a blended family so you’ve got an excellent starting point to begin strategizing with your client.

Important Information You Need but Don’t Ask Outright.
The intake process will provide you with a lot of information. With this information, you should determine:
* whether you want to represent a client;
* whether you can represent both spouses;
* your counseling strategy; and
* planning strategy.

Your powers of observation are critical both to deciding whether to offer an engagement letter to a blended-family prospect and to planning your counseling strategy for them.

Power Imbalance
Especially if your intake questionnaire indicates a large disparity in age, net worth, education, or health, carefully observe how a couple—and the whole blended family if children are present—interacts during the interview to identify and explore potential power imbalances.
* Is one spouse doing all the talking?
* What does their body language tell you?
* Does one spouse look to the other for consensus?

Denial
“They’re all our children.” Estate planning attorney and WealthCounsel member Jeff Sydney identifies this statement as a bright red flag. In his experience, couples in denial about the important and unique needs of a blended family are extremely hard to counsel. A blended-family couple must be willing to acknowledge that their situation is a breeding ground for conflict. The more access you have to the family’s dynamics, the better strategy you can create for its specific needs. Without that access, you can at least plan for the “worst case scenario”, but even that kind of planning requires the couple to acknowledge that effective planning must contemplate conflict. The more complex a family’s situation, the more specific and detailed the planning strategy must be.

Confidential Information
Requested private conversations—one spouse requests a conversation with you without the other spouse present—are another flaming red flag. Sydney indicates that the request typically starts like this:  “I didn’t want to say this in front of my [spouse], but . . . ” and, if you don’t stop it, sometimes concludes with disclosure of a secret child or hidden asset.  For an attorney, this attempted or achieved disclosure of non-shared information raises critical and perhaps insurmountable issues concerning representing the couple as joint clients. For that reason, attorneys must have the “no secrets among us” conversation at the very earliest opportunity and refuse any proffer of secret information from one spouse.

What you need to know
If your intake interview is designed for blended families, the answers it prompts will be a strong indicator of whether you want to or can engage a client. But make sure to read between the lines of how a blended-family couple interacts so that you have the whole picture. Make sure your intake process includes counseling strategy assessments so that you can effectively facilitate open, honest communication essential to effective client meetings.

Your Ethical Obligations as They Relate to Blended Families
Turning away a client may seem counterintuitive to your business plan, but carefully screening potential clients keeps you in the driver’s seat. For an attorney, declining a potential client at the outset is easier than resigning from an existing relationship. After a thorough intake interview, you will be able to determine if you are qualified to handle the client’s needs, if any conflicts exist, and if you want to proceed to the next step. Carefully assess the prospective clients’ direct responses to the interview questions and their observed behaviors. Be sure that the clients are forthright with each other and with you about the information needed to provide an effective and realistic financial plan for their family situation. A professional relationship founded on incomplete information and poor communication will keep you up at night and may lead to ethics issues. A positive professional relationship will be a more positive experience for you and will generate new leads for your business.

For the attorney or advisor:

  • Should you represent both spouses?
  • Should you represent parents or children of existing clients?

Ethics questions for the attorney:

  • Will you represent both of the spouses as a couple, or will you represent only one of the spouses?
  • If you represent the couple, does your engagement agreement contain necessary conflict-of-interest disclosures and waivers of attorney-client privilege as to each spouse?
  • If you represent only one of the spouses and have met with both of them, have you informed the other spouse in writing of his or her need to retain independent counsel?
  • If the other spouse has retained separate counsel, have you informed your client and your staff and instructed them in writing to deal only with the spouse’s counsel in matters related to the planning engagement?
  • If the other spouse has waived the right to independent counsel, did you get that waiver in writing?
  • When should you resign from an existing engagement?
  • When must you resign from an existing engagement?

Attorneys must know state requirements specific to representing blended families. Some state statutes address:

  • Duty to enter into written contract
  • Duty to avoid actual conflict of interest
  • Duty to avoid potential conflict of interest
  • Duty to maintain client’s confidence

What you need to know
Your observations during the intake interview may raise some ethics questions in your mind about representation. Know your state’s laws and ethics rules.

Actions to Consider:
* Market your professional services to blended families.
Blended families represent a growing share of the market, and they often afford the opportunity to implement advanced planning strategies. They can represent an excellent client base for your planning practice.
* Make an informed decision to represent a blended family.
Recalibrate your intake process to screen potential blended-family clients for some of the known landmines.
* Maximize your time together, fostering a productive and efficient professional relationship.
Collect the information you need to formulate your counseling strategy.

Our thanks and acknowledgement to WealthCounsel member Jeff Sydney for his contributions to this article.

 

Next in the Blended Family series:  Part II – Counseling Strategy

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.

 

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