The Dayton Law Firm

Life Insurance Reviews

Passing along some useful information this time.  Our friends over at reviews.com have recently done a write-up on life insurance, and reviewed a few major providers, which can be found here:  https://www.reviews.com/life-insurance/

 

We would like to add the following information about how this all interacts with your estate plan.  Life insurances tends to be passed down in one of three major ways:

  1. Naming designated beneficiaries directly: This defines a person to get cash from the policy when you pass on.
  2. Naming your revocable living trust as the beneficiary: Revocable living trusts provide a way to lump your estate’s assets and debts together to be handled all in one efficient process. This is why our general advise for anyone with a trust-based estate plan and who is not going to pay any estate tax is to name the trust as the primary beneficiary.  With the new rules, fewer people than ever will be paying estate tax, so this is increasingly the best option for the majority of Californians.
  3. Creating and naming an irrevocable trust just for your life insurance (known as an ILIT): This technique is used to move the value of a life insurance policy outside of a taxpayer’s estate for the purposes of estate and gift taxes.  You do a separate trust just for your life insurance, and it interacts with your other revocable living trust to help pay your estate’s debts. Right now, this is generally more costly than it is worth unless you know you will be paying estate tax, but where it is needed the tax savings can be quite large.

If you are unsure which option is best for you, then feel free to give us a call and we can help guide you through deciding which vehicle is right to transport your life insurance to your loved ones.

Estate Planning For 2018: What You Need To Know

When the Tax Cuts and Jobs Act first passed, it left many of us going into the new year with little knowledge about the details. It has been picked apart by experts now and a clearer picture is starting to form. Some of the bigger changes are on the income tax side, providing corporations and individuals with potentially lower income taxes. To be noted is that they left the rates on estates and trusts almost identical to the previous high level. This disparity will make people rethink some year-to-year decisions to reinvest or distribute income from ongoing trusts and estates.

However, substantial updates are seen on the estate and gift tax side, where the individual lifetime exemption has been doubled. This means fewer people than ever will pay estate or gift tax. These numbers were set at $5 million per individual or $10 million for a couple, and are now doubled to $10 million and $20 million respectively. With inflation included, these will be $11.2 million per individual and $22.4 million per married couple that may pass estate or gift tax free in 2018. Above those amounts, however, there is still a hefty tax on anything passed-on or gifted.

For better or worse, much of this new tax bill has a “sunset provision.” This is included due to the law being passed under a special congressional rule. Many of these rules, including the doubled lifetime gift and estate tax exemption, will go back to old numbers in the year 2025 unless Congress reaffirms the bill. Due to the current popularity of the new tax laws, it is also possible that Congress make change things in the years before 2025. With that in mind, anyone with their ear to the floor needs to know both how to maximize the use of the current rules as well as know when and how things may need updating later.

We have both reviewed the rules ourselves and have consumed a dozen white-papers and seminars on the subject, and the following is our early take on how the tax laws effect Californians in the following total net worth categories:

$0-$150,000: Planning in this bracket was not changed by the new laws. In California, if your net worth is below $150,000 and real property (like a house) is less than $50,000, then your estate may pass with the use of just a Will and a summary probate without the need for court supervision. This value includes your house regardless of the mortgage; so $900,000 mortgage on a $1,000,000 house means your net worth includes the whole $1,000,000. The focus of planning at this level is making sure you cut red tape in advance of an emergency or long-term inability to act for yourself. Luckily, a collection of key documents, which we call a comprehensive estate plan, can help make sure everything is handled both before and after you are gone.

$150,000-$5 million: Again, very little changed for this bracket, but there are still red flags to be wary of. Californians worth over $150,000 or who own at least $50,000 in real property are required to go through a court supervised probate, even if they have a Will. Additionally, anything you own at death passes on to your loved ones with the federal capital gains taxes erased (known as stepped-up capital gains basis). The simplest way to avoid the court probate while still erasing the capital gains is with a revocable trust, known sometimes as a living trust. Living trust-based estate plans are all of the documents of a comprehensive estate plan, but everything is pointed towards a trust as the managing document. Trust-based plans are the bread and butter of estate planning in California due to the abnormally high probate costs. This means most firms (including us!) have found ways of making a trust-based estate plan easy to create and manage. Thus, Californians in this bracket are best served with simple trust-based estate plans.
Depending on your personal wishes, the focus of your plan is probably more about providing for your family and friends. Among the popular ways of ensuring protection for married couples is with marital trust planning. Older forms of this focused on estate taxes and often included language requiring the funding of a trust that is no longer a good idea due to the high income tax rates and lack of capital gains stepped-up basis for assets in that trust. Our firm currently uses a more contemporary option that guarantees some assets will be held separately after the first spouses passes, but also lets the surviving spouse make sure the type of trust is the right one for tax reasons.
There are also ways of providing for children and other loved ones without giving an immediate gift of cash. One of the more popular is by making sure IRAs are inherited rather than cashed out with the use of a Retirement Plan Trust. Another is to provide gifts after death in long-term trusts with a special trustee named to prevent the trust assets from going to the beneficiary’s creditors or ex-spouses.

$5 million-$25 million: this is the bracket where estate taxes may have previously affected you, but now you no longer have to worry (at least for the time being). Unfortunately, this means any estate plan already in place needs to be reviewed. Many popular planning techniques from a few years ago will now be costly for you and good for the IRS. Fortunately, cutting edge attorneys and accountants have been testing the waters over the past decade to see what works to help provide flexibility. We currently offer a couple options that can be used in varying ways to plan around different taxes, all of which can be built in to your plan now so fewer revisions are needed in the future. Californians with net worth in this range absolutely should seek advice to make sure their estate is planned correctly for the current rules and possible future situations. As with the above, now that the tax rules are simpler the goal may be to provide the gifts to your loved ones the way you want.

$25 million and beyond: This group is who we can reasonably say will pay estate and/or gift tax. This is the historically high watermark under a unique political climate, which leads experts to think this is as high as it goes. Anyone in this category should consider taking advantage now. If you have not yet done any planning, now is a great time to put something in place. If you have done planning, you should review it and see which parts still make sense. Some popular planning techniques should be updated to consider the new rules. One example would be TCLATs (Testamentary Charitable Lead Annuity Trust) built into revocable living trusts should have the new estate tax numbers incorporated so money doesn’t go to charity that otherwise could be going to your family tax free. Another example would be revising the size of life insurance policies taken out to cover expected taxes after death. While not useless, some larger policies may benefit from being reduced or strategically repurposed for other reasons. And while not directly related to the present tax bill, the withdrawal of proposed 2704 regulations by the IRS means there can still be a benefit to splitting ownership with your loved ones during your life. These techniques are not for everyone, but where they make sense big tax savings can be had.

And so now the collective professional tax world sits back off the edge of our seats and learn forward to finally get some work done. We know the rules for now, and we know how to assemble things to be adaptable moving forward. There has never been a better time to double check with all your tax professionals that things are set up and working correctly for you. And don’t forget, once you are done dealing with your income taxes, you should also talk to us to make sure you estate is handled too!

The Tax Cuts and Jobs Act; a brief update

As many have probably heard, Congress just passed its long awaited tax reform bill, known as the Tax Cuts and Jobs Act.  More complete summaries of the updates can be found around the internet.  The one which we have found easiest to read through is provided by Northern Trust Company, and can be found here:  https://www.northerntrust.com/insights-research/detail?c=c6f940209cb783cc86b19dd29aa0c861

 

The big takeaway for estate planning is that the Gift, Estate, and Generation Skipping Transfer Taxes (also called “transfer taxes”) are all still in place, but with almost doubling the individual lifetime exemptions.  This means that, where before there was no transfer tax for an individual until about $5.5 million and couples until about $11 million, now there is no transfer tax for individuals until $10 million and couples until $20 million.  Since there is no transfer tax until those amounts, capital gains focused tax plans are where planning should be considered for most people.  This is a much smaller change than some of the proposals.  In short, the laws remain similar to how they have been since 2013, only applying to fewer taxpayers.

 

Luckily, anyone who has done or reviewed an estate plan with us in the past few years is likely still okay.  If you are unsure, early 2018 is a great time to have your situation and plan looked at.  Now that we know what the laws will look like for the foreseeable future, we can (for the first time in more than a year!) properly provide guidance for people looking to plan to pay fewer taxes.

Desert Caballeros Ride

Hidden somewhere in the middle of this is the firm founder Rich Dayton.  He attends the annual Desert Caballeros Ride, who just published their pictures from this year’s trip.  Since Congress hasn’t decided to shed light on what the future tax laws will be yet, we decided to take it easy and let you know what we do in our spare time.

 

If you are interested in joining Rich, more information can be found here: http://desertcaballerosride.com/

Terry Pratchett and the Steamroller: a lesson in unusual requests

Terry Pratchett, famed author of the ‘Discworld’ series of satirical fantasy novels, passed back in 2015. He may have been a citizen of the United Kingdom, but watching his estate teaches a good lesson on how proper planning is done. He had a will which specifically handled is multi-million-pound estate. However, more importantly, he talked his last wishes out with his loved ones to ensure even his most unusual requests are honored.

As a prolific author, Mr. Pratchett had several books he was working on at the time of his death. Since he had fair warning, he made sure to tell his friends what he wanted to happen to those unpublished works. On August 25, 2017, that wish was fulfilled thanks to the help of a bonafide steam-powered vintage steamroller. As fellow author and friend Neil Gaiman had told the press previously, Mr. Pratchett had asked that all his computers and work “…be put in the middle of a road and for a steamroller to steamroll over them all.” The idea being the author did not want anyone trying to finish and publish what he had still been working on. Fortunately, sufficient instructions and liquidity was available to be sure the odd desire was fulfilled in excruciating detail.

Requesting such a bizarre task may be on your wish list, and if so, you can learn from this tale. First, and most important, is to make sure the wishes are not a secret. Telling your loved ones and additionally getting it in writing is a great way to know it will be on their minds. Second, making sure there is enough liquid funds set aside as needed can be the difference between a hope and reality. While loved ones may be willing to go out of pocket to see ashes spread on a faraway beach, it is much more likely if there is a provision that the cost be paid for by your trust or estate. Those two together can ensure almost anything happen after your passing. It may seem like a far-off situation, but as we discussed last year, even David Bowie was not buried where he wanted because no one knew about his request until he was already in the ground. (read more here: http://thedaytonlawfirm.com/2016/02/bowies-last-request-who-decides-where-you-are-buried-or-cremated/)

For more details, including pictures of the steamroller, see BBC’s report on the rolling here: http://www.bbc.com/news/uk-england-dorset-41093066

Estate Planning in the Digital Age

At this point, most people have had the odd experience of realizing one of your Facebook friends is deceased, and one of his or her loved ones are posting on that account. More concerning is realizing who may have access to your online accounts with private information, such as those associated with your bank or hospital. This is why planning for digital estates is a topic of increasing importance.

Residents of California (along with a few other states, including New York, Florida, and Illinois) have adopted a general set of rules for this cutting-edge issue. The Revised Uniform Fiduciary Access to Digital Assets Act provides authority for the creator of an estate plan to authorize his or her agents to have legal authority to access, manage, and close online accounts. For this to work, your estate plan must specifically reference digital asset powers. Fortunately, we work to ensure estate plans from our firm include this language, focusing the role of handling these assets to be controlled by the Trustee.

Separately, there are a couple things you can do on your own to ensure your online accounts pass to your loved ones correctly. First, the only guaranteed way to ensure someone can access your account after you are done is to provide the user name and password. Either personally organizing your online accounts and passwords or making use of a password management program or service can help make transferring the accounts easier. It is always important to practice safe practices when creating a list of sensitive information, such as password protecting the document or only keeping a written copy. Second, be sure to make sure of designated recipients or beneficiaries of your online accounts, as some services allow you to nominate a successor email in the event of periods of unusual inactivity. Facebook includes the ability to nominate a legacy contact for a memorialized account, and other services offer something similar. Third, and this can often be the most important, be sure there is information in your estate plan that these digital assets exist. If you don’t tell your children about an account, and they have no reason to know it exists, they will not try to locate and claim the account.

Active Ownership: Planning for Business Owners

This is a general reminder that ownership of a closely held or family business should be integrated in your estate plan. While sophisticated planning can be done to maximize estate and gift tax treatment, even those who do not have estate tax concerns can benefit from pre-planning. In situations where the owner is the manager of a business, providing the correct authorizations for agents and trustees to act on your behalf can save your business legal costs and delays associated with an important manager/owner falling ill or worse.

Your powers to manage your business are often tied to ownership in small, closely held, and family businesses. Unless specific planning is done in the business entity documents, owners have many voting rights tied to either making management decisions or deciding to remove and replace managers. Unfortunately, if the ownership is in your name (rather than held in a trust), then a court must appoint a representative to act for you in situations of incapacity or death. Appointing this appropriate conservator or administrator could take months and cost thousands. Any small business owner knows that few decisions can wait months and few balance sheets can easily take that hit.

However, doing an attorney advised estate plan and making sure your attorney knows you own a small business can help avoid the courts. Creating an appropriate Trust and Durable Power of Attorney document, funding/assigning as many interests in the Trust, and ensuring both documents have business interest powers built in can be the solution. This plan allows the owner to assign someone the power to make decisions and sign documents on behalf of the business owner in times of incapacity or death. Because the person was pre-designated, there is no need for the court’s delays and costs.

Thus, business owners can benefit from having their business interests included in their estate plans. If you have a plan but it was done before creating the business or without discussing it with the attorney (or if the plan was not attorney advised), then there are benefits to be gained by revisiting the plan and incorporating your business interests.

Will Your Evil Sister-in-Law Raise Your Children?

You may be surprised to find some of the most important parts of an estate plan have nothing to do with money. Planning includes naming who is in control of everything you own and everything you are responsible for. This means your parental rights over your children are also something that should be handled with your plan.

Many parents are familiar with how this works, but just as review: until your children reach the age of majority (age 18 years in California) or are Court emancipated, they do not have the right to sign contracts, open bank accounts, or make medical decisions. Until then, the minor’s rights are controlled by their parent or Guardian.

A Guardian is a Court appointed adult who is accountable for managing the child’s living situation and assets (including government benefits available for the child). Technically, the Guardian of the Estate (who manages money) and Guardian of the Person (who manages living situation) are not required to be the same person. In special circumstances, you may see these jobs separated, but generally a single person is appointed by the Court to take both jobs.

The Court must be involved with appointing the Guardian of a child who has lost a parent (or if the parent is unavailable to act for some reason). There are default laws for the Court to use to decide who gets to take the job. This rule is a list of relatives of the natural parents. The highest person on the list who asks to take the job is normally given it after a thorough investigation and hearing any objections from other relatives. Thus, if you don’t name your preferred guardians, there is a long list of relatives of natural parents (including your favorite in-law) who may end up as Guardian.

In California, the place to name your Guardians is in your will. Even if you have a trust, having a “pour-over” will can be important for many reasons, especially to name your preferred Guardians. Keeping your list of Guardians updated may change more often than other decisions, so you can know just changing this is a very small update that only requires changing the will. While it is necessary to vet your choices carefully, you can also feel safe that the job is not required, and relieving themselves of the responsibility to let your next named person act is as easy as a signed one-page document.

If you have already done a comprehensive estate plan, then you have already handled this. If you are a parent or planning on being a parent, deciding to create an estate plan can be for purposes beyond just yourself.