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Estate Planning Under The American Taxpayer Relief Act of 2012

Posted on January 3, 2013 by

Whatever one feels about the “averted” fiscal cliff, the President, or Congress, The American Taxpayer Relief Act is now law.  No one should get too excited because annoying issues like the country’s debt ceiling (i.e., US Government’s credit card limit) will revisit all Americans in about 60 days.  Nevertheless, here is some basic information to satisfy curiosity about the estate tax.  Many clients whose estates exceeded $1 million dollars worried about what could happen with their estate plan after December 31, 2012.  Fortunately, the estate tax did not revert the former $1 million figure.  The estate tax exemption remains at $5 million (adjusted annually for inflation since 2011).  The 2012 estate tax exemption was $5,120,000.00, and the 2013 estate tax exemption is anticipated to be $5,250,000.00, with estates over that $5.2 million threshold taxed at the rate of 40%.  This is a 5% increase from 2012 for estates that exceeded $5.1 million dollars.  Lots of people laugh off the $5 million figure as far beyond their estate, but sometimes clients have more than they think.  When combining real estate, life insurance proceeds, cash, stocks, and other assets, one’s estate can easily exceed the $5 million threshold, and be subject to estate tax (a/k/a death tax).  Therefore, having an annual sit down to examine one’s assets and estate plan is time well spent.  Busy people tend to toss wills and other estate documents in the safe or file cabinet, and not think about them.  Taking time each year to revisit an estate plan is just as important as having an annual physical.  This task need not involve a horrid trek through the file cabinet or the cloud.  These days there is user friendly software that helps individuals track their net worth, and most brokerage houses have online tools associated with a client’s account.  While entering data on the front end may be a small time investment, once it’s done the task becomes fairly painless.  The benefit of making this annual review of one’s estate is that the individual and his/her attorney can update the existing estate plan to minimize future estate tax implications.  Happy New Year to all!

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Dodging Bullets Post Divorce and Posthumously

Posted on October 4, 2012 by

Perhaps the most welcome day in the life of a person going through divorce is the day all the documents are signed, sealed and delivered, the decree is entered by the Court, and the damn thing is FINAL for all practical purposes.  Despite the good work by one family law attorney, the estate of his client became entangled in probate court over an Individual Retirement Account (IRA).  Before husband and wife married, the man opened an IRA naming his fiancé and father 50/50 payable on death beneficiaries.  The parties married and subsequently divorced, with the final decree awarding 100% of the IRA to the husband as his separate property (Olmstead v. Napoli, 2012 Tex. App. LEXIS 7641 (Tex. App. — Houston [14th Dist.] September 6, 2012).  Though Texas law presumes that if you’ve gone to the trouble to divorce your spouse, that you do not want him/her to inherit from you after you’re dead.  See Tex. Prob. Code § 69 and Tex. Fam. Code § 9.302.  Whether you prefer calling detailed diligence “wearing a belt and suspenders” or saying “an ounce of prevention is worth a pound of cure”, either would have been helpful in this case.  Unfortunately the ex-husband did not change his beneficiary designations on the IRA he was awarded.  The ex-husband’s father predeceased him, and thereafter the ex-husband passed away as well.  When the estate requested distribution of proceeds from the IRA, the financial institution refused because the ex-wife was still a designated beneficiary on the account!  Though I wasn’t there I’m fairly certain the bank was given a certified copy of the divorce decree with the section about the IRA highlighted.  That apparently did not help. The estate not only had problems with the bank, but also the ex-wife who showed up to claim her half of the IRA, making the argument that she was made a beneficiary before marriage and that Texas law addressing these circumstances to an ex-spouse and not a fiancé.  The 14th Court of Appeals didn’t bother interpreting the statutes and her argument.  Because language in the final decree was well drafted to withstand future challenges, and because there was no question that the ex-wife gave up any right she previously had to the IRA proceeds, the Court ruled in favor of the estate.  The take-home lesson is this: After divorce, there is still work to do such as updating your will, revoking former powers of attorney, drawing up and recording a new power of attorney, and changing beneficiary designations.  While justice prevailed (at least in my opinion), ask yourself how much the estate had to spend in legal fees to deal with the bank and the ex-spouse.  That doesn’t even take into consideration the added emotional distress to a family grieving the loss of a loved one.

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You Need the Medical Power Attorney? Oh *&$%!!

Posted on September 15, 2012 by

I follow the legal advice I give my estate planning and probate clients, but recently, I made a mistake that could have been a huge problem. To set the scene, it was a lovely Saturday night in Houston.  The hubby and I were enjoying dinner on the patio at one of our favorite restaurants.  Without warning he lost consciousness while sitting across the table from me.  Fast forward through the drama of my worst fears and ambulance ride to the hospital, to the point where I’m with the admission personnel.

She asks, “Do you have a medical power attorney?”

I respond, “Of course.  I have a medical power of attorney, advanced directive and a durable power of attorney.”  I’m an attorney after all!

She says, “Great.  We need a copy of the medical power of attorney and advanced directive.”

Now I look like a deer in the headlights.  It’s Saturday night.  The bank is closed until Monday.  So, the earliest I can get my hands on this important document is Monday at 10:00 a.m.!  Surely I have a copy at home?  But, I’m not leaving the hubby at the hospital for all the world’s riches.  Now I don’t feel so smug.

The mistake was keeping our probate and ancillary documents like the medical power of attorney too safe in the bank box.  I advise my clients to keep their documents in a safe place like a bank box, as well as a copy readily available.  Unfortunately, in this case, having copies somewhere in the piles of paper at home was useless.  It’s not like people carry these legal documents on their person!  But, can they?  Do they? Yes.  It occurred to me that I should have scanned images of the documents and stored them as a .pdf on my Drop Box account because that’s almost as good as carrying the hubby’s medical power of attorney in my purse, because I can pull it up on my smart phone or even the hospital computer.  We have incredible technology at our fingertips through the Internet, so why not take advantage of it.  Even if you don’t like cloud computing, it’s possible to e-mail yourself a .pdf of such crucial documents.  Fortunately, the hubby is okay following a three-day stay in the hospital, and I never had to challenge anyone at the hospital on making medical decisions (I am the next of kin after all), but things could have turned out differently.  When you’ve got the stress of a loved one in the ER or hospital, you don’t need the added anxiety of having to wonder about where you put the medical power of attorney. Never in my wildest dreams would I have expected my super healthy hubby to keel over and conk out on me, but it happened.  If there is a next time, I’ll be prepared.  So, please learn from my mistake and plan for life’s little surprises.

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Estate Planning Misconceptions to Avoid

Posted on June 29, 2012 by

Many people I come into contact with feel they need not worry about estate planning to reduce federal taxes because “they’re not that rich”.  While that may hold true based on remnants of the Bush tax cuts which sunset on December 31, 2012, 2013 is a whole new game.  That game depends upon what Congress does between now and then, and who is in the White House come January.  Consider these examples:  If one of my clients passes away during 2012, his/her estate is exempt from the estate tax so long as the estate does not exceed $5 million dollars.  Every dollar beyond the $5 million is taxed at 35%.  However, if the same client dies in 2013, the figures are quite different:  the estate is exempt from the estate tax so long as the estate does not exceed $1 million dollars, and every dollar thereafter is taxed at the rate of 55%.  While the majority of my clients need not worry about having an estate in excess of $5 million, the $1 million mark is problematic, which leads into the next misconception.  Many clients believe that life insurance proceeds are not taxable.  That is only partly true, and failing to correct this view can really cost one’s beneficiaries.  Life insurance proceeds are not taxable to the designated beneficiary; however, the proceeds of a life insurance policy do count toward the decedent’s gross estate for estate tax purposes.  Considering that most people have a term life policy of at least $500,000 provided by an employer or through a private policy, $1 million dollars is not far away.  You have more than you think!  Adding the value of the decedent’s home and other real estate, bank accounts, stocks, annuities, retirement accounts, and significant personal property quickly adds up, and pushes the decedent’s estate into a taxable situation.  Whether the decedent’s estate is taxed at 35% or 55%, that takes a huge chunk out of what is left to the decedent’s family and other devisees under his/her will.  There are estate planning techniques to mitigate estate taxes, which are not all that difficult to implement, but doing so requires a tax planned will and trust.  None of us knows what Congress will do about the estate tax in the coming months, but it will be a subject of partisan debate during election season. Uncertainty about the estate tax is unsettling, yet we can speculate that one of a few things might happen: (1) Congress will do nothing, and the estate tax will revert to a taxable rate of 55% for estates over $1 million; (2) Congress will vote to keep things status quo until later; (3) Congress will eliminate the estate tax altogether and we can all stop worrying (not likely); or (4) Congress may implement the Obama administration’s position, which is to tax estates in excess of $3.5 million at a rate of 45%.  Trying to read the tea leaves or look into a crystal ball rarely helps, but working with your family attorney to create a custom made estate plan is action that will yield results.  Estate plans, like a football team playbook, need to be evaluated and tweaked on a regular basis to have a winning team.  For estate planning purposes, the team consists of you, your CPA and your attorney.

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Reasons to Have an Estate Plan

Posted on May 7, 2007 by

One very important, and often overlooked, factor to consider as part of your dissolution of marriage is a re-evaluation, (or first evaluation as is often the case) of your estate plan. If there is no plan in place, the laws that will determine how your estate will be divided upon your death change significantly when you are divorced. If there is a plan in place, you will most certainly want to make changes for your future to match the changes in your life today. Below are some very basic points on estate planning from about.com:

If you have assets, no matter what your age, marital status, or financial wealth, you should plan your estate in the event of your death or incapacitation. If you should die without a sound estate plan, someone will be exposed to additional grief and expense. If you become incapacitated, your bills might not get paid. You could also be put on life support which is OK unless you have strong feelings about your life being prolonged artificially if you have no chance for recovery. A little preparation and maintenance could make this difficult time less taxing for those you love and who love you.

There are many reasons to have a sound estate plan but here are eight I feel are most important. If you should die or become incapacitated, a sound estate plan could:

1. save your family thousands of dollars
2. distribute your assets to those of your choosing, not of the government’s choosing
3. designate who will raise your minor children
4. make sure someone is authorized to pay your bills
5. avoid conflicts among your family members
6. make sure your assets aren’t divided among your children’s ex-spouses
7. keep your children from frivolously spending the inheritance
8. prevent death taxes.
(more…)

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