Gifting Strategies for Medical and Education Expenses

     As we touched on in our last blog, many strategies exist for using gifting as part of an estate plan. Today’s blog addresses some of the simpler planning opportunities available through gifting. In future blogs we will focus on the more sophisticated strategies.

     Tuesday’s blog discussed the Annual Gift Tax Exclusion, but it is important to note is that there is another, unlimited Gift Tax exclusion permitted for amounts paid by one individual in two circumstances:

1. On behalf of another individual directly to a qualifying educational organization as tuition for that other individual.
2. On behalf of another individual directly to a provider of medical care as payment for that medical care.

     A "qualifying educational organization" is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where it regularly carries on educational activites. It can be a primary or secondary school, including a vocational high school, college, university, or a normal, technical, mechanical school and similar institutions. . The Internal Revenue Code (the "Code") permits an unlimited exclusion for tuition expenses of full-time or part-time students paid directly to the qualifying educational organization providing the education. The Code does not permit an unlimited exclusion for amounts paid for books, supplies, dormitory fees, board, or other similar expenses that do not constitute direct tuition costs.

     "Qualifying medical expenses" are limited to those expenses defined in Code §213(d), but include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. In addition, the unlimited exclusion from the Gift Tax includes amounts paid for medical insurance on behalf of any individual. The unlimited exclusion from the Gift Tax does not apply to reimbursement for amounts paid for medical care by an individual. 

     While contributions to a qualified tuition program, such as a §529 plan do not qualify for the tuition exclusion above, they do enjoy treatment as a "present gift" that can qualify for the gift tax annual exclusion (currently $14,000 per year). The rules also allow the taxpayer electively to spread the contributions made in a single year over a five-year period. This means that grandparents can make a gift of $70,000 each ($14,000 times 5 years) to a §529 plan for a grandchild, for a total of $140,000 in one year, essentially "frontloading" a grandchild's education and allowing for a greater appreciation of the account. These gifts remove funds from the grandparents' estates, saving estate taxes on their deaths.  

     By using these gifting strategies, individuals can help their loved ones currently and reduce possible future estate taxation. Next week we will start discussing some of the sophisticated strategies used to increase the benefits of lifetime gifting in estate tax planning. 

A Lifetime of Planning

     Many perceive estate planning as a tool older, wealthy individuals use to protect their assets. While estate planning offers clear benefits to the very wealthy, a better explanation of estate planning is that it is a lifetime process with different benefits for people of different ages and situations. Many of my clients are surprised when I suggest that the most appropriate time to begin the estate planning process is when a person reaches age eighteen.

     When children reach eighteen, they are legal adults  under Michigan law, and their parents no longer have the authority to make legal and medical decisions on their behalf. By beginning the estate planning process at this time, the newly designated adult can execute a Durable Power of Attorney and Patient Advocate Designation that allow parents to continue to make legal and medical decisions in the event of incapacity. This initial step of estate planning introduces young adults to an attorney and provides them (and their parents) with peace of mind knowing that mom and dad can still help them if needed

     As these young adults move through the next few years, complete their education, join the workforce, and begin to accumulate assets, the estate plan that started with only lifetime documents protecting on incapacity then expands to include a simple Will. At this time the client learns about the probate process and begins to understand how proper planning will make things easier for their loved ones should something happen to them. It also helps to remind the young adult of their own mortality and the importance of preparing for the future.

     As the client marries and starts a family,  their planning expands at the same time as the family. Wills become more complex and include guardianship provisions to protect minor children. Additionally, the attorney-client relationship grows, giving the client access to the attorney's advice regarding employment issues, assistance in starting businesses, and referrals to financial advisors.

     As a married couple’s assets and family continue to grow, at a certain point it will make sense to include a Living Trust in their estate plan. By this time, the couple has experience with their attorney and with estate planning. They are equipped to understand the benefits of expanding their estate plan. From this point forward, as the client’s life changes, their long-standing relationship with their estate planning attorney provides them the opportunity to learn about more advanced techniques if those techniques are relevant to their personal and financial situation.

     When a client treats estate planning as a lifetime process, the client develops a sense of the importance of estate planning at various stages of their life. It can also provide a peace of mind that loved ones are protected in the event of unexpected illness or death.  By establishing a relationship with professionals while they are still young these clients can avoid expensive mistakes in the future.

     For planning to be successful, both the client and the attorney must be engaged in the process on the long-term basis. If either the attorney or the client treats estate planning as a "one-time event", long-term benefits and protection of estate planning will be missing. If both the client and the attorney are proactive in developing the relationship, the client will enjoy the benefits of the long-term planning and the protection and peace of mind that goes with it.

Matt Ferrara

Why a Will is only Part of an Estate Plan

     Prospective clients will sometimes arrive for our initial consultation convinced all they need is a simple Will to have a complete estate plan. Sometimes a Will may be all the client needs, but more often after a review and discussion of their situation, we recommend the inclusion of a Living Trust. After explaining how Wills and Trusts work and their benefits, clients will occasionally comment that Wills and Trusts seem to serve the same purpose. Today’s blog addresses the ways that Wills and Trusts vary. 
     While both a Will and Trust can set up provisions for the distribution of a decedent’s assets, there are significant differences. The biggest difference between a Will and a Trust is that property passing to beneficiaries through a Will must pass though the potentially long and expensive Probate process, while property passing via a Trust does not. This is because Probate only attaches to property owned individually by the decedent. A Trust is a legal entity separate from the individual (even though the Grantor totally controls the Trust during lifetime), and cannot die, and therefore assets owned by the Trust almost never require the intervention of a court to facilitate transfer. 

     Before any actions are taken with assets passing through a Will, the Probate must be opened and the Court must approve the Personal Representative. This can take time and create problems if any decisions need to be made quickly. While a Will provides directions as to what happens to assets, the Probate Court stays involved and confirms the Personal Representative’s actions are appropriate and the assets are accounted for properly. A Trust, on the other hand creates a contractual relationship between the Grantor, who creates the Trust, and the Successor Trustee. The Grantor specifies in the Trust the beneficiaries who are to receive assets, when they are to receive assets, and the powers given to the Trustee to administer the Trust provisions. That relationship functions without the intervention of the Probate Court.

     Another difference between a Will and a Trust is that a Will only functions following the death of the person who executed the Will. The Trust on the other hand functions from the moment of its execution. This means that should something happen to incapacitate the Grantor, a successor Trustee can immediately step it to care of the Grantor’s assets and use those assets for the Grantor’s benefit. A Will does not provide this benefit, and absent a Durable Power of Attorney or the Probate court appointing a Conservator, assets may be inaccessible. 

     Estate planning is a personal activity and each person’s circumstances are unique. The insight of an knowledgeable attorney can be the difference between an easy transition following a death and a long drawn out probate process.

Matt Ferrara

Should I Panic about being Named Successor Trustee?

     In October, we explained how a trust works. We have also recently addressed the role of the Personal Representative in the probate process. As a follow-up to those posts, today we will discuss the role of the successor trustee of a Living Trust. 

     Normally the Grantor, the person who set up the Living Trust, acts as the initial Trustee, with total control over the trust assets. The Grantor designates other individuals or corporate fiduciaries, to act as successor Trustees upon their incapacity or death. Most successor trustees do not understand their role, either during the lifetime of the Grantor or at their death or disability. It is important that the Successor Trustee be aware of their designation so that they can assume the role and responsibilities of trustee quickly upon the death or incapacity of the initial Trustee. The successor Trustee should either have access to the trust document because they have been given a copy of the Trust document or at least know where the document is located. The Successor Trustee must review the document in order to understand their obligations. Because the Successor Trustee is a fiduciary and therefore subject to a high degree of care in order to avoid liability for actions the trustee, should seek clarification of any questions from the attorney who drafted the trust or another attorney regarding the successor’s responsibilities. 
     The trustee can use a copy of the Trust or the Certificate of Trust Existence and Authority to show their authority when acting on behalf of the Trust. These documents will show their power to deal with assets of the trust, wherever located. Armed with knowledge of the trust and a copy of documents showing their authority, the trustee can then take action on behalf of the trust beneficiaries. One of the Successor Trustee's important duties is determine the scope and amount of the Trust assets and inform the institutions maintaining those assets of the change in Trustee. This step is much like the Personal Representative's role in discovering the estate's assets except that it does not rely on the Probate Court's order to establish the Trustee's authority to act and therefore can occur quicker and with fewer problems. It is important for the successor Trustee to establish a thorough accounting of the Trust assets because, like the Personal Representative, the successor Trustee is responsible for providing the Beneficiaries of the Trust with a regular accounting of the Trust assets. Our next post will deal with more of these important actions.

Matt Ferrara

Estate Planning for a Second Marriage

     Recently a colleague asked for information about the use of trusts in estate planning following a divorce and remarriage. Since we have not addressed this topic yet, a post on the subject seemed appropriate. It is important for client to consider estate planning issues following a divorce and remarriage to avoid inadvertently disinheriting either the new spouse or children of the first marriage. Clients (husband and wife) in their first marriage usually have common goals, such as providing for the surviving spouse during their lifetime and leaving any remaining assets to their children equally. This makes estate planning relatively simple, because a living trust holds the assets to limit tax liability, avoid probate, and ensure the assets pass to the surviving spouse for use during the spouse's lifetime and then on to the couple's children.

     Clients in second marriages, whether because of divorce or death, usually have a more complex situation with which to deal. In those circumstances there are concerns regarding the surviving spouse, children from the first marriage, the surviving spouse's children, and possibly children from the second marriage. Clients wish to ensure the surviving spouse has sufficient assets during lifetime, while also ensuring that the assets they brought into the marriage eventually pass to their children.

     A frequent concern of clients in their second marriage is ensuring that both their second spouse and their children receive gifts following the client's death. A common technique used to achieve this goal provides the surviving spouse with a regular stream of income from the trust assets, while reserving distributions of principal for the client’s children following the death of the surviving spouse. When using this technique, it is also common to provide the trustee with the discretion to make distributions of principal to the surviving spouse, under a limited set of circumstances, to ensure that the surviving spouse has sufficient assets to live on following the first spouse's death. It is important in these circumstances that the trustee understand that part of their responsibility is to balance the best interests of both the spouse and children from the first marriage in making distributions. It is a good idea for the client to discuss these issues with the named trustee.

     Alternatively, some clients opt to address this issue by distributing different assets to their surviving spouse and their children. For example, a trust might provide that the client’s children receive immediate distributions from the trust assets equal to the payout from a life insurance policy. The client may also provide that the children are beneficiaries of the client’s IRA or other retirement accounts. The trust then provides that the client's surviving spouse receive all income from the remaining trust assets, and gives the trustee broad discretion to make distributions of principal for the surviving spouse's needs. Any trust assets that remain following the death of the second spouse are distributed to the client’s children. This technique ensures that that the client’s children receive an immediate gift as well as the potential for additional assets should any remain after ensuring that the surviving spouse has sufficient assets during the their lifetime.

     A well-drafted trust is required to make use of these techniques because you need an entity maintain the trust assets instead of passing those assets directly to the surviving spouse. During a first marriage, a common technique for probate avoidance is to own property jointly with rights of survivorship. This allows the surviving spouse to remain the sole owner of the property following the first spouse's death without the property passing through probate. If this same technique is used following a second marriage, the surviving spouse becomes the sole owner of the property or bank account and then is free to do with that property whatever he or she chooses. This means that property the client intended for children to inherit following the second spouse's death could pass directly to the second spouse's children or family and completely disinherit the client's children from the first marriage.

     There is not always controversy about who inherits which assets. In many second marriages, spouses and their children from first marriages live in perfect harmony. Even in these circumstances, the spouses may wish to ensure that particular assets, such as vacation homes or collectibles, that each has brought into their second marriage are eventually inherited by their own children. With proper planning, it is possible to maintain these separate assets for both spouses’ use while ensuring that after the second death the assets will go to each spouse’s children, while assets earned jointly during the marriage are split equally amongst all the children.

     It is clear that the circumstances that exist when contemplating estate planning for a second marriage involve a level of complexity that generally does not exist when planning during a first marriage. These circumstances can become even more complex if either spouse’s children has special needs, dependency issues, creditor problems, or if there are significant personal conflicts between children and second spouses.  You may actually have a case where the new spouse has his or her own issues, which need to be addressed. An example of this occurs if the new spouse has an unpaid federal income tax liability and the spouse transfers a residence originally owned individually to the other spouse as joint tenants. Now the IRS can attach a lien to the residence. It is important to speak with an experienced attorney to ensure that the estate plan meets the goals of both spouses and is implemented with a minimum of conflict.

Planning to Pass Values along with Valuables

     As estate planning attorneys, we spend a considerable amount of time with clients discussing estate taxation, probate avoidance, and beneficiary selection. We worry about the value and type of assets in the estate and the titling of those assets. We work with the clients to determine those loved ones who are to receive a portion of the estate and the manner in which they are to receive it. In short, we worry about their "tangible valuables".

     Sometimes, as part of the discussion, clients' concerns about their beneficiaries' lifestyles creep into the conversation. Are the beneficiaries mature enough to handle large sums of money? Do they have problems of their own, whether it is a rocky marriage, creditor issues, or even a dependency issue? Some conversations go even deeper, to an area where most attorneys, and perhaps other professionals, are wary of treading. Clients start to question whether their beneficiaries have developed values and beliefs similar to the client’s that makes the client comfortable with passing on tangible valuables. As these concerns become more prevalent, we as planners need to be aware of how we can assist our clients in addressing them. 

     Jim Stovall, author of "The Ultimate Gift", a book in which the main character passes on 12 life lessons to his grandson, has said "Giving second- or third-generation family members resources without a mental, emotional and informational foundation is like giving them a loaded weapon without instruction or caution." More of my clients are starting to feel the same way. When a client expresses these concerns, it is a good idea to take a holistic approach to estate planning and introduce them to the concept of an “Ethical Will” which they can use to pass on their "values" as well as "valuables.” 

An Ethical Will is a document that can transmit a client's core values and principles. It is not legally binding, but rather an expression of the beliefs, opinions,and cherished memories a person does not want forgotten. An Ethical Will may contain of some or all of the following,

     Things you learned from your grandparents or other relatives that you want your children to remember;

• Important events in your life;
• Things learned from an experience that you want to pass on; or
• An expression of the values you want to pass on to your beneficiaries.

     A simple Google search of the words "ethical will" will provide more than enough information and examples if one wants to consider writing an ethical will. It need not be something larger or formal, and may begin with simple thoughts jotted down from time to time. The website, www.ethicalwill.com, suggests some tips for writing an ethical will, such as:

1. Over time, write down ideas, a few words, or a sentence or two about things like: 

• Your beliefs and opinions 
• Things you did to act on your values 
• Something you learned from others 
• Something you learned from experience 
• Something you are grateful for 
• Your hopes for the future 

1. Write about important events in your life
2. Save items that articulate your feelings, e.g., quotes, cartoons, etc.
3. Review what you have collected after a few weeks or months and arrange paragraphs in an order that makes sense to you.

     While an ethical will may be beyond what many clients are willing to prepare, it is becoming more critical that people pass along their values before they pass along their valuables. I once had a discussion with a bank trust officer who said to me that he thought third-generation money was the most useless. The first generation worked hard to earn the money. The second generation saw how hard their parents worked and therefore had an appreciation of the money. However, the third-generation had no idea how hard it was to earn, had no appreciation for the money, and therefore rarely put it to good use. While leaving one's tangible estate is important, it can be even more impactful to leave an "intangible legacy" to your loved ones.

Why is this Attorney Asking for all my Personal Information?

     When meeting a potential estate-planning client for the first time, it is a normal practice for an attorney to request substantial amounts of personal information prior to agreeing to represent the potential client. This information often includes details about the client’s employment, the client's children and their spouses, real property holdings, bank accounts, investment accounts, retirement benefits, and life insurance. Prior to the first meeting with a client at our office, we request the client complete checklist that requests this information, and ask the client to consider whom they might designate to act on their behalf for administrative purposes if something should happen to them. Occasionally a client will complete the checklist providing us with detailed information, but more often, the client has not taken the time to collect the needed information. Today's blog addresses the question of why an attorney requires so much information prior to an initial consultation and why a potential client should not be concerned about providing the attorney with that information.

     Contrary to what some potential clients think, the purpose of having full asset information is not to determine how much a client can afford to pay for estate planning. Generally, estate planning attorneys need much of the information they request from a potential client for the initial meeting because it is difficult, if not impossible, to analyze a client's situation in a vacuum. With full information, and input from the client during the meeting, a proposed estate plan can be crafted that meets the client's needs. This will save the client both time and money. As most professionals know, it is also a good idea to get as much information immediately as possible in order that planning is not delayed because clients "get busy with life" and delay providing information needed to complete the planning process. The sooner information is available and client decisions are made, the sooner documents can be drafted and executed for protection of the client and the loved ones. In addition to the documents themselves, a major goal of the estate planning process is ensuring the smooth transition of the client’s assets to their loved ones with as little delay as possible. When a client fails to inform their estate planning attorney of the full extent of those assets, it becomes impossible to achieve this goal. During the initial consultation with a potential client, the attorney is attempting to educate the client regarding the goals of estate planning and the purpose of the assorted documents involved, while ensuring that the client has provided the attorney with sufficient information to implement a plan that achieves the client's goals. Let us consider some of the information requested by an attorney and the purpose behind the request.

• Information about Children and Children's Spouses: Frequently children are primary beneficiaries of a client's estate plan, therefore it is important to know the ages of those children, their marital status, whether there are any concerns about the stability of that marriage, whether those children have any children of their own, and whether the client has any concerns regarding their children's ability to manage assets. This information allows the attorney to make recommendations regarding distributions to the children that take advantage of the benefits of a living trust in order to achieve the client’s goals
• Property holdings: Property holdings can substantially increase the value of an estate while at the same time presenting a variety of liability and credit protection issues. By knowing the full extent of a client's property, the attorney is able to determine if more than one type of trust is needed and whether it is appropriate to fund that property to a client’s trust. It may be more beneficial to establish an L.L.C. to act as a holding company for the property, thus limiting personal liability in the event an accident occurs on the property.
• Bank and Investment Accounts: This information is important both because it is the most transparent valuation of a client’s assets and because such accounts are representative of the client’s level of planning. By evaluating the distribution of a client’s assets between such accounts, an estate planning attorney is able to evaluate the potential for future developments that may necessitate more complex planning.
• Retirement Benefits: Retirement benefits are often a large part of a client's assets, and it is especially important for estate planning attorney to have an awareness of the retirement benefits, because of the substantial regulation that exists surrounding the inheritance of such benefits. By providing the estate planning attorney with the complete scope of such assets, it is possible to ensure that potential beneficiaries can take advantage of more beneficial distribution provisions as well as ensure that assets are available over a longer period for beneficiaries who may be unable to manage an inheritance effectively.

     Looking at the list of information we have discussed it is understandable that a client may be reluctant to provide a relative stranger with so much detailed personal information. It is important to know however, that by agreeing to meet with a potential client for a consultation, whether paid or free, and attorney creates and attorney-client relationship that provides the potential client with attorney-client privilege. This attorney-client privilege creates a fiduciary duty for the attorney and limits the information and attorney is legally allowed to provide to others regarding the client. If an attorney violates this fiduciary duty or inappropriately provides information to other parties without a client's approval, the potential client has substantial legal remedies against the attorney. Due to the attorney-client relationship created during the initial consultation, attorneys go to great lengths to ensure that they do not retain extraneous information regarding potential clients who do not engage their services, including sending follow-up letters to those potential clients who opt not to retain their services returning any personal information to their possession.

     An attorney's goal is to provide the best service for clients. Having as much information as possible about a client's situation makes meeting that goal easier. With a better understanding of why an attorney requests information, it becomes much easier for a potential client to disclose that information in a timely manner, thus ensuring that the attorney is able to craft an estate plan that takes into account both the scope of the client assets and the state of potential beneficiaries in order to achieve the client's goals for their assets. As with many other matters, an experienced estate-planning attorney is willing to answer a potential client's questions regarding the information the attorney is requesting. While it is important for an attorney to have adequate information, each potential client must feel comfortable with providing information and should never feel pressured to do so. The client should recognize, however, that without sufficient information the attorney will be unable to provide proper services and may refuse to represent a client who is overly reluctant to provide needed information.

Other IRA Issues with Estate Planning

On Tuesday, I discussed funding retirement benefits to a Living Trust and some of the issues that may come about because of the funding. In response to that post I received a few comments and questions on related issues and thought it a good idea to expand on the topic in today's post.

The first comment talked about the opportunity of using a direct IRA beneficiary trust as well, to mandate a "stretch-out" of distributions and protect non-spouse beneficiaries from creditor claims. We discussed the IRA Trust in our post on November 20, 2012, but it is worthwhile discussing it again.  

The “IRA Trust”, is a stand-alone trust, separate from a Living Trust that acts as the beneficiary of IRAs or retirement other benefits. The provisions of an IRA Trust satisfy all of the regulations related to the distribution of IRAs and retirement benefits, allowing the beneficiaries to take advantage of their inherited benefits over their lifetime. Using the IRA Trust allows the client to design a special trust specifically for the IRA assets and perhaps even for different beneficiaries then for the majority of the estate under the client's Living Trust. Except for the required minimum distributions (RMDs), the IRA assets can continue to grow tax-deferred and protect beneficiaries against their own bad habits of this spending in mismanagement of money. Additionally, if an IRA trust provides for more than one beneficiary, if the IRA beneficiary designation form specifies the percentage of the account that will go to a specific sub trust for each of the beneficiaries, each beneficiary can then use their own life expectancy in calculating the RMDs for a particular year.
     A second comment asked how one meets the "see-through" trust requirements when one of the trust beneficiaries is a charity or other non-individual beneficiary. When a client names non-individual trust beneficiaries, those beneficiaries can be "removed" as a beneficiary for the purposes of determining the “see through” status of the trust. To “remove” the non-individual beneficiary the trustee must either make a distribution of the amount allocated to that beneficiary or arrange for the beneficiary to disclaim their interest. The deadline for this “removal” is September 30 of the calendar year following the calendar year of the account owner's death (the "Beneficiary Finalization Date"). If this is accomplished, the regulations exempt the non-individual trust beneficiaries for purposes of determining individual beneficiaries.
One might ask why anyone would disclaim his or her interest in a Living Trust. In some cases an older beneficiary will disclaim their interest in the IRA assets of the trust, because it will allow the younger beneficiaries (perhaps grandchildren in their 20s) to extend the IRA distributions over the lifetime of the oldest life expectancy of that group. This is important because unless you eliminate the elder beneficiary, all of the beneficiaries must use the oldest beneficiary's life expectancy in calculating the RMDs. Alternatively, a charitable beneficiary may disclaim an interest in IRA assets in exchange for a larger immediate gift that it can invest or put to use immediately.

On a final note, if there are sufficient assets in addition to the IRA to protect loved ones, and the client is charitably inclined, client may want to consider designating one or more charities as the beneficiary of the IRA. This will satisfy their charitable inclinations will save significant income taxes because the IRA will not be subject to income tax when paid to the charity. This can save a large amount of tax, especially where the estate is taxable for estate tax purposes and then the IRA is taxed for income tax purposes as it is distributed to individual beneficiaries. Naming a charity as the IRA beneficiary excludes it from taxation for federal estate tax purposes and income tax purposes.

Again, it is important that a client discusses their desires with experience counsel prior to designating beneficiaries in order to protection of beneficiaries and minimize taxation of the account.

Talking About an Estate Plan

As we discussed previously, the estate planning process does not end with the signing of the documents. One aspect of the process that is the client’s responsibility involves discussing planning with those individuals named to make decisions and potentially with beneficiaries.

In our practice, we have found that the best plans are ones where everyone involved knows the plan and there are no surprises. This does not mean that the client need to discuss every detail of their estate with every person named in the documents. However, providing those whom the plan most affects with sufficient information makes execution of the plan significantly easier.

First, it is important to inform those people who have been designated to make decisions upon the client’s incapacity. We encourage our clients to discuss this prior to the signing, therefore avoiding a situation where a named individual intends to immediately step aside. Talking with your named designates ensures that all of the individuals named in an estate plan are willing to act if called upon, and decreases the chance that the probate court will become involved in naming a successor designee. Additionally, it is important to inform those designees where those executed documents are kept so they can be located easily in the event the need to step in arises.

In addition to informing those individuals named as designees of their potential roles and duties, it is also important to discuss with these people the client's concerns and desired treatment if called upon to act. It is important to provide designees with sufficient information regarding values, beliefs, and wishes so that they are able to make decisions that they feel are in the client's best interest and reflect decisions that the client would make were they not incapacitated. Frequently these discussions will touch upon sensitive topics such as the circumstances under which the decision to withhold medical treatment is appropriate. Many clients express a reluctance to have such discussions due to their sensitive nature. If a discussion does not occur, at a minimum we recommend providing a letter with instructions regarding those issues. The letter can be kept with the Patient Advocate Designation.

The importance of establishing guidelines for designees is not limited to those named as Patient Advocate. Should a client become incapacitated, those who will act on their behalf as Successor Trustees under the Trust and Attorneys in Fact under the Durable Power of Attorney must also be aware of the client's overall goals. Both of these roles may involve providing access to assets for dependents, continuing the client's charitable gifting, and the operation of the client’s business. If those individuals named are not familiar with the client’s desires, it makes acting on behalf of the client significantly more burdensome. Again, the client can provide many of these details in a separate writing that is kept with the relevant documents. Important information to be contained in this writing includes specific instructions as to what should be done with particular assets should the client become incapacitated, instructions for the continuance or modification of charitable giving, and instructions regarding the operation of businesses to name a few.

In addition to designees named in documents, others may benefit from receiving advanced information about the terms of an estate plan. Providing beneficiaries with information regarding potential inheritances establishes reasonable expectations and reduces the chances that a beneficiary will challenge the terms of the estate plan. How much information a client chooses to give to a beneficiary depends on the family situation. There is no correct answer to this question, as the right amount of information can vary significantly from client to client and even from beneficiary to beneficiary. Where some beneficiaries have sufficient experience and maturity to provide them with the full details of their potential inheritance, others may misuse such information and engage in patterns of reckless or irresponsible behavior.

It is been our experience however, that beneficiaries who are informed of distributions for their benefit in at least general terms create the least amount of problems following a death. When beneficiaries have an understanding of the donor's reasoning in making the gifts they make, there is often less conflict following the death. This is not to say that a discussion of potential distributions solves all problems. There are individuals who, upon learning of their share of an estate, will always feel they have been treated unfairly.

In addition to discussing the specific distributions laid out in the in the estate plan it is also frequently beneficial for a client to discuss the distribution of their personal property. By learning which items of property their loved ones feel will provide a connection to the client after death, the client is better able to ensure that their loved ones are able to retain those items and the memories associated with them. When a client discovers that multiple loved ones have an interest in the same items, it is possible to head off conflicts by designating particular individuals to receive particular items so that disputes do not occur following a death, avoiding further pain during an already difficult time.

Discussing estate planning, medical concerns, and death are difficult subjects. However like much of the rest of the estate planning process, by engaging in these discussions while people are healthy and active, it is possible to avoid a great deal of trouble should a person become incapacitated or after they have passed away. In our practice, we strive to provide clients with peace of mind that their loved ones will be cared for following their death. By encouraging our clients to engage in discussions regarding their planning we hope to avoid potential pitfalls and awkward situations as well as additional grief, strife, or problems after a client's death.

Using your "Imagination" in Designing a Living Trust

My clients will often ask if they can provide for certain events in their Living Trust documents. The usual answer is that "the only limit on what you can put in your estate planning documents is your imagination." However, I do temper that with the statement that you should not let your imagination run wild.

     While it is true there is almost no legal limit on what you do in your Living Trust, it may lead to bigger issues later. While we are all concerned that our beneficiaries may not have the maturity or good sense we have developed after a lifetime of experiences, we should be careful not to be so restrictive that it makes it difficult to administer the trust.

     For example, I had a client who wanted to place restrictions on distributions for young children in the event he predeceased them. He wanted to require that they received no inheritance unless they earn a degree from a specific college. While it was a worthy desire, it did not take into consideration that the children might have no interest in attending that college, for any number of reasons unrelated to their desire for a college education. An alternative college might better suit the child's interest and skills. Alternatively, the child might be better suited to entering into a trade rather than going to college for which there is no interest.

     Another client had three daughters and at any given time was at odds with one of them, although not always the same one. Over the course of ten years, one of the three was always excluded from the Trust. I cautioned the client that trying to use her estate to control her children might not be the best way to establish a good relationship, but every twelve to eighteen months, she revised her trust to remove one daughter and provided only for the other two. I did not look forward to the day I had to explain to the three daughters that only two of them were beneficiaries of her trust. Eventually, my client concluded that it was counterproductive to try to control her children with her money and asked that I revise her trust to provide for all three daughters equally. She died unexpectedly a few months later, but the daughters shared equally because of the last trust amendment.

     A third client had three sons, all in their 30s. One son was the "good son" and was to receive a share of the trust immediately upon the death of his parents. The client did not speak with his second son because of a business arrangement gone awry. That son borrowed money from his father to go into business, then grew bored with the business, and left it to his father to clean up the mess. This lead my client to provided that this second son was not to receive any of his inheritance until he reached age 65. The third son was also not to receive his inheritance until age 65, unless "he was not married to that woman." Including provisions such as these (and some even more imaginative) in the trust is the client’s prerogative but, as you can imagine, may cause serious problems and possibly create sibling disharmony when the parents die.

     Many clients desire to promote their own value system to their beneficiaries and discourage unproductive behavior. Trust provisions for this purpose include:

1. Allowing a Trustee to make distributions to assist in the purchase of an automobile at certain ages and upon achieving a specific grade point average.
2. Providing for a distribution to a beneficiary upon enrolling in college.
3. Distributing an annual award for academic performance.
4. Distributing an award upon receiving a Bachelor's degree, especially within a designated period of time
5. Providing an award for receiving an advanced degree.
6. Making a distribution to match the beneficiary's earned income, up to a certain maximum amount.
7. Allowing distributions to assist in the purchase of a residence.
8. Allowing distributions to assist in starting a business.
9. Requiring financial training to assist beneficiaries in managing distributions
10. Providing for distributions for the cost of traveling to visit family members in an attempt to encourage and maintain relationships among children and grandchildren.
11. Preventing distributions to those not engage in productive activities or who are substance abusers

     These and many other incentive provisions are possible, but should not be added to a document without serious thought of the consequences as well as possible drawbacks or traps created because circumstances may change in the future.

One of the great freedoms of a Living Trust is the ability to dictate the exact distribution of your assets after you are gone. It is important to temper that freedom with common sense and to engage an experienced attorney to seek out potential problems with your distribution instructions. The trust is a tool that can assist in protecting your loved ones from potential problems in life, but just as it is nearly impossible to use a hammer on a screw, tools have limits. Attempting to work outside of those limits can have unexpected and sometimes disastrous consequences.

The Importance of Regular Document Review

Many of my clients, after signing their estate planning documents, express with relief, “I'm glad we’re done with that task". Whenever I hear that statement, I remind my clients that, while executing documents is an excellent first step in the estate planning process, as their life changes, their documents may someday need changes, updates, or revisions. I suggest three primary events that should cause them to review and possibly update their estate planning documents:

 Substantial Change in the Value of Assets

An important goal of estate planning is to minimize or avoid gifting and estate taxes. As asset values increase, especially the point where a portion of the estate may be subject to estate taxes, it is critical to review documents to determine if the current strategies implemented are sufficient to achieve planning goals and to determine if different or additional strategies are advisable to protect against possible tax liability.

As assets increase, it may be advisable, or desirable, to take advantage of advanced gifting strategies for loved ones. This not only benefits family in the near-term, but also reduces the value of the future estate, thereby reducing estate tax liability. Certain gifting strategies also have an effect on income tax liability. By transferring income-producing assets to children or grandchildren, the income created by those is taxed at a lower rate due to the new owner’s lower total income.

In addition to reviewing an estate plan in regards to eventual distributions, as assets increase it is important to make sure additional assets are appropriately included in the trust property. Proper funding is important to achieve the second goal of estate planning, probate avoidance.

An increase in assets is not the only reason to review estate plan documents. If the value of assets decreases, it may be possible to simplify an existing estate plan by eliminating revocable trusts that are no longer necessary. Additionally, existing gifting plans may require review to ensure the existence of sufficient assets to provide for continued personal well-being.

Change in Family Situation

The family situation and dynamics are rarely stable, with many possible events creating a desire to modify an existing estate plan. Those events include,

1. The birth of additional children
2. The birth of grandchildren and a desire to provide for their future in addition to, or in lieu of, providing for children
3.  A special need arises with a child or grandchild
4.  A child demonstrates greater maturity earlier than anticipated, or perhaps demonstrates significant immaturity, raising questions about their ability to handle funds
5.  A parent or another elderly relative indicates a potential financial need
6. The need to remove an ex-spouse as a beneficiary following divorce
7.  In contemplating remarriage the need to ensure protection for both a new spouse and children from a prior marriage
8.  A significant change in personal health
9.  For any number of reasons, those people chosen to act as guardians for minor children, trustees, or persons designated to make legal or medical decisions in the event of incapacity are no longer appropriate choices.

These and many other naturally occurring family events require periodic review to make sure that estate plan documents reflect the changing situation and present desires.

Changes in the Law

Since 1976, almost every year has brought a modification to federal estate tax statutes. Case law is constantly evolving as the Internal Revenue Service litigates positions in opposition to strategies used by taxpayers to minimize or eliminate estate taxes. In addition, state law as it relates to probate, trusts, and powers of attorney and patient advocate designations has changed a number of times. Regular review of documents and the status of the law help ensure maximum estate tax and probate savings.

These three factors may have different relevance for clients with different situations. For an older client whose assets remain constant there may be little need to revise estate planning strategies for tax law changes, but it may be more important in the family dynamics change concern arises for beneficiaries with previously unforeseen issues. For younger clients with growing families and growing balance sheet, document review becomes important as assets approach taxable levels, or the birth of children creates an increased need for protection in the event the unexpected occurs.

Whatever the reason, it is important to be mindful that in order to provide maximum protection for loved ones and minimize potential tax liability estate planning must be an ongoing process. For younger families with rapidly changing lives, a review every three to four years, or perhaps even more frequently, is advisable. For families in more mature or secure situations, less frequent review is necessary. A good estate-planning attorney should provide guidance when there is a change in the law that affects existing documents, but since a client’s personal life rarely makes front-page news it is important to keep attorneys apprised of major life changes. This allows them to provide guidance and support that creates peace of mind from knowing that an estate plan continues to provide protection for loved ones.

The Value of Annual Gifting to an Estate Plan

As we assist a client preparing their estate plan, we must be aware of a number of factors, one of which is a desire to minimize the amount of assets subject to the Federal Estate Tax. The Federal Estate Tax is the tax levied when the estate of a decedent transfers assets to beneficiaries. Currently the first $5,120,000 transferred is exempt from taxation (this is the “Estate” portion of the Estate and Gift Tax Lifetime Exclusion). The value of gifts (other than "Annual Exclusion" gifts which will be discussed later) that the decedent made during their lifetime reduces the $5,120,000.00 exclusion dollar for dollar (this is the “Gift” portion of the Lifetime Exclusion). After a person has exceeds the $5,120,000.00 mark, further gifting (either during life or at death) results in a tax liability. Keep in mind, each person has their own Lifetime Exclusion, so married couples can transfer  more than  $10,000,000.00 before incurring any tax liability, and the present law even allows a widow to use their deceased spouse’s unused Exclusion.

For most clients, knowing that they need to give away $10,000,000 before the IRS comes knocking is reassuring. It means that even if they succeed in accumulating a substantial estate, they can make gifts with little worry about paying anything extra in taxes. You likely remember however that the current $5,120,000 Lifetime Exclusion is scheduled to decrease to $1 million beginning in 2013. In addition, the top tax rate for gifts is scheduled to increase from 35% to 55%. If Congress does nothing and the default outcomes occur, this change will pace increased emphasis on clients addressing their lifetime gift planning now. Last week we addressed the possibility of making large lifetime gifts before the end of the year in order to take advantage of the current Estate and Gift Tax Lifetime Exclusion. It is important that clients look at those options before the end of the year. However, even if a client is not interested in making large gifts, the client can benefit loved ones by making gifts using another exclusion, the Annual Gift Exclusion.

The Annual Gift Tax Exclusion allows a person to make gifts of $13,000 or less to as many people as they desire each year, whether or not they are related, without incurring any tax liability and without using any portion of the Lifetime Exclusion. This means that a person with two children and four grandchildren could make Annual gifts of $13,000 to each of those people (totaling $78,000) without using any of their Lifetime Exclusion. As with the Lifetime Exclusion, the Annual Gift Exclusion is unique to each person, so a married couple can each make gifts to children and grandchild (using the example above a married couple can give away $156,000 each year without incurring any tax liability). While clients only should make such gifts if they are comfortable they have sufficient assets for their own  needs, a schedule of regular gifting can reduce the assets of person to the point where their estate has minimal tax liability.

For clients that worry that making substantially lifetime gifts will negatively effect their beneficiaries, due to concerns over addiction, problem marriages, or even a concern that the beneficiary will work less due to the Annual gift, additional planning can allay these concerns.

A primary tool to delay a beneficiary’s access to gifted funds is an Irrevocable Trust for the beneficiary’s benefit. The client makes the annual gifts to the Trust, thus limiting the beneficiary’s use of the gift subject to the terms of the Trust. Frequently, the terms of the Irrevocable Trust are similar to the terms of a client’s Living Trust, such that a beneficiary is able to request funds from the trustee for a limited number of reasons and then receives distributions of principal following the client’s death.

A gift to an Irrevocable Trust for a beneficiary must be a "present interest" in order to qualify for the Annual Gift Exclusion. This means that a beneficiary must have the right to immediately take possession of the gift and use the gift as the beneficiary pleases. However, by using a “Crummey Notice” a client is able to side step this limitation. As we have previously discussed while discussing Irrevocable Life Insurance Trusts, a “Crummey Notice” informs a beneficiary of their right to withdraw the Annual gift for a limited period of time, otherwise that gift becomes part of the trust for the beneficiary’s benefit. Most beneficiaries are aware that future gifts may be conditional upon the beneficiary's willingness to let the "Crummey Notice" period lapse and allowing the gift to be held in trust. For minor beneficiaries “Crummey Notices” are signed by Guardians, thus for clients making gifts only to their own minor children, husbands may sign the “Crummey Notice” for the wife’s gift and vice versa.

An additional tool for gifting to minor children is the §529 Education Savings Plan. The primary advantage of a §529 plan is the earnings of the plan are not subject to Federal Income tax and generally not subject to State Income tax when used to pay for “qualified education expenses” including tuition, books, computers, and room and board. While contributions to such plans are not deductible from Income tax purposes, §529 plans do allow individuals to pre-pay up to five years of contributions in one year, which will count as gifts made in the current year and the following four years. Using the example above, the couple with four grandchildren can contribute $130,000 in the first year to a §529 plan for each grandchild, totaling $520,000). §529 plans are flexible and there is no penalty for changing the beneficiary from one family member to another or for combining §529 plans with the same beneficiary. When clients desire to provide for education of family members and have the  ability to pre-pay contributions, §529 plans are an excellent part of a schedule of regular gifting.

A final method of gifting involves the direct payment of medical care and tuition expenses. Using this method, a person may make unlimited payments, directly to a school or medical provider, for the benefit of another person. Gifts made in this fashion do not count toward either the Annual Exclusion or the Lifetime Exclusion. The Internal Revenue Service broadly defines the meaning of medical care to include not only diagnosis, treatment, and prevention of diseases but also payments for transportation to such care and payments for qualified long-term care services. Tuition gifts can pay for both private and public institutions and are not limited to college tuition, private primary and secondary school tuition is also payable. The key for a client making use of this method of gifting is making payment directly to the school or medical provider.

As we have said both earlier in this post and in discussing large lifetime gifts, before making any gift it is important to consider the consequences of that gift. Clients should consider the impact on their own lives, the chance that they will need the gifted funds later in life, and the impact on the beneficiary receiving the gift to determine if the benefits of gifting outweigh the potential consequences. Using the Annual Gift Tax Exclusions and the Lifetime Estate and Gift Tax Exclusion may require the filing of Gift Tax Return, and  making gifts to and Irrevocable Trust requires the existence of a valid trust, so clients should make sure to include their attorney and tax professional are a part of the planning process. Annual gifts are an effective way to pass assets on to future generations without the expense of additional tax liability. The sooner a client begins a regular gifting program, the more effectively they can make use of the process.