Every now and again, it’s helpful to go back to the basics. This blog will go back to the basics of estate planning to talk about how and why everyone should have an estate plan. Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.
No matter how BIG or small your net worth is, estate planning is a process that addresses how and to whom you leave your assets when you die and names decisionmakers who will wind-up your affairs at death and make financial, medical or personal decisions for you if you cannot yourself.
An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:
Your car
Your home
Financial accounts
Investments; and
Personal property.
Part of estate planning is deciding which people or organizations are to get your possessions or assets after you’ve died. This includes determining how to give it to them, and that plan addresses concerns such as marital status of the beneficiary, how they are with money, addiction problems, taxes and so on.
It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.
One of the biggest reasons people don’t have an estate plan is they assume they have no “estate” to be concerned with. It might be true they don’t have much money, but everyone should consider naming individuals to act for them if they become incapacitated, ill or otherwise need help making decisions.
It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.
You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.
All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan covering these three basic areas.
A new case out of Tax Court centers on the question of when a “deathbed gift” is complete for federal estate and gift tax purposes. Clients make gifts to reduce the federal estate tax, or reduce it to a manageable size, especially as we draw closer to 2026 when the estate tax exemption will be a far lower number.
Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any federal gift taxes. The exclusion, indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022. It’s doubled to $32,000 for joint gifts made by a married couple. Estates can be reduced with planned use of the annual gift tax exclusion. For instance, if a taxpayer and a spouse give the maximum $16,000 to five relatives for five years in a row, they will have transferred $800,000 ($32,000 x 5 x 5) out of their estate, free of taxes. This is enhanced when you make gifts of different assets that can be discounted in value.
Now, every time I write an article about gifting, I always temper it. You’ll noticed from the next paragraph that the estate tax doesn’t apply to too many people, and so may not be advantageous. It is also true that assets not in your estate at your death do not receive a step up in basis. This applies to things like stock, real estate and many other non-cash items, which means gifting may ultimately increase the total tax to beneficiaries instead of reducing it. So, it is worth discussing this with a professional before starting a gifting campaign. See our website for a much broader approach to estate tax planning. https://galligan-law.com/practice-areas/estate-tax-planning/
Unified estate and gift tax exemption. In addition to the annual gift exemption, gifts may be sheltered from tax by the unified estate and gift tax exemption. As of this writing, the exemption is $10 million, indexed for inflation, which brings it to $12.06 million in 2022. It is scheduled to drop to $5 million, plus inflation indexing, in 2026.
Using the exemption during the taxpayer’s lifetime reduces the available estate shelter upon death. These two provisions give even very wealthy taxpayers a great deal of flexibility regarding liquid assets.
In the new case, Estate of DeMuth v. Comm’r, TC Memo 2022-72, 7/12/22, the agent under a power of attorney for a Pennsylvania resident made gifts of the annual gift tax exclusion on an annual basis from 2007 to 2014 to his siblings and other family members, in accordance with the POA.
The father’s health began to fail in 2015 and he passed away on September 11. On September 6, five days before he died, the son wrote eleven checks, totaling $464,000 from the father’s investment account.
Some recipients deposited the checks before the decedent’s death, but others did not. Only one check was paid by the investment account before the decedent’s death.
The question before the Tax Court: are the gifts complete and removed from the decedent’s estate?
According to the IRS, any checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to the state’s law to determine the outcome of the other checks. The Tax Court ruled the checks not deposited in time must be included in the decedent’s taxable estate.
As a fun aside for our Pennsylvania friends, Pennsylvania also has inheritance tax, which attaches to transfers made within a year of death with a $3,000 exemption per recipient. So, the estate would still have to pay inheritance tax on the completed transfers, although the inheritance tax rates are nothing compared to the federal estate tax rates.
The estate planning lesson to be learned? Timing matters. If checks are written as part of the plan to minimize taxes, they must be deposited promptly to ensure they will be considered as gifts and reduce the taxable estate. In all cases, it is better to have, and execute, a plan of action before trying to resolve taxes on your deathbed.
Guardianship is often unnecessary or limited thanks to guardianship alternatives which include appropriate estate planning.
Guardianship is the court process by which a Judge appoints a person to make decisions on behalf of someone who cannot make them for themselves. Guardianship is a very involved process which removes or reduces the legal autonomy of the individual and appoints a decision maker for that person. Guardianship can be invasive, time-consuming and costly. Although guardianship is sometimes necessary and beneficiary to the individual, many clients seek to avoid guardianship and, in fact, Texas (and virtually every state’s) law directs you to use less restricting guardianship alternatives where available. The best options require preplanning however, so if you want to avoid the need for guardianship, you should consider some of the following guardianship alternatives. See the article entitled “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First” from Kiplinger for more.
Durable Financial Powers of Attorney
Guardianship often is necessary when an elderly individual loses legal capacity due to dementia, Alzheimer’s or other conditions leading to cognitive decline. In that case, the person cannot make their own financial decisions anymore, so a guardian would need to be appointed to manage their assets.
However, if an individual has a durable financial power of attorney (POA) in place, then this may not be necessary. The POA names an individual to take financial action for you if you can’t yourself. It is usually much better than guardianship as you are the person choosing who will act and you can set the rules as you want. It is also substantially cheaper than guardianship litigation. It is also one of the most important estate planning documents for this reason.
Trusts are more than just will substitutes. In this context, the trustee of the trust can control the assets owned by the trust. So, if the person who created the trust becomes incapacitated, the successor trustee (again a person you choose) can take over and start controlling the assets. This is often a major reason for clients who create revocable trusts later in life or who have concerns about long-term care or management of their assets.
Medical Powers of Attorney
This echoes the issues of the financial POA, namely that you can appoint a person to make medical decisions for you. Now, the law does provide default decision makers for medical decisions makers, so this isn’t typically the reason for a guardian. However, it too is a critical document for several reasons. Among them, you may not want the default to be your decision-maker, it provides clarity of responsibility and lets the decision-maker know in advance what’s expected of them, and finally, avoids delay in a medical crisis when the documents have to figure out your family history to determine who a default decision-maker is.
Naming Fiduciaries for Minors
Another common guardianship scenario is leaving property to minors. Although there are multiple state-based alternatives which might be helpful, such as creating UTMA/UGMA accounts (Uniform Trusts for Minors Act/Uniform Gifts to Minors Act), paying to a court registry or possibly to a parent of that child depending on the circumstance. However, if these alternatives don’t work, you may need a guardian for the minor.
In any case where leaving property is intentional, such as in a will or trust, an easy solution is to establish a trust for the minor within your own documents. This accomplishes several goals, but here, allows for an adult to hold the property for the child. They can then spend the assets on their behalf, such as on education, daily living and so on,
Now, the above are mostly proactive steps, so these are what you can do now to avoid guardianship later. However, if you or a loved one find yourself without sufficiently covering these concerns and contemplating guardianship, there are still some alternatives that might help or help reduce the scope of the guardianship.
Limited Guardianship
This a blog unto itself so this will be brief, but guardianship can be limited in nature. Essentially, the powers of the guardian are limited so that the least autonomy is taking from the individual as possible. This could mean that only assets are under the control of the guardian, or perhaps only to control some personal decisions such as medical decisions.
Joint Ownership
Some families take the step of making a family member a joint owner on a bank or other assets. Now, I didn’t include this as a proactive measure because joint ownership has a litany of difficulties. It includes the risk of creditor issues, potential concerns over gift making, disruption of the estate, plan, tax implications and lends to family disputes. However, should you find yourself with the need for guardianship, this can be a less restrictive guardianship alternative.
Social Security Representative Payees
Social Security pays to an account with a designated rep payee for beneficiaries who can’t act for themselves. So, on this particular account, the rep payee, which is typically a close family member, but could be someone else, is already authorized to control that particular asset. So, this doesn’t typically completely avoid the need for a guardianship, but does mean that one account receiving income can be accessed and utilized for an individual without the intervention of a guardian.
Community Property Administration by a Spouse
This is distinctly a Texas solution, but we have community and separate property. Community property is owned by the marriage, as opposed to the individual. So, depending on the assets of the individual, her marital status and suitability of the spouse to do this, community administration might be a helpful guardianship alternative.
Guardianship Appointment
Although this isn’t a guardianship alternative, I’d be remiss if I didn’t mention it. You have the power to name the person who you would want to be a guardian for you if guardianship is necessary. We routinely prepare these for clients so that should guardianship be necessary, you’ve told the court who should do it. They are very seldom necessary due to the estate planning we put in place, but it serves a belt and suspenders approach to ensure you have as much control over a guardianship process as possible.
Other Alternatives
There are other guardianship alternatives beyond what I included here, but key factor is that preplanning is the best guardianship alternative. Talk with an experienced estate planning attorney to protect yourself or loved ones from having to pursue guardianship.
