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Wednesday, December 23, 2015

De-Cluttering Your Life: Improve the Ease of Estate Administration, Part Two

A consistent comment  we hear from our clients goes something like this: "I want things to be easy for my family with a minimum of hassles when I pass away."  What people sometimes fail to understand is that the degree of difficulty and hassle faced by the family when administering an estate is often directly proportional to the number and types of assets that are owned by the decedent at the time of death.


Read more . . .


Wednesday, August 5, 2015

De-Cluttering Your Life: Improve the Ease of Estate Administration

This is the first of a three-part article about the benefits of "de-cluttering" your estate.

The most consistent theme that we hear from people about estate planning is that they want things to be simple for loved ones. The prevailing wisdom is that if the proper legal documents are in place, the surviving family members will have an easier time winding up affairs. While it is important to have up-to-date legal documents, these are only half the story.


Read more . . .


Thursday, July 23, 2015

Prepare for the Worst; Expect the Best - Making Emergency Rooms Less Scary

If you’ve ever been to an emergency room, you know the importance of being able to answer a multitude of questions quickly and accurately.  Your life, or that of a loved one, may depend on the ability to provide the right information to those caring for you. If you are a Generations client, part of what’s needed is already right there in your Estate Planning Portfolio. We suggest you put all of the information that might be needed in a location that’s easily accessible, no matter where you are. It should be available when you travel - make sure a close family member or friend has access, as well.


Read more . . .


Wednesday, December 17, 2014

Inherited IRAs - Naming Your Beneficiary

Over the last few years there have been a number of changes about how the IRS treats inherited IRAs and the necessary provisions if you name a trust as the IRA beneficiary.  On June 12th of this year, the United States Supreme Court unanimously ruled in the Clark case that inherited IRAs are not afforded the same protections from creditors as regular IRAs.  We don't yet have certainty about the impact of this decision for Alaskans.  These changes make this a great time to think again about who you have designated as beneficiary for your IRAs.


Read more . . .


Friday, September 12, 2014

What is Portability? And What Does It Mean to You?

When Congress passed the American Taxpayer Relief Act (ATMA 2013), there were two permanent changes made in the estate tax law that have significantly impacted the way that many families plan their estates.

 The first permanent change was the increase to $5 million of the Federal Tax exemption (with annual increases for inflation). The 2014 exemption amount is $5.34 million for the estates of people who die this year. Since less than one percent of all estates are valued at more than $5 million, most families do not have and do not expect to ever accumulate a taxable estate.

 The second permanent change to the estate tax law was a provision that allows the unused portion of a deceased spouse’s exemption amount (called DSUEA) to be transferred or “ported” to the surviving spouse, effectively doubling the amount of exemption available to the surviving spouse, in most cases. In order for the surviving spouse to claim the DSUEA, the surviving spouse must file a federal estate tax return Form 706 for the deceases spouse and elect to receive the unused exemption amount.

 The following three examples demonstrate how portability works. Along with the examples are four potential pitfalls that may arise when trying to take advantage of the portability of a DSUEA.

 Example One: John and Jane Jenson have an estate worth $8 million. John does in 2014 and leaves $1 million to his children from a prior marriage and the remainder of his estate to Jane. The bequest to John’s children will not be subject to estate taxes because John has a $5.34 million exemption to cover the bequest. Jane can also file a federal estate tax return Form 706 and elect to receive the unused portion of John’s exemption, which would be $4.34 million. When Jane passes away, she will have her own exemption (currently worth $5.34 million), plus John’s unused exemption, giving her a total available exemption of $9.78 million.

 Pitfall (1): DSUEA must be elected by filing a federal estate tax return. The surviving spouse MUST file a complete federal estate tax return for the estate of the deceased spouse and make the DSUEA election, even if a federal estate tax return is not otherwise required. The means that a surviving spouse and the spouse’s advisors must be pro-active in the months following the death of the first spouse to determine whether to make the election and then to prepare a return.

 Example Two: Tyler and Tina Thompson have an estate valued at $2 million. Upon Tyler’s death, Tin does not file a federal estate tax return to elect Tyler’s DSUEA because the estate is well below the $5.34 million exemption amount. Five years later, Tina receives an unexpected inheritance of $8 million from her rich uncle. Tina now has a $10 million estate and just one exemption amount valued at $5.34 million, indexed to inflation. If she had elected Tyler’s DSUEA, she could have sheltered the entire amount from estate taxes on her death.

 Pitfall (2): The estate of the surviving spouse may grow faster than expected. The surviving spouse may not think that it is necessary to utilize the DSUEA upon the death of the first spouse, only to learn many years later that the estate has grown into a taxable estate faster than anticipated.

 Example Three: Hubby One and Wife One have an estate valued at $10.5 million. Hubby One dies in 2014 and leaves everything to Wife One. Wife One files an estate tax return and elects Hubby One’s DSUEA, giving her a total exemption of $10.78 million. Wife One marries Hubby Two. Hubby Two has an estate valued at $5.34 million, and he leaves that entire amount to his children when he dies. Wife One can only elect to receive the DSUEA of the last deceased spouse and Hubby Two had no DSUEA to give her because he used it all in the bequests to his children. Wife One effectively loses the DSUEA of Hubby One, and she now has $5.34 million of assets subject to a 40% taxation rate that were previously protected by the Hubby One DSUEA.

 There is a taxpayer-friendly rule that may allow Wife One a way out of her dilemma. IRS regulations provide that Wife One can use Hubby One’s DSUEA to make gifts prior to the death of Hubby Two, thereby possibly avoiding the forfeiture of Hubby One’s DSUEA if Hubby Two dies.

 Pitfall (3): Only the last deceased spouse’s DSUEA amount is portable. This means that a surviving spouse who remarries may lose the DSUEA of the first spouse, if the surviving spouse survives a second spouse.

 Pitfall (4): DSUEA does not apply to the GST exemptions of a deceased spouse. The ATRA 2013 increased the Generations-Skipping Transfer (GST) Tax exemption to $5.34 million and indexed it to inflation. That means that the state tax exemption and the GST tax exemption are the same. But the GST tax exemption is not portable and may not be elected by the surviving spouse. If the first spouse to die does not take advantage of the GST tax exemption (by leaving assets in a GST tax exempt trust, for instance) the GST tax exemption is wasted or lost.

 So what does portability mean to you? Most of our married clients who have estates of $2 million or more provide that upon the death of the first spouse, the share belonging to the deceased spouse will be directed to a Family Trust to ensure that it is not subject to estate taxes at the second death. The Family Trust also provided bloodline protection for the children, asset protection for the surviving spouse, and divorce protection if the surviving spouse remarries. But some clients who do not expect their estates to ever exceed $10 million are now opting to leave everything to the surviving spouse, rather than creating the Family Trust, and allowing the surviving spouse to elect portability to protect the estate from federal taxes. If you think it is time to review your estate plan because of changes in the tax law or other changes in your life, give us a call.



Wednesday, June 4, 2014

Extending a Uniform Transfer to Minor Act Account

Uniform Transfer to Minor Act accounts (UTMAs) have become a popular way for parents, grandparents, guardians, or friends to hold money for minor children.

In Alaska, UTMAs are particularly popular for families who want to accumulate and invest Alaska Permanent Fund Dividend (PFD) checks for children to be used for their education.  These accounts are statutory trusts created and governed by state law.  At the time the account is opened, a custodian selects an age - no older than 25 - when the custodianship will end and the account is transferred to the child.  But what happens if a child is still not mature enough to manage the account when he or she reaches the age originally selected for the termination of the UTMA?  

Many parents have discovered that their child is not prepared to manage the account as they reach 18, 21, or even 25 years of age.  These parents and grandparents become frantic as the date approaches to transfer potentially thousands of dollars to children who are unprepared to handle the money.  Fortunately, in 2013 the Alaska Legislature modified the Alaska laws related to UTMAs and established a process that provides the custodian of an Alaska UTMA with the option to extend the time for disbursement past the original termination age, and even past the original statutory maximum of age 25.

Here is how the process works:  A custodian may extend the custodial term by giving the minor written notice of the custodian's intent to extend the term.  The notice must specify the duration of the extension and inform the minor of the minor's right to compel immediate distribution of the account. The notice must be given either during the six-month period immediately prior to the last day of the custodial term, or during the six-month period that begins on the minor's 18th birthday.  If the minor does not give the custodian notice within 90 days that he or she intends to compel immediate distribution of the account, then the term is extended to the date specified by the custodian.  

This procedure sounds workable until it is applied to a real-life situation.  Let's examine how this process could potentially work out:

Example Scenario:

In 1997, Mary Livingston established a UTMA for her daughter, Amanda, with the custodial term scheduled to end on Amanda's 25th birthday.  Amanda will turn 18 on July 15, 2014.  Mary has been depositing Amanda's PFD checks in the UTMA account.  In addition, Amanda's grandparents have made periodic gifts to Amanda to assist with her future educational needs, and these gifts have also been deposited into the UTMA account. The UTMA account is now $80,000.  Amanda has not done well in school and has become rebellious and difficult to deal with; she is using drugs and spending time with peers who are not a good influence on her.  Mary is concerned that Amanda is unlikely to go to college and may never get her life in order. The investments in the account might continue to grow to $100,000 or more in the next seven years, and Mary is worried about what Amanda will do with the money.  Mary wants to extend the term of the UTMA until age 35.

Under the statute, Mary can give Amanda written notice that the UTMA will be extended to age 35.  But Amanda also has to be given notice that she has the right to compel immediate distribution of the account.  So when should Mary give Amanda notice?  

Mary could give Amanda notice the day after she turns 18 and hope that Amanda isn't savvy enough to write back that she wants to terminate the account and take the money immediately.  The other option is to wait six years to see if Amanda's behavior improves, and to give notice in the six-month period before Amanda reaches age 25.  This is a troubling choice, because Amanda is bound to be a little wiser as she gets older, increasing the likelihood that Amanda will compel the distribution.

Our personal experience is that parents are able to exercise substantial control over children who are 17 or 18. At that age, it is very likely that the term can be extended with a properly drafted notice that is also delivered with an appropriate explanation to the child.  On the other hand, if a custodian waits until near the end of the term of the trust, when a child is nearing age 25 and more independent, it may not be easy to convince the child to agree to extend the term.  Still, many children remain dependent on parents well into their mid-to-late 20s, which can give a parent substantial control of the situation.  If a child is reasonable and practical, they will probably go along with the extension of the UTMA account term.

In either case, we recommend that clients consult with an attorney so that the notice can be properly drafted and so that the brokerage firm or bank is given proper notification that the statutory process has been completed, allowing the UTMA to be extended to a later date.

 


Wednesday, December 11, 2013

The Family Meeting - An Essential Part of Your Estate Plan

Perhaps the biggest risk to a well-organized estate plan is the ignorance that arises from poor communication and the lack of basic understanding of how estates are administered.

Most people never disclose the estate planning decisions they have made during their lifetime to loved ones, successor trustees, executors, and agents.  Those left behind can only imagine what the deceased family member really wanted. In addition, surviving family members are often unaware of whether estate planning documents have even been prepared, much less where they are located.  There are countless stories of families unable to find the will that mom or dad mentioned to some, but not all, of the children.  This leaves everyone in the dark; the unfortunate result is often misunderstanding and conflict. 

A good estate plan, whether organized around a will or a trust, requires a certain amount of knowledge about the process of administering the estate and how the various legal documents work.  Most family members lack even a basic understanding of the estate administration process and rely on what they have learned from Hollywood movies and false assumptions.  It is surprising how many families try to decipher the final wishes of parents based on long past conversations, cryptic notes, family traditions, and personal perceptions of fairness.  This is a recipe for disaster.

The attorneys at Foley, Foley & Pearson have long advocated holding family meetings to ensure that children, trustees, key advisors, agents, and managers understand our clients' wishes and know where the important estate planning documents are located. That is why we suggest our Generations clients hold family meetings with an attorney who can answer questions about the legal documents and explain the responsibilities of successor trustees, personal representatives, health care decision makers, and agents.  We also host free workshop and seminars, to better explain how wills and trusts work and how they are administered.  Here are some of the basic issues a family meeting with an attorney can address:

  • Identify each of the legal documents (Trust, Will, Power of Attorney, Health Care Directive, Community Property Agreement) and explain the purpose of each document.  Discuss where their legal documents will be located and how the family can locate the documents quickly at the time of death or disability.
  • Educate the successor trustees, personal representatives, and agents about their responsibilities when administering an estate and explain the steps to be taken to complete the administration.
  • Assure family members they have the right to know what is going on at each stage of the administration and explain to family members who will serve as agents, their responsibility to keep everyone informed of the administration process.
  • Explain the purpose and function of the professional advisors who will be needed to help the fiduciaries perform their duties and discuss the fees and costs associated with using professional advisors to assist in the estate administration.
  • If desired, the attorney can help the senior generation explain the decisions they have made. For instance, why did they select agents in the order named? Why was one family member named as an agent while another wasn't? Why were the agents named in a certain order or required to work as a team?
  • Identify all assets and the estate value and describe how the assets will be distributed and protected for future generations.
  • Identify difficult assets that might need to be handled in a special way, like the home, family business, or "one-of-a-kind" family heirlooms.
  • Explain why an inheritance was left in one or more trusts rather than outright and demonstrate why that decision was a wise one and not simply arbitrary.
  • Build and strengthen family ties and relationships through communication, education, and explanation. Build relationships between key advisors and the next generation.
  • Communicate important family values from the older generations to the younger generations.
  • Answer questions from children and fiduciaries so that everyone feels comfortable about the plan and how the decisions were made.

We like to talk to our clients prior to the family meeting to ensure that we cover all of the issues they desire and that details they prefer not to share with everyone are not discussed. Sometimes our clients worry about raising these issues for fear it will create conflicts and hurt feelings. In fact, this is exactly what may happen if the senior generation leaves behind a plan the children know nothing about. Communication can help children understand that their parents' decisions were purposeful and carefully considered, based on good counsel.  If there is no communication during lifetime, children may try to undermine some aspects of the plan, feeling that the parents made the wrong decisions because they didn't fully understand their implications.  A family meeting may prevent this unfortunate result.

 **If you are a Generations client and you want to hold a family meeting, contact our office to schedule a time for your family meeting. If everyone isn't available locally, some of your family members and fiduciaries may participate in a conference call.


Wednesday, November 13, 2013

Contributing in a Way That's Good for Others and Good for You

If you are at least 70½ years old and want to support a favorite charity, using your IRA as a source of liquidity can be attractive.  With the American Taxpayer Relief Act of 2012, the tax law provision that makes donations directly from an IRA possible was extended to apply in 2013.  Here's how it works.

Instead of requesting your entire required minimum distribution from your IRA, you ask that some or all of the distribution be sent directly to the qualified charity of your choice.  No more than $100,000 can be distributed to charity this way in 2013.  You can divide the distribution among several charities.  To do this, you will need to get the correct legal name and mailing address of each charity, as well as its Federal EIN, as the custodian of your IRA will likely want this information. 

Remember that you do NOT want to have a check made payable to you.  Instead, the check should be payable to the charitable organization and mailed directly to the charity from the institution where your IRA is housed.  If you want to have your contribution used for a specific purpose, be sure to contact the charity in advance to let them know that the "check is in the mail," and how you want to see it used.  When the charity issues a receipt, ask them to indicate that the money was received from your IRA, if possible.

When you make a contribution this way, that amount will not be counted as gross income for income tax purposes.  If you are still employed and receiving enough income that every dollar earned reduces your Social Security benefits, this can be a financial bonus.  Remember that any amounts distributed directly to you from your IRA will be included in your gross income for tax purposes.  If, instead of making the distribution directly to charity, you receive your required minimum distribution and then contribute the same amount to charity, the charity will receive the same amount and you will end up with the same amount from your IRA in your pocket.  However, your entire required minimum distribution will be included in gross income for income tax purposes.  If you are charitably inclined and that distribution from your IRA bumps your income up so Social Security benefits are reduced, you'll be kicking yourself.

In 2013, making your contribution directly from your IRA means that amount is not included in your gross income.  You may or may not have this opportunity in future years.  Therefore, this year at least, charitable contributions from IRAs are good for others and good for you.


Friday, May 31, 2013

Older Americans Are Worried About Health Care Issues

As Americans continue to live and work longer, health care issues have become the biggest worry for retirees.  That is one of the major conclusions in a study commissioned by Bank of America Merrill Lynch in partnership with Age Wave, a leading consulting firm on the aging work force.  The survey gathered responses from more than 6,000 individuals, age 45 and older, from all walks of life (including pre-retirees as well as retirees) who weighed in with their hopes and fears regarding retirement.

When asked about their greatest concern in regard to living longer, 72% said they were worried about serious health problems.  60% said they were worried about not being a burden to their family and 47% said they were worried about running out of money.  Only 13% of the respondents said they were worried about not having enough money to leave an inheritance to children and grandchildren.

The survey also asked about the top financial worries.  Again, the greatest response related to health care where 52% of respondents, with at least $250,000 in investable assets, indicated they were worried about the cost of health care.  Interestingly, only 6% of people with at least $250,000 in investable assets said they were worried about a lack of social security.  

A complete copy of the study may be found at:

http://wealthmanagement.ml.com/wm/Pages/Age-wave-Survey.aspx

According to the study, unanticipated medical expenses can derail years of retirement preparation and 60% of bankruptcies in the U. S. today are related to medical bills.  Health issues are also the number one reason why people retire early.


Monday, May 13, 2013

How Does the New Estate and Gift Tax Law Affect Your Planning?

Many of our clients have wondered how the new estate tax law affects their current estate plan.   The short answer is that the change in the tax law doesn't hurt anyone with a smaller estate and is certainly helpful for people with larger estates.

We often refer to the estate tax exemption as your "coupon."  Every American is allowed to pass the "coupon amount" to their heirs without paying any federal estate or gift taxes. The coupon has now been set at $5 million, indexed for inflation.  The law has no expiration date.  So how does this change affect existing plans?

Many of the living trust-based plans that we have implemented for our married clients in the past 10 years include planning that maximizes the amount of wealth that can pass to others upon the second death.  These plans provide that upon the death of the first spouse, the decedent's portion of the estate (up to the coupon amount in effect in the year of death) passes to an irrevocable trust we call the Family Trust. With a $5.25 million coupon this year, the first spouse could transfer up to $5.25 million to the Family Trust. But if a couple doesn't have $5 million, the Family Trust will simply be funded with less money. 

The Family Trust planning we have done takes into consideration that the coupon amount was increasing, but might also decrease. Therefore, if you have a Family Trust in your plan, flexible language provides for maximum funding of the Family Trust based upon the current coupon amount.

Some clients might ask whether they need a Family Trust any more as part of their estate plan after the death of the first spouse, if together they have less than a $5 million estate.  The answer to this question is, "It depends."  The Family Trust provides tax planning, but it also provides asset protection for the surviving spouse and protection that the wealth will not be given to the wrong people by the surviving spouse later on.  We call this bloodline protection.  We anticipate that most of our clients will probably keep the Family Trust as part of their estate plan, even if they no longer have a taxable estate.

Periodic plan review is included in our Generations Trust Maintenance Program.  If your circumstances have changed, or if you are not sure what your plan says and want to know exactly how the new law affects you, feel free to schedule an estate plan review with our office.


Wednesday, April 17, 2013

Congress Makes Estate Tax Exemption Permanent at $5 Million

For the first time since 2001, Congress has provided some degree of certainty about the federal estate and gift tax.  The new estate and gift tax law was part of the more sweeping American Taxpayer Relief Act of 2012 (ATRA 2012) that was negotiated to avoid the "fiscal cliff" created by the expiring 2001 law and automatic spending cuts.  The new law was signed by President Obama on January 2, 2013.

When the 2001 law was originally passed, the estate tax exemption was immediately raised to $1 million and periodically increased over the last decade to $3.5 million in 2009.  But the law was scheduled to expire in 2011.  The exemption was raised to $5 million in 2010, and the law was extended by two years until December 31, 2012.  The expiration provision threatened to roll back the exemption to $1 million this year, if Congress was unable to pass a new law.

Under ATRA 2012, the estate and gift tax exemption was made permanent at $5 million, subject to inflation indexing.  With indexing, Americans can actually pass up to $5.25 million in 2013 to their heirs without incurring any gift or estate taxes.  The tax rate for gift or estate transfers above $5.25 million was raised from 35% to 40%. This means that an individual who is passing $6.25 million to children this year would incur a tax of $400,000.

Married couples can each pass $5.25 million of wealth, so that, with proper planning, a family can actually transfer $10.5 million to their heirs.

Call us or attend one of our regular estate planning workshops if you have questions about how the new law affects your personal estate planning.


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