No Kids? An Estate Plan is Still Important

hoffmankimcolorThere are certain times in life where the need for a proper estate plan is so clear, its like the wail of a newborn at 3AM.  How will that child be cared for if something happened to you?

But what if you do not have children?  The answer may not be as clear, but it is no less important.

If you do not specify in a proper Will or Trust to whom and how your want your assets disposed of at your death, the State will do so for you.  Generally, the State will find your closest heirs and divide your assets among them.  Sound ok since that’s where you would send your assets anyway?  Then you should know that intestate (without a will) probate proceedings tend to be much more costly and time consuming than proceedings with a properly drafted Will.  The urgency is even greater when you do not want your brother and his kids to inherit your assets.  To direct otherwise requires an estate plan.

An estate plan is more than just a will though.  A Healthcare Directive and a well-drafted Power of Attorney are key components to a basic estate plan.  A Healthcare Directive names someone to make medical decisions for you in the event you cannot do so, it grants such person authorization to access your medical records under HIPAA, and it may include preferences for end of life care in the event of a terminal condition.  These directives make it much easier on loved ones to properly care for you in the event you can no longer communicate your medical preferences.  Anyone over the age of 18 needs a Healthcare Directive.  A parent no longer has automatic access to the medical records of their children after age 18, but so often an 18 year old is still under the care (financially, and otherwise) of their parent.

The last leg of the stool is a properly drafted General Power of Attorney.  These may be drafted to be “springing”; so that they spring into effect only upon incapacity.  Then, in the event of incapacity, you have previously named a trusted individual to manage your financial and personal affairs.  Should incapacity occur without a Power of Attorney in place, a court may appoint a Guardian or Conservator after an administrative process.

These Powers of Attorney and Healthcare Directives are essential documents, even for those individuals who do not feel a will is necessary because they have no children.  We, of course, still disagree with that notion, and we will be glad to discuss how each of these components of a good estate plan fit your specific needs.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

 

Donald Sterling and the L.A. Clippers: There’s Even More to the Story

Kim NewDonald Sterling was the controlling owner of the L.A. Clippers who made racially insensitive comments that went viral earlier this year.  After a hefty fine from the NBA, a lifetime ban, and a threat to force him to sell his controlling interest, Mr. Sterling, at age 80, still refused to sell his ownership interest in the team.  However, it was not the NBA that forced the sale of the team, it was his wife, Rochelle Sterling (“Shelly”), and the interplay of their estate plan that forced the sale and turned this scenario akin to a made-for-TV movie.

The Sterlings, California residents, created a lifetime revocable trust and funded it with all of their assets, including a controlling stake in the Clippers.  Both of the Sterlings were Co-Trustees and primary beneficiaries.  The revocable trust is the core document of an estate plan in many states, including California.  It controls assets during a person’s lifetime and manages the disposition of those assets at death without the need for the probate process.  As Co-Trustees, Donald and Shelly made decisions jointly with regard to their assets.

About the same time as the racial comments came to light, Shelly had Donald evaluated by two doctors for a determination of his mental capacity.  The doctors concluded Donald indeed suffered from diminished cognitive ability and was exhibiting signs of Alzheimer’s disease.  Pursuant to the Sterling’s revocable trust agreement, Donald could no longer serve as Co-Trustee with such diminished capacity, leaving Shelly as the sole Trustee with sole power to administer the trust’s assets.

Shelly negotiated the sale of the Clippers to former Microsoft CEO Steve Ballmer for $2 billion, despite the protests from Donald.  Donald sued to enjoin the sale and sought damages from Shelly and the NBA.  He argued that he had the proper capacity to remain Trustee, and that Shelly failed to follow the proper protocol in his medical evaluation; therefore, she was not sole Trustee and did not have authority to sell the Clippers

The dispute went to Probate Court in California where the Judge heard arguments as to whether Donald was properly removed as Co-Trustee based on his mental capacity and whether Shelly had authority to sell the Clippers under the terms of the Trust agreement.  In late July, the Probate Court Judge ruled entirely in favor of Shelly and held the sale of the Clippers could proceed even if Donald appealed the ruling.  The Judge dismissed the claim that the capacity argument was merely a scheme by Shelly to sell the Clippers.

This case received a lot of attention for Donald Sterling’s racially charged comments, but the case also deserves a lot of attention for highlighting the issues of incapacity and estate planning.  As the population ages, reports of dementia, Alzheimer’s disease and other forms of diminished mental capacity are on the rise.  Planning for someone else to manage your personal and financial affairs in the event of such illnesses or accident is a crucial part of an effective estate plan.  Who you choose to act on your behalf and how it is determined that you are “incapacitated” are equally important.  Although the events surrounding the sale of the Clippers were not as Donald and Shelly likely anticipated when creating their Revocable Trust, the Trust functioned exactly how it was intended.  Upon the death or incapacity of either Donald or Shelly, the survivor or remaining Trustee would serve as sole Trustee and continue to manage their joint assets, no court intervention needed.

A General Durable Power of Attorney and a Healthcare Power of Attorney or Directive are two key documents that plan for incapacity.  Without these in place, a time-consuming and costly court action will be required to name a Guardian or Conservator to manage the affairs of someone who is incapacitated.

Talk to your estate planning attorney about getting these documents in place for your family.  If you already have Powers of Attorney, give them a quick review, and make sure they still express your wishes and appropriately plan for the determination of incapacity.

 

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Estate Planning for Women

Women are a powerful financial force in today’s economy as they independently earn, manage, and distribute more wealth than ever before.  That’s why at Hoffman & Associates we  feel it’s important for women to take control of their long term financial security and develop a proper estate plan.  A successful estate plan is one that helps protect and preserve your wealth, gives you control over financial matters, ensures children and elders are taken care of, and honors your strong charitable passions.

Today, women face many challenges whether married, divorced, single or widowed, including a possible lack of financial know-how, lower lifetime wages and compensation, and greater responsibility for caretaking of children and elders.  Why are women unique when it comes to estate planning?  First, because women generally outlive men by five to seven years, and the average age of a widow is merely 56 years young.  Some of these single women are faced with managing thousands and even millions in assets without ever balancing a checkbook.  For single working women, compensation is also a major obstacle as women tend to earn less over their lifetime as compared to men and many take time off during child-bearing years, which may affect social security and pension benefits.   Another challenge unique to women is their tendancy to be the main caregivers in the family, making it critical to develop a comprehensive plan for the care of minor and special needs children, as well as elderly parents.  Finally, women generally harbor more charitable inclinations than men making it a priority for them to consider philanthropy and giving as part of their estate plan.

Here is a  checklist women can use in developing a successful estate plan:

  • Become educated in the importance of tax planning, know the current tax laws, become familiar with exclusions and how to take advantage of them, investigate advanced estate planning tools and techniques, including trusts, gifting, and college savings plans.
  •  Create an itemized list of all property and debts, including, but not limited to, insurance policies, securities, bank accounts, real estate, jewelry and artwork, business interests, pension plans, IRAs, and other retirement benefits.
  •  Consult with appropriate advisors (estate planning attorney, CPA, financial advisor) and execute a Will to direct the disposition of your estate, designate who should be in charge, simplify probate, and name guardians for minor children.
  •  Consider a Trust for the protection of children and assets and to reduce the tax liability (income, gift and estate).
  •  Get general powers of attorney and advanced directives for healthcare in place.
  •  Create a viable plan to manage and preserve your estate, keeping in mind the changing exemption limits for passing assets.  Currently the permanent estate and gift tax exemption is $5,250,000.
  •  Consider having adequate life insurance in place to pay taxes if necessary and to help preserve your family’s lifestyle by paying for children’s education, mortgage expenses, taxes or other needs after your death.
  •  Record where a safe deposit box is located and maintain all important documents in an organized manner.  Maintain a written list of all current advisors and keep it with your  list of property and debts.
  •  Provide instructions regarding your funeral wishes and any prepaid funeral plans to whomever may be involved in making such arrangements.
  •  Consider charitable transfers to accomplish your estate planning goals. A charitable remainder trust, charitable lead trust, charitable gift annuity or outright gifts to any number of charities.
  •  If you are a business owner, plan for your business’ succession, so you are deciding who will manage your entity during illness, disability, or after death.

 

Although some women feel uncomfortable taking on financial responsibility for their  future and that of their heirs, we strongly urge every woman, whether married, single, divorced or widowed to take a careful look at their financial situation and plan accordingly. Married women should ensure their estate plan coincides with that of their husbands to adequately take advantage of tax considerations.  And since married women are more likely to outlive their husbands, they must be prepared to ultimately be responsible for the protection and distribution of all assets.  For many working women, their main concerns include retirement planning and long term financial security, guardianship for minor children, caretaking for elderly parents, lowering tax liability, and ensuring assets remain in the family bloodline. We encourage all women to consult with professional advisors to ensure adequate financial and estate plans are in place while also incorporating lifetime goals and wishes.  Hoffman & Associates has created specialized estate planning services  for women designed to address these specific needs.  For more information on our targeted services, please visit www.hoffmanestatelaw.com.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Last Will and Testament

A Will is a basic estate planning document that provides for the distribution and disposition of property and personal assets of an individual after death.  A Will becomes effective upon death; therefore, it may be changed at any time prior to death.  It should also be periodically reviewed to be sure it applies to the maker’s current personal and family situation.  A Will may contain general or specific provisions regarding the care and distribution of property, the distribution of disclaimed property, recommendations for guardians of minor children, the appointment of executors to administer the Will and express desires and guidance regarding the administration of the estate.  Finally, the Will may establish trusts for the benefit of loved ones or charities and trustees to manage these trusts.

The design of our preferred Will for single-marriage clients creates two trusts at the death of the first spouse:  a Marital Trust and a Credit Shelter Trust.   At the death of the first spouse, the Credit Shelter Trust is funded with enough assets to capture the first-to-die spouse’s federal estate tax exclusion amount, and the remaining assets, if any, fund the Marital Trust.

The Marital Trust is funded with any amounts over the exclusion amount because the (100%) Marital Deduction allows an unlimited amount of assets to be transferred to a spouse upon death tax-free.  This structure provides for the benefit of both estate tax exclusions:  initially the federally-provided exclusion, whatever that may be in the year of death, and the marital exclusion for all assets above that amount.  Thus, no estate taxes are due at the death of the first spouse.

While it seems complicated, please keep in mind that the surviving spouse may have control over all of the assets of each Trust, as the Trustee of the Trusts, and would also be the primary beneficiary of the Trusts.

In the event one or both spouses are not U.S. Citizens, additional language must be added to the Will to ensure the couple receives the full benefits of the U.S. estate tax laws.

When children inherit property, we prefer a descendants’ trust created by the Will at the death of the second spouse.  This allows the assets to pass, in trust, to children and future descendants.  This format protects the assets from future estate taxes, creditor issues, divorce or other claims against the descendants.  The descendant, just like the surviving spouse above, upon reaching a certain age, may be the trustee of their trust and will be the primary beneficiary of his/her trust.

 

For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

GRAT Examples

Example of GRAT valuation:

$1,000,000 trust with grantor receiving a $50,000 annuity for 10 years. If the section 7520 rate is 3.2%, the value of the grantor’s retained interest is $396,260 and the remainder is valued at $609,740.

  •  So the right to receive the $50,000 annuity for 10 years is worth $396,260 and the right to receive the remainder at the end of the 10 years is worth $603,740.
  • The value of the remainder interest ($603,740) would be subject to gift tax upon creation of the GRAT.

Example of a qualified payment in a GRAT:

Grantor transfers 100 shares of X Company to a 3 year GRAT. The terms of the trust stipulate that the trustee must pay the grantor an annuity equal to 10% of the initial value of the trust in the first year with the annuity payment increasing 20% in the second year and 20% third year. After the third year the trustee is to distribute the remaining trust to the beneficiary.

Example of how a valuation formula will reduce the risk of unexpected gift tax consequences when dealing with hard to value assets:

Grantor transfers 100 shares of X Company to a GRAT, X Company has 200 shares outstanding and a company value of $1,000,000. Under terms of the GRAT, grantor retains an annuity of 15%, increasing by 20% annually, for 5 years, with the remainder interest going to his beneficiaries. Grantor files a gift tax return showing a transfer of $300,000 to the GRAT ($1,000,000 x 50% ownership minus 40% discount), with a gift of $44,872.50 to 3 beneficiaries. If on audit the IRS only allows a 20% discount, the taxable gift would be $59,830. Thus, an increase in the amount transferred by $100,000 increases the taxable gift by approx. $15,000.