At the end of 2012, the news became dominated by talk about the "fiscal cliff." In short, the fiscal cliff referred to anticipated increase in taxes in 2013 due to the expiration of the 2010 Tax Relief Act which extended the Bush tax cuts and a decrease in spending due to the Budget Control Act of 2011. Without action by Congress, the expiration of the 2010 Tax Relief Act would have caused the 2011 and 2012 estate and gift tax exemption to revert from $5 million to $1 million. This combination of increased taxes and decreased spending would likely have caused a short term negative impact on the U.S. economy, which is currently still struggling.
Towards the end of 2012 with Congress making little progress towards a solution, many people began revising their estate plans in anticipation of the Estate and Gift Tax Exemption reversion. At the last minute, in order to avoid the fiscal cliff, Congress passed the American Taxpayer Relief Act of 2012 (the “Act”), on January 1, 2013. The Act essentially extended the Bush tax cuts, with a few changes.
Who is subject to the federal estate tax? Most estates are not subject to the federal estate tax. The Act extended the federal estate tax exemption of $5 million, with increases for inflation. The exemption for 2012 is $5.12 million and $5.25 million for 2013. The Act prevented the exemption from reverting to the 2001 exemption amount of $1 million and subjecting many more estates to the federal estate tax. For married couples, the exemption amounts may be increased through portability (discussed below). Is should be noted the exemption amount applies to lifetime gifts as well as estates transferred on death.
For example: A single person makes lifetime gifts of $2 million. In order to avoid gift tax on this amount, they use a portion of their estate and gift tax exemption. Their exemption is now decreased to $3.25 million. If they die with $5 million in assets, $1.75 million of the estate would be subject to estate tax. Basically lifetime gifts above the annual exclusion will either be subject to gift tax or reduce the estate and gift tax exemption amount available.
How does this impact married couples? If your spouse is a U.S. citizen you can leave them as much as you want at your death, tax free. A gift to a spouse is treated as a deduction from the gift or estate tax. This is referred to as the marital deduction. Gifts to the spouse may be taxed when the spouse dies, if applicable.
Portability: Another perk for married couples is portability. Under the Act, portability is now permanent which allows a surviving spouse to utilize the unused portion of a deceased spouse's gift and estate tax exemption. (This does not apply to generation skipping taxes.) Portability is permanent but not automatic. The surviving spouse must do some pre-planning to use a deceased spouse's exemption including transferring the exemption and making sure the executor of the first deceased spouse's estate files an estate tax return with the IRS. If none of the exemption has been used, this procedure may provide a surviving spouse with a $10.5 million estate tax exemption rather than $5.25 million. That's a large estate tax free estate.
Here's an example: A couple has a community estate of $3 million. If the first spouse dies and bequeaths all of their community, or $1.5 million, to the surviving spouse, there is no tax on this amount (marital deduction) and none of the first spouse's $5.25 million exemption has been used. With proper planning, the surviving spouse now has a $10.5 million exemption from gift tax on lifetime gifts or on the estate once the surviving spouse dies. If the assets increased to $9 million by the second spouse's death, the estate would pass tax free with the $10.5 million exemption.
Annual Exclusion: The Act does not change the annual exclusion, however due to inflation the annual exclusion amount has increased for 2013 to $14,000. The annual exclusion is excluded from gift tax and allows each person to annually give up to $14,000 to an unlimited number of persons. So, if you have two children and five grandchildren, you could give each of them $14,000 each year for a total of $98,000 per year. The gift must qualify for the annual exclusion, meaning the person receiving the gift must have a "present interest" in the property. Thus, gifts to some types of trusts which restrict the use of funds will not qualify for the annual exclusion, as often the beneficiary does not have a "present interest" in the funds. Crummey Trusts and 529 Plans qualify for the annual exclusion while still placing some restrictions on the use of the funds by the beneficiary.
There is also an unlimited exclusion for payment of tuition and medical expenses when payment is made directly to a provider of medical or educational services.
If you intend to make lifetime gifts in excess of the annual exclusion or believe your estate may be subject to estate tax, it is important to consult an estate planning attorney to determine your options. An attorney can assist you in making the proper gifts and establishing an estate plan which may reduce or eliminate taxes on your death.
Tuesday, January 22, 2013
Wednesday, January 9, 2013
Adult Guardianship
According to the US National Library of Medicine and National Institutes of Health, as the Baby Boomer generation ages, it is projected by 2030 the "elderly" population in the U.S. will double what it was in 2000. By 2030 there will be 61 million people falling in the 66-84 age range and another 9 million over 84. The following link contains an illustration of the anticipated elderly population growth.
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1464018/figure/fig2/
With this sharp increase in the elderly population, it is inevitable the need for adult guardianships will also rise. The burden of seeking guardianship will likely fall upon the children of the Baby Boomers or the State, as Texas has a Court initiated Guardianship procedure. It is important for the aging population and their children to understand what a guardianship is, when it is needed, and how it can be avoided.
What is guardianship? Is a guardianship needed?
A guardianship is a court initiated proceeding which determines whether a person who is having trouble managing his or her personal care or finances is legally incapacitated and in need of a guardian to handle said affairs. The incapacitated person is referred to as the ward or proposed ward. There are two types of guardianship, guardianship of the person and guardianship of the estate. Guardianship of the person addresses the medical and personal care of the ward. Guardianship of the estate addresses financial management of the ward’s assets. If someone no longer has capacity to make decisions, one or both of these options may be needed.
The need for a guardianship most commonly arises when a child is caring for an elderly parent who can no longer manage their personal care or finances. Initiating a guardianship is a serious legal matter and should not be taken lightly. Guardianship proceedings often cause family strife, are embarrassing for the ward, and when contested can be extremely expensive.
A guardianship takes away a person's right to manage their own affairs, so the proof needed to establish a guardianship is substantial. Amongst other things, the court must find by clear and convincing evidence that the proposed ward is incapacitated. With this high burden of proof, a guardianship is not appropriate in situations where a person is simply making bad decisions. People have the right to mismanage their financial affairs, make poor financial and health decisions, and refuse medical treatment. If a proposed ward mismanages money and files bankruptcy, this probably would not be sufficient grounds for a guardianship. However, if a proposed ward is suffering from dementia and enters into a reverse mortgage which provides the ward no monetary benefit, this may be grounds to consider a guardianship. Evaluating the need for a guardianship is fact specific and requires in depth analysis of a host of facts.
How to avoid a guardianship.
Avoiding a Guardianship After Incapacity
Once a person is incapacitated, avoiding a guardianship becomes exponentially more difficult. If the potential ward is truly incapacitated, they no longer have capacity to execute the necessary advance planning documents. If none of the above advance planning documents exist and there is no longer capacity, a guardianship or guardianship alternative may be needed.
If the person is having problems addressing his affairs, but still has capacity, execution of a durable power of attorney, a medical power of attorney, or a trust may be appropriate.
Certain areas in Texas offer Money Management Programs which assist seniors in managing finances as an alternative to guardianship. In the San Antonio area Catholic Charities, Archdiocese of San Antonio, Inc., offers money management. For more information see: http://www.ccaosa.org/services.html
If the person has joint accounts, the joint account holder may be able to manage the majority of the incapacitated person's financial affairs.
If government benefits are received by the proposed ward, a representative payee may be designated to receive and apply the funds. A representative payee is under an obligation to use the funds exclusively for the benefit of the proposed ward.
A family meeting and discussion of arrangements for the incapacitated person may help develop a solution and diffuse any family tension. Guardianship proceedings tend to put a great deal of stress the potential Ward and cause conflict amongst family members regarding who should be appointed Guardian. Sometimes simply meeting and making sure all the family members are in agreement or compromising prior to proceeding can save a great deal of grief, time and money.
Under the Health and Safety Code, there is statutory surrogate decision-making for medical treatment when a person is incapacitated but does not have a medical power of attorney. The same does not exist for financial decisions. At a minimum, someone in the family should be able to make medical treatment decisions.
A Management Trust may be implemented to manage the incapacitated person's financial affairs in lieu of a full guardianship. Establishing a management trust still requires a court proceeding and if the estate is valued at more than $50,000 a financial institution usually must be appointed as trustee. Financial institutions generally charge fees to act as a trustee and may not be inclined to accept a trustee appointment for small estates.
In situations involving mental illness, commitment may be the proper avenue to ensure the incapacitated person's safety.
Temporary Guardianship is a limited form of guardianship used to stop imminent harm or danger to the incapacitated person or his/her property.
Limited Guardianships may be used to allow the incapacitated person to have some participation in management of his/her affairs. Courts prefer to use the least restrictive means necessary to protect the ward, and will generally prefer a limited guardianship over a full guardianship if the ward is capable of participation in the management of his/her affairs.
A full guardianship may be needed if a guardianship alternative is not available, not applicable, or if any of the parties involved are not cooperative.
Hopefully through education, the majority of the aging population will plan for future incapacity. It is important to keep an open dialogue amongst family members and encourage each other to take the necessary steps to prevent a future guardianship. If nothing else, consult an estate planning and probate attorney to learn about your options.
For more information on this topic see: http://www.dads.state.tx.us/news_info/publications/brochures/pub395-guardianship.pdf
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1464018/figure/fig2/
With this sharp increase in the elderly population, it is inevitable the need for adult guardianships will also rise. The burden of seeking guardianship will likely fall upon the children of the Baby Boomers or the State, as Texas has a Court initiated Guardianship procedure. It is important for the aging population and their children to understand what a guardianship is, when it is needed, and how it can be avoided.
What is guardianship? Is a guardianship needed?
A guardianship is a court initiated proceeding which determines whether a person who is having trouble managing his or her personal care or finances is legally incapacitated and in need of a guardian to handle said affairs. The incapacitated person is referred to as the ward or proposed ward. There are two types of guardianship, guardianship of the person and guardianship of the estate. Guardianship of the person addresses the medical and personal care of the ward. Guardianship of the estate addresses financial management of the ward’s assets. If someone no longer has capacity to make decisions, one or both of these options may be needed.
The need for a guardianship most commonly arises when a child is caring for an elderly parent who can no longer manage their personal care or finances. Initiating a guardianship is a serious legal matter and should not be taken lightly. Guardianship proceedings often cause family strife, are embarrassing for the ward, and when contested can be extremely expensive.
A guardianship takes away a person's right to manage their own affairs, so the proof needed to establish a guardianship is substantial. Amongst other things, the court must find by clear and convincing evidence that the proposed ward is incapacitated. With this high burden of proof, a guardianship is not appropriate in situations where a person is simply making bad decisions. People have the right to mismanage their financial affairs, make poor financial and health decisions, and refuse medical treatment. If a proposed ward mismanages money and files bankruptcy, this probably would not be sufficient grounds for a guardianship. However, if a proposed ward is suffering from dementia and enters into a reverse mortgage which provides the ward no monetary benefit, this may be grounds to consider a guardianship. Evaluating the need for a guardianship is fact specific and requires in depth analysis of a host of facts.
How to avoid a guardianship.
The most effective way to avoid a guardianship is through proper advance incapacity planning. Implementing a comprehensive estate plan which includes a statutory durable power of attorney, a medical power of attorney, a living will, and a trust virtually eliminates the potential for a future guardianship. It is also helpful to execute a designation of guardian before the need arises, to ensure if a guardianship is ever needed, the ward's choice of guardian will be considered.
- Statutory Durable Power of Attorney: Authorizes the named agent to manage assets on your behalf if you become mentally incapacitated.
- Medical Power of Attorney: Authorizes the named agent to make medical decisions on your behalf if you become mentally incapacitated.
- Living Will (also commonly referred to as an Advance Directive to Physicians): Specifies which life saving measures medical professionals should, or should not, administer if there is terminal illness and death is imminent. This document ensures your agent under Medical Power of Attorney is aware of and follows your wishes. Many people are familiar with this document because of the Terri Schiavo case.
- Revocable Trust: A legal entity used to hold assets in accordance with the trust document. You establish a revocable trust and name yourself as trustee and name another party as successor trustee. Upon your incapacity, the successor trustee is able to manage your assets held by the trust without the need for a guardianship.
- Declaration of Guardianship: A document requesting the court to appoint a specific guardian for yourself or your minor children, should the need arise.
Avoiding a Guardianship After Incapacity
Once a person is incapacitated, avoiding a guardianship becomes exponentially more difficult. If the potential ward is truly incapacitated, they no longer have capacity to execute the necessary advance planning documents. If none of the above advance planning documents exist and there is no longer capacity, a guardianship or guardianship alternative may be needed.
If the person is having problems addressing his affairs, but still has capacity, execution of a durable power of attorney, a medical power of attorney, or a trust may be appropriate.
Certain areas in Texas offer Money Management Programs which assist seniors in managing finances as an alternative to guardianship. In the San Antonio area Catholic Charities, Archdiocese of San Antonio, Inc., offers money management. For more information see: http://www.ccaosa.org/services.html
If the person has joint accounts, the joint account holder may be able to manage the majority of the incapacitated person's financial affairs.
If government benefits are received by the proposed ward, a representative payee may be designated to receive and apply the funds. A representative payee is under an obligation to use the funds exclusively for the benefit of the proposed ward.
A family meeting and discussion of arrangements for the incapacitated person may help develop a solution and diffuse any family tension. Guardianship proceedings tend to put a great deal of stress the potential Ward and cause conflict amongst family members regarding who should be appointed Guardian. Sometimes simply meeting and making sure all the family members are in agreement or compromising prior to proceeding can save a great deal of grief, time and money.
Under the Health and Safety Code, there is statutory surrogate decision-making for medical treatment when a person is incapacitated but does not have a medical power of attorney. The same does not exist for financial decisions. At a minimum, someone in the family should be able to make medical treatment decisions.
A Management Trust may be implemented to manage the incapacitated person's financial affairs in lieu of a full guardianship. Establishing a management trust still requires a court proceeding and if the estate is valued at more than $50,000 a financial institution usually must be appointed as trustee. Financial institutions generally charge fees to act as a trustee and may not be inclined to accept a trustee appointment for small estates.
In situations involving mental illness, commitment may be the proper avenue to ensure the incapacitated person's safety.
Temporary Guardianship is a limited form of guardianship used to stop imminent harm or danger to the incapacitated person or his/her property.
Limited Guardianships may be used to allow the incapacitated person to have some participation in management of his/her affairs. Courts prefer to use the least restrictive means necessary to protect the ward, and will generally prefer a limited guardianship over a full guardianship if the ward is capable of participation in the management of his/her affairs.
A full guardianship may be needed if a guardianship alternative is not available, not applicable, or if any of the parties involved are not cooperative.
Hopefully through education, the majority of the aging population will plan for future incapacity. It is important to keep an open dialogue amongst family members and encourage each other to take the necessary steps to prevent a future guardianship. If nothing else, consult an estate planning and probate attorney to learn about your options.
For more information on this topic see: http://www.dads.state.tx.us/news_info/publications/brochures/pub395-guardianship.pdf
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