By now most people have heard that the best year to die is 2010! Why? No federal death tax (so far). Sounds great, right? It depends. If your estate is over 3.5 million dollars, then you may have hit the jackpot. If not, 2010 could be a nightmare. Why? Because with the repeal of the death tax comes new tax rules targeting the middle class who wouldn't have had to pay anything had Congress left the death tax alone. The target is appreciated assets. In prior years, those who inherited appreciated assets like stocks or property, received a stepped-up basis to the fair market value date of death. In other words, when your grandchildren sell the IBM stock you leave them in your will, they would only pay capital gains tax on the appreciation from the date you died until the date they sold the stock. They would not pay tax on the difference between the sale price and your original purchase price. But, these favorable basis rules changed for 2010 so your heirs will no longer get a full step-up in basis on appreciated assets. This means your heirs will get hit with a much larger tax bill then they would have had you died in 2009! Moreover, Congress is still talking about changing the rules back to the old rules at some point in 2010. So what will happen if you die between January 1, 2010 and the time Congress goes back to the old rules? We'll wait and see. And what about all the people who have clauses in their wills or trusts that link distributions to the federal estate tax? Who will get what if there is no federal estate tax? These answers will be decided by the courts--which means many families like your could end up in protracted legal battles pitting siblings against each other for years after you're gone. The financial and emotional costs of battling it out in court will be devastating. The bottom line--2010 can be your worst nightmare or, with competent estate planning, your family could be protected. Will your family get the shock of their lives after your gone? The way it stands now, they will and the middle class will pay dearly.
Tiger Woods finally came out of hiding and held a press conference. Yes it was controlled. Sure it was on his terms. In true form, Tiger was robotic like his golf game. His prepared remarks were all of these things and more. The "more" is his speech was probably required by his re-negotiated prenup with his wife. Of course, since Tiger is married, his re-negotiated prenup can't really be called a prenup anymore. It's more like a postnup. The difference between a prenup and a postnup is a prenup says "I'm not sure I can trust you because we haven't been married yet." A postnup, on the other hand, says, "Now that we're married I know I can't trust you!" Big difference, right? In Tiger's situation, this certainly rings true. After all, Tiger went from the wholesome golf superstar to the poster boy for men behaving badly. So what does Tiger's newly re-negotiated prenup actually say? Your guess is as good as mine, but I promise you it involves more money than the combined GDP of most tropical vacation destinations in the Caribbean! So what does this have to do with estate planning? It has to do with asset protection. Yes, Tiger had a prenup and prenups are wonderful tools. But they have their problems. For starters, many state court judges don't like prenups and when push comes to shove, that spells trouble for someone like Tiger. Another problem is they have their loopholes. For example, if the rumors are true that Tiger renegotiated his prenup with his wife, it leads one to believe that the prenup didn't provide much protection in the first place. In addition to a well drafted prenup, someone like Tiger Woods would benefit from asset protection trusts that effectively place the assets therein out of reach from creditors, ex-spouses, lawsuits, etc. So does this mean that Tiger's wife would get nothing if they divorced? Of course not. Alimony, child support and the laws of the state the couple reside in would all play a part in the settlement. It does mean, however, that a sizable portion of his assets would be beyond the court's reach and the reach of creditors. Now, Tiger may already have such trusts in place. We simply don't know because trusts are private. The sad thing is many of the wealthiest people in the world fail to plan accordingly and wind up broke, especially athletes. Just remember that no matter who you are, asset protection is important.
So this is the third installment of this discussion. Why so many posts on it? Because it is important! Because it is one of the most dangerous myths/misconceptions/misunderstanding (whatever you want to call it) that cloud the judgment of hard-working, middle-class seniors. And, because it all too often gets well-meaning people into a heap of trouble. The last part of the problem with giving the house to the kids is the tax aspects of the transaction. Let's get this out of the way now so there is no confusion. Probate and taxes are NOT the same thing. Many believe giving the house away to the kids or holding property jointly with their kids avoids probate and taxes. First, joint ownership of property does not avoid probate. It delays probate until the second joint tenant dies. Delaying probate is not the same as avoiding probate. Second, joint tenancy does not avoid death taxes. Assuming the two owners are husband and wife, half the value of the property is included in the estate of the first joint tenant to die and the other half in the estate of the last joint tenant to die. If the owners are not husband and wife, the entire value of the property is included in the estate of the first joint tenant unless the other joint tenant proves otherwise, which is unlikely in the case of children co-owners. Even worse, "putting the kids name" on the house is a gift that most likely exceeds the annual gift exemption amount thereby requiring the parent to file a federal gift tax return. Of course, the parent didn't know that because he/she was simply "putting the kids name" on the house, but the IRS won't care. It will care, however, about the failure to file a gift tax return! And, another thing most people don't know, is the gift (which they didn't know was a gift) eats away at the lifetime federal estate tax exemption amount! This will come as one of the rudest awakenings to the kids when mom and dad pass away and Washington demands its estate tax payment within 9 months. I could go on and on about how bad an idea it is to give away the house to the kids. Suffice to say, just don't do it. Call for far better options: 413-588-8298!
I hear this question all the time. Typically, I ge this question because people think it works to avoid paying nursing home costs. Usually, people who ask me this question have already given their house away and have told me they are "all set." I call that the "I'm all set syndrome." Whenever I hear someone say they are "all set" I know immediately that they are anything but "all set." In fact, they are in deep trouble. Just to be clear, giving your property away to your kids is certainly inexpensive. The costs are minimal for the deed and the filing fees at the Registry of Deeds. But, thinking logically, why would anyone believe that simply putting someone else's name on your property could protect the property from a nursing home, the government or any other creditor, for that matter? Washington and the states have "figured" out how to deal with this tactic many years ago. Today, with Medicaid look-back periods increased to 5 years for gifts (such as giving the house to the kids) and disqualifying penalties that would put most middle class families in the poor house, giving the house away is often a bad decision. Not only is it a bad Medicaid planning strategy, it is also a bad personal strategy. More to come on why in Part 2...
Times change. People change. Laws change. Our priorities change. ironically, about the only constant we know is change. So after creating an estate plan, be it just a simple will or a more complex tax based asset protection plan, the question is how often should you review the plan? I recommend an annual review. Why? Because changes occur all the time without your knowledge. One of the most common misconceptions I see is that your legal documents, once created, are good for ever. Actually, they are only good until the laws change. Sometimes laws change and they have no affect on your legal documents. Other times, the changes, which you will most likely not be aware of, can invalidate your plan altogether. For example, it is not your fault that federal law changed making it illegal for doctors to share your health information without your permission. Nevertheless, this change made several years ago voided critical provisions in many trusts and powers of attorney. What if your power of attorney is useless when you need it the most? Unfortunately, we are not just talking about the law. A well crafted estate plan will use the law to meet your goals. This means when your circumstances change, i.e., new grandchild, divorce, re-marriage, death in the family, etc., your plan may need amendments. If not, your wishes may not be carried out as you had hoped. A classic example are beneficiary designations in retirement plans! Example--your spouse is named as the beneficiary of your IRA. You get divorced but never get around to taking your ex-spouse off your IRA. What happens when you die?? You guessed it--your ex-spouse will get an unexpected gift of your cash. This happens too often and can be avoided with someone looking over your shoulder. These are just a few examples why your plan should be reviewed on an ongoing basis. Think of it like your car--just as it needs maintenance to run well, your estate plan needs maintenance to work the way you intended it to work. Neglect it too long and your family may wind up in Probate Court after all.
Dinner Seminar at Delaney House--Next Tuesday and Thursday, February 9th and 11th @ 6pm!
My firm is sponoring an estate planning seminars next week at the Delaney House. I'm opening these two seminars to friends on facebook, twitter and readers of this blog who are/or know someone who is interested in estate planning--parents, grandparents, newlyweds, parents with minor children, your family members, friends, relatives, etc. The seminars are free and start at 6:00pm. Topics include: how to avoid costly probate; how to minimize taxes when you die; how to protect assets from divorce, bankruptcy, lawsuits and in-laws; how to ensure your estate goes to only those you want; what Washington doesn't want you to know about your IRA; and other topics to save money and protect assets. If you or someone you know is truly interested in these topics, please drop me a line or call my office, 413-588-8298 to reserve seats (up to 4 adults) for one of the nights next week. Let me know quickly as these seminars always fill up to capacity. If calling the office, please give your name, address and phone number to the receptionist. Reservations are a must--no admittance at the door.
