Often after presentations, attendees exclaim to me their surprise at my passion for the subject of estate planning. They say, “Wow, Matt. You really love talking about wills and trusts and powers of attorney!” Yeah, I do. I love talking about it and doing it. My clients and I share a really good feeling after the documents are signed. Usually, that’s in my office. Sometimes it’s in other places. I did an estate plan in an ICU once. The nurse that was managing the patient’s (my new client) care was awesome. The family would share with me later the tremendous peace of mind their mom had after I had served her. What an honor for me to help.

Really, if you’re considering doing your estate plan, one reason you might be putting it off is its complexity and all the contingencies you feel you must consider. If you’ve been reading my blogs or know me, you know that I consider myself more an estate planning teacher than simply an estate planning attorney. You deserve to understand the choices you can make and the ramifications. Check out the testimonials on this site and see what people just like you have said about our process.

So, day in day out, no big deals, then suddenly, life happens. What my latest video focuses on is one of the catalysts to estate planning. The moving factors often are marriage, birth, travel, death, taxes and health. Let’s focus on health. So many people are diagnosed every day with serious health issues. If you or someone you know has had this happen, the last thing they want or need to worry about is their estate plan, yet it weighs on them heavily. They want to get this done. Help them get with a good estate planning attorney who knows how to answer their questions and walk and talk them through the documents they need to cover incapacity and death. Help them get this item checked off their bucket list. If you’re a doctor, nurse, therapist, pharmacist or other health professional, be ready with a good referral for all those patients you serve. They need that prescription, too.

To preserve your estate tax lifetime exclusion, your good attorney put in your will (or your living revocable trust) a bypass trust.  Might have called it credit shelter trust, might have called it the family trust, regardless, if drafted right, it followed the internal revenue code and could receive your lifetime exclusion upon your death.  Your widow could be the trustee and the primary beneficiary of this trust, so her life seems just like it would if you left it outright to her, but for estate taxes, you’ve done a good thing for your family.  When she dies, her estate may suffer death taxes, but the assets that were placed in your bypass trust should transfer to the kids with no death taxes, a very good thing.

So now it’s 2011 and the new law says you don’t have to have some fancy bypass trust to preserve your lifetime exclusion.  You die and your executor/trustee can apply the unused amount of exclusion to your widow/widow’s estate without your late husband having a bypass trust.  I don’t even want to go into the limits of this and what happens if she remarries.

What I want to communicate is that you should still seriously consider the bypass trust which doesn’t disappear if she remarries.  If done right, it takes your lifetime exclusion and allows it to appreciate.  It can go up in value and that value can still transfer to your kids upon your widow’s death without suffering the estate tax.  It can also preserve the assets from generation skipping transfer taxes, which are not portable under the new law.

Please also remember that bypass trusts can protect their assets from the bad things that happen to good people, that is, they can have protection from unworthy creditors.

Photo Credit Born.to.be.mild

Doesn’t the title to this blog just flow from your lips?  So, when a spouse wants to make a gift to their spouse while they are both alive, there’s really been no limits because the transfer tax laws say there’s none.  Same thing when the first spouse dies and gives the estate to the surviving spouse.  So she bequeaths $54 million to him.  Fine.  But whether he survives her by ten minutes or ten years, at some point, he too shall die and then, the question remains, what shall the transfer taxes be on his estate?

So with non-spouse transfers, there’s been limits before a transfer tax kicks in.  You’ve heard of the estate/death/inheritance tax and the gift tax.  There’s also a generation skipping transfer tax that you probably haven’t heard of.  They’ve usually all had the same lifetime exclusion amount and if you exceed that amount when you’re transferring assets, a tax has to be paid.

If we go back to the good old days when it was simple (Hah!), a million dollars was that limit for each of us.  Now the gift tax had along with its lifetime exclusion also an annual exclusion.  That was good for donors because it allowed living transfers, if that amount or less, to pass without hardly any tax implications; no gift tax, no reduction if the lifetime exclusion, and usually not taxable to the recipient.  Exceed that annual exclusion with a living gift, and you would reduce your lifetime exclusion for your estate tax by the same amount and definitely affect your exclusion for generation skipping transfer taxes.

Let’s stay in these good old days for this example.  If you’re adding up in your head lifetime exclusions, spouses don’t get to do that.  Example: So you’re a real Texas gentleman and die first, leaving your widow to have some time to herself.  You better leave her everything!  Heck, you know that what’s yours is hers, what’s hers is hers, and what you owned together was hers anyway.  So if you had a $1 million lifetime exclusion and she did too, later when she dies, $2 million would transfer estate tax free.  Right?  Wrong.  You lost your lifetime exclusion when your assets went to your widow.  When she dies and gives it to the kids (and it doesn’t change the estate tax if there’s 1 or 15 of them), everything over the first $1 million is subject to the estate tax which is about 50%.

To be continued….

Photo Credit Don DeBold

So we all heard that there was no estate tax in 2010, but did you know that there were no step-up in basis rules?  You see, in the years prior to 2010, when someone died and their will gave you their house, you usually got what is often called a step-up in basis.  Your basis in the house was the fair market value of the house on their date of death or their basis, whichever was greater.  In contrast, if the person made a gift of the house to you while they were alive, you did not get to step-up your basis, instead you got their basis, called the carry-over basis.

Our new tax laws actually are retroactive and say the transfer tax limits for 2010 are $5 million.  Of course, it’s not nearly that simple.  They let executors and trustees choose whether they want to limit the estate of 2010 to $5 million and get the step-up in basis, or choose no limit to the lifetime exclusion of the decedent but get no step-up in basis. But there’s more.  The trustee or executor may apply basis to the assets of the estate for the beneficiaries; up to $1.3 million for non-spouses and $3 million for spouses, limited in both situations to the fair market value.  Choices…choices.  What’s one to do?

photo credit: Rob the Moment

A blog is no place to give legal or tax advice, nor is any other medium.  When you ask your CPA or lawyer to advise you on taxes and they agree, then you’re getting tax advice.  This warning applies to everything on this website and its noted elsewhere here, but it’s worth repeating.

So what follows is an attempt to explain the labyrinth we find ourselves in tax-wise:

Our new law brings the lifetime exclusions together again.  The estate tax, generation skipping transfer tax, and gift tax have exclusions of $5,000,000 and a top bracket of 35%.

Clear as mud?

Think of these taxes as transfer taxes.  When you receive a gift or bequest, it may not be taxable for you.  Look at your 1040.  Gifts and bequests are not usually considered income.  The question is: Does the donor have to pay a tax because the transfer exceeds his lifetime exclusion?  If Don (the donor) gives you, his non-spouse, $5,013,000, what are the tax consequences?  Well, for him, he probably just exhausted his lifetime exclusion of $5 million and his annual exclusion of $13,000.  If he had never exceeded his annual exclusion before, and he had $5 million he could transfer, he may not owe any taxes.  But he should fill out and turn in Form 709 to show what he’s done to the IRS.  He probably has exhausted his lifetime exclusion for estate and gift taxes.  So if Don dies the next week, and his estate still has $3 million worth of assets, and he bequeaths to you, his non-spouse, that amount, now his estate probably has to pay the estate tax.  The $3 million would, under this scenario, be subject to about 35% of tax, or $1,050,000.  His estate is supposed to pay that tax within nine months.

So of the three transfer taxes, estate, generation skipping, and gift, only the gift tax has an annual exclusion to go with its lifetime exclusion.  You can give a non-spouse a certain amount per year that is under the exclusion amount, and yes, you can give more than that, but it will have gift tax implications.  See the example above.

Please note what is often called the spousal exclusion or exemption.  For most US citizen spouses, there are no transfer taxes between them.

The estate tax is the sticking point.  So say the pundits this Wednesday morning, December the 8^th.  The proposal accepted by President Obama, which keeps personal tax rates at their current level, sets the death (estate) tax lifetime exclusion at $5 million.  Estates passing more than that in asset value would have to pay 35% on that amount within nine months of the loss of the loved one.

So the Senate, going against all conventional wisdom and their own statements, allowed the death tax to be repealed for this year, 2010.  Now they think this lifetime exclusion amount is too high and that the rate of the tax is too low.  They may get a compromise.

Reader, know this:  there’s nothing in the law that’s permanent.  All things change.  Putting automatic repeals or changes to tax code provisions make them no more changeable than they’ve ever been.  Look:  our federal Congress is almost always in session and they’re constantly making new laws and changing old ones.  The death tax goes up, down, sideways, gets repealed, gets killed, buried, and yet, it keeps coming back.

When are you going to die?

If married, when is your spouse going to die?

How much will your entire estate be worth?

What will the law be at that time?

If they ‘permanently’ repealed the death tax today, do you not believe that next month, next year, four years from now, a new congress would bring it back?

You see, planning, estate planning, doesn’t limit your choices.  It doesn’t paint you in a corner.  On the contrary, planning allows for choices; for you, for your loved ones, for the organizations and causes you support.

Plan now.

photo credit:  Lars P

(The following is a guest blog post by our client, Polly Duke.)

Enter the client.

That’s me, Polly Duke.  I’m here at the Spahn Law Firm for a typical reason.  I need a will that legally covers all the bases:  from my health care in case I become incapacitated, to the distribution of my possessions following my death.  No wonder I’m grim.  This is a scenario I find strange, fearful, lonely, sad, disorderly.  My mind cannot come to grips with a world in which I am no longer actively among my family, and I would prefer to procrastinate once again.  That is not the mental state from which clear thinking resulting in a finely drawn will emerges.

In two smooth, actually pleasant, sessions Matt Spahn and his staff at Spahn Law Firm guided me through the two distinct emotional levels of the many documents comprising a will:  the first is the cold necessary charted legalities as prescribed by law, in which Matt’s legal knowledge and experience predominate. The second is the best-for-all decisions of choice as decided by me, in which my family knowledge and experience predominate.  The latter is where the going gets tough, but after session one, my thoughts became organized and crystallized enough to convince me that, as a team, we could complete the task.

Session two is over.  The will has been edited, scrutinized, understood, signed and witnessed.  It’s a done deal, a handshake and a high-five conclusion to what should have been done long ago.  It’s the very best that Matt and I could do, and we are happy with it.

Exit the client.

photo credit, konstriktion

Worried about getting on that plane because you don’t have a plan?  What will happen to the kids?  To the retirement plans?  The home?  You’re not alone if you have these concerns when you’re traveling on vacation.  We all worry about our mortality and capacity and how the inevitable will affect those we love.

Did you know that in 90 minutes or less you could have wills, powers of attorney, and HIPAA releases comprehensively created and executed?  Your plan can save amazing amounts of heartache, headache, time and money.

Some of my favorite client sessions have been for those about to fly off to some exotic locale.  Typically, they’re apologetic.  Like, “Matt, I know we’ve said we need to do this for some time.”  I respond, “Yeah, I was going to procrastinate but I decided to wait until tomorrow to do so!”

“We leave this Friday.  Can we have something done?”

“We’ll have it all ready for you Thursday, giving us enough time to make any changes necessary.”

“Really?”

“Yes.  Relax.  And know you’ll be able to completely enjoy your trip because it will be done.”

Admittedly, it’s more dangerous for us to drive on the freeway than it is for us to fly or board that big ship.  But we think about things differently when we’re traveling.  Whatever it takes to get it done.

Think of everything you own:  life insurance policies, annuities, IRAs, 401ks, retirement plans, pensions, brokerage accounts, all the bank accounts and money markets and CDs, your home, other real estate, business interest, autos and finally, all the stuff in and around your home and on your property, furniture, computers, TVs, firearms, tools, paintings, pianos . . .

We’re going to classify your assets as either probate or non probate.

Probate assets are those controlled by your will: the home and other real estate, the cars and the personal property, the stuff in your home and cars.

Non-probate assets include life insurance, IRAs, 401ks and 403bs, and certain bank accounts and brokerage accounts.  They go directly to the beneficiaries you have designated.  The will does not control their distribution.  Read the prior sentence again.   So accounts you own JTWROS (joint tenancy with rights of survivorship), or you’ve made POD/TOD (payable on death/transferable on death) go to those persons who survive you.  Life insurance proceeds and IRA’s go to the beneficiaries you’ve designated.

I can’t tell you how many times my clients have looked at me in shock when they’ve fully grasped this.  Let me tell a common tale:  Mom survived dad.  Her daughter has become her big helper again.  They re-titled accounts JTWROS and made daughter beneficiary for the other financial products.  Mom’s will is good and valid and says all her assets go equally to her two sons and one daughter.  They all think the estate, the probate and non-probate assets, will be split evenly when mom dies.  But oh no, they won’t.   Just the house and the stuff in it will be split evenly.  It’s worth $150,000.  The non-probate assets will go completely to daughter.  Those assets are worth $500,000!  Well, what can daughter do?  Two things:  One, she can receive the assets and make gifts to her two brothers and suffer transfer tax consequences (think “gift tax” and IRS form 709).  Two, she can disclaim the asset (if she officially and correctly does so fast enough) and then the assets become probate assets and then the will can control.  Do you know how to “disclaim” properly?

You see, planning means taking care of these things now, so that later it truly is simple for the survivors.  No guessing, no wondering, no need to fight.  Planning promotes harmony.

Stay tuned for how to make your non-probate assets probate assets, and vice-versa!

It was a cold, wet day when Yvonne and I presented at the Ecumenical Center, a great place smack in the middle of the South Texas Medical Center that opens its doors to many groups:  patients, caretakers, family members and organizations.  The local ALS Association had invited us to present basic estate planning to its members.  We were warmly welcomed.  We talked about wills, trusts, powers of attorney for legal, financial and medical decisions, HIPAA releases, directives to physicians, and declarations of guardianships.   We answered a lot of questions.  I revealed that my father’s twin died of ALS some years ago.

A few weeks later, a husband and wife who had attended the presentation set an appointment to come in and talk.  They asked and we gladly affirmed that their adult daughter was welcome to join us in our meeting.  The three of them worked through the issues with me, gently deferring to each other on decisions of who would do what, and when.  It’s different to do this when one of the clients is truly facing death.  The person holding the roles of wife and mother was graceful; strength personified in the midst of her mortality. The daughter seemed to have the steely reserve of her mother, yet as we progressed through the process, she began to soften, often sobbing gently.  The directive to physicians, a.k.a. the living will, was not some hypothetical discussion in this setting.  It was concretely real and we all knew that soon it may need to be shared with others so they would know what the writer really wanted at the end.

We quickly produced the documents, yet just days later when the couple returned to sign their plan, we could see the matriarch’s decline.  As they left, with our hugs, well-wishes and prayers, Yvonne retreated to her side of the office.  When I followed her and found her crying, she responded, “The woman. She’s so beautiful, so sweet, so brave.  She’s dying Matt.  And we’re seeing it.  I feel so sorry for her and her husband and her daughter.”  I tried to comfort Yvonne.  I felt the weight of our work and the honor we have to serve.

Photo credit, Ms. Abitibi