Colorado Estate Planning

Attention All Women: Get Estate Planning Savvy Now

Still, for all [women] have achieved — with our careers, managing our finances, sharing child rearing and other household responsibilities — we're not as savvy about estate planning as we ought to be.

Estate planning is the personal responsibility of every adult American. Of course, that doesn't mean that certain groups don't have special concerns, especially women. Not surprisingly, Deborah L. Jacobs has written in Forbes about the case for women to come to grips with estate planning.

Estate planning tends to have a disproportionate effect on women. They tend to longer* than their mates, tend to marry older men and tend to have lower lifetime earnings. As a result, women are more likely to be alive when the estate plans of their spouses go into effect.

As the surviving spouse, typically all of the marital assets owned by a couple are transferred to the wife. This forces many women to take on new responsibilities for their own finances and estates. Ms. Jacobs has some practical estate planning advice for women, to include encouraging them to talk about estate planning. Whether that conversation is with a spouse, an adult child, or a parent, she offers suggestions in all three cases.

* Among Americans 65 and older, 42% of women are widowed compared to just 14% of men.

Reference: Forbes (August 9, 2011) "Nice Girls Talk About Estate Planning"

Tax-Smart Giving

The bottom line, however, is that the IRS is watching, and you should be very careful and get good tax and legal advice before you make that gift.

As many have written, 2011 and 2012 just might be great years for gifting, but that doesn't mean there aren't fundamentals worth considering, as Benny Kass points out in a recent piece for the Chicago Tribune about gifting property.

You likely know that property transfers can be made as outright gifts while you are living or post-mortem after your death. One of the key considerations is the tax consequences.

Lifetime gifting raises the issue of "tax basis," since "the tax basis of the giver of the property (the giftor) becomes the tax basis of the recipient of the gift (the giftee)." If the property has significantly appreciated in value (and, yes, even in this economy some real estate has appreciated greatly), the recipient receives the same tax basis as the giver. For example, a $100,000 home that has appreciated to $500,000 at the time of its gift still has only a $100,000 tax basis. Further, if the recipient doesn't own and live in that home for two of the following five years before selling it, then this tax basis will make the ensuing profit from sale a prime target for capital gains upon and other taxes (i.e., the difference between the tax basis and sale price in this example).

It's a tricky arithmetic.

If the recipient is going to turn around and sell appreciated property, then simply gifting a capital gains tax bill might not be efficient. Perhaps other transfer options might make more sense.

Regardless, if you decide to gift, remember to file a gift tax return. Should you wish to take a "belt and suspenders approach," you may want to file a gift tax return even if you aren't likely to incur gift taxes upon the transfer. As the Chicago Tribune article points out, the IRS is in the middle of a campaign to uncover unreported but taxable gifts… by looking specifically at real estate transfers.

Reference: Chicago Tribune (July 29, 2011) "Giving property as a gift requires careful tax planning"

Be Sure Your Life Insurance Is “Life Insurance”

A California appeals court holds that a woman who purchased an endowment life insurance contract that repaid her premium and dividends during her lifetime and did not pay a death benefit is not entitled to Medicaid because the contract is not a life insurance policy. Lind v. Maxwell-Jolly (Cal. Ct. App., No. C061912, July 28, 2012) (unpublished).

Not all life insurance is the same, and that's not just an old sales trick to up-sell a client. In the eyes of Medicare and Medicaid, not all life insurance actually is "life insurance" – and that can be a reason to deny benefits.

Consider the case of Lind v. Maxwell-Jolly (Cal. Ct. App., No. C061912, July 28, 2012) (unpublished), as discussed here on ElderLawAnswers.com, where an endowment life insurance contract became an impediment to Medicaid benefits.

Mary Lind, a nursing home resident, applied for Medicaid benefits and then purchased a "Single Premium Pure Endowment Life Insurance Contract" for $92,000. Here's how the contract works: If she were still alive at the contract maturity date five years hence, then Ms. Lind would be repaid her premiums plus dividends. Of course, the state and two appeals courts weren't buying it. Since the contract specifies that it will repay Ms. Lind in her lifetime, it is not life insurance. Further, the contact didn't even specify the amounts to be paid out to beneficiaries upon her death. Accordingly, the court held that the contract is more akin to a legal trust and, therefore, the funds invested in it are available funds precluding her from Medicaid.

Clearly, then, not all "life insurance" is life insurance. As in all things financial, and legal, look before you leap.

Reference: ElderLawAnswers.com (August 1, 2011) "Endowment Life Insurance Contract Is Available Asset for Medicaid Availability Purposes"

IRS Issues Estate Tax Guidance… For 2010 Decedent’s Estates

On August 5, 2011, the IRS published long-awaited guidance for executors of estates of people who died in 2010. Notice 2011-66 explains how these executors can opt out of the estate tax, and Revenue Procedure 2011-41 explains the special tax rules that apply to assets when executors opt out of the estate tax.

After a bit of biding our time, we finally have something official with which to work regarding 2010 estate taxes. Nevertheless, there is a bit more waiting to do. The IRS recently published its guidance in the form of Notice 2011-66 and Revenue Procedure 2011-41.

As you may recall, 2010 was a uniquely advantageous year for decedent's estates. Yet, in many ways, it was a uniquely stressful year for estate tax planning. Most of the wealth transfer taxes lapsed after the inaction of Congress the previous year, until last December's tax compromise that is. This compromise set the transfer taxes back in place, retroactively for the entire past year (i.e., 2010). With taxes both in effect and not in effect by various laws, the December compromise left it to individuals taxpayers to decide between paying estate taxes or not paying estate taxes. Consequently, much of the chatter on the issue has been debating which path to take (since it's not actually as obvious as one would think). Now, resolving that tax dilemma is less hypothetical since Notice 2011-66 explains how to opt out of the estate tax and Revenue Procedure 2011-41 explains the special tax rules that will go into effect if you do opt out.

Hani Sarji has offered up a helpful piece on his Forbes-based blog explaining the developments in detail, along with the pros and cons. He also provides several helpful tables of information to help you navigate this issue.

Reference: Forbes (August 9, 2011) "Tax Deadlines for 2010 Deaths? IRS Finally Issues Guidance"

Debt Deal: Not (Really) A Done Deal

If there's any lesson to be learned from the recent debacle in Washington, D.C., it's this: Don't run your personal finances the way the U.S. government does. "Don't live beyond your means, and don't increase your debt levels, especially when heading into retirement," said Greg Rosica, a tax partner in the personal financial services group at Ernst & Young and a contributing author to the Ernst & Young Tax Guide 2011. "Don't emulate the federal government." – "How the Debt Deal Will Affect Retirees"

I suppose it goes without saying that the past few weeks have been a rather tumultuous time, and especially so for America's seniors. It's quickly proving to be a vital time to take stock of the situation and prepare. Luckily, the news is awash with important reminders and advice about what's at stake.

First, the debt deal was finally passed. As I mentioned last week, it's already been called a mixed bag by AARP, but the bad may outweigh the good and there are specific changes to watch with interest. Robert Powell of MarketWatch has put together another resource detailing what you ought to know with a special emphasis on budget cuts on programs (both the $1 trillion already going into affect and future cuts to Medicare), along with interest rates and taxes.

Immediately following on the heels of the debt deal, however, the S&P downgraded the U.S. and forced a rather volatile "market correction." As SmartMoney points out in this article, it's like 2008 all over again, because it's the baby-boomers who have the most to lose and must taken action to engage strategies to protect their nest egg if market forces continue to threaten it.

And, finally, there's looking to the future… the future of rehashing the past few months and the debt debate. The deal that was reached, calls for the commission of a super committee to make more suggestions for cutting the debt. That means Medicare and Social Security might not remain safe, since the debate isn't actually over. Indeed, if the committee's suggestions are not implemented, then immediate spending cuts to Medicare will go into affect by Christmas. Reuter's, for one, thinks there's reason enough to be wary of the super committee altogether, especially if you're concerned about retirement. In fact, they've found eight reasons to worry.

Reference: MarketWatch (August 4, 2011) "How the Debt Deal Will Affect Retirees"

SmartMoney (August 8, 2011) "The 2011 Correction: Another Bad Turn for Boomers."

Reuters Money (August 5, 2011) "8 ways the super committee is not super for retirement"

Credit Shelter Trust Still A Valuable Estate Planning Strategy

Some estate planners have suggested that portability makes it unnecessary to continue to draft estate plans that include credit shelter trusts. This reported demise of the credit trust reminds me of Mark Twain's famous observation, after his obituary had been mistakenly published by the New York Journal, that "The reports of my death are greatly exaggerated." Like Mark Twain's "death," it seems to me that reports of the demise of the credit trust are greatly exaggerated.

One of the most-heralded simplifications of the new estate tax law is portability of the individual's federal estate tax exemption between married persons. Some media "experts" have been saying that portability would eliminate the need for most estate planning. Not true. As pointed out recently in the Journal of Financial Planning, credit shelter trusts are still a savvy planning strategy.

Portability means that any unused portion of a deceased spouse's estate tax exemption doesn't simply dissipate but can go automatically to the surviving spouse. Each individual gets a $5 million exemption, which means a married couple can effectively protect up to $10 million with their combined exemptions. That amount is sufficient to protect the vast majority of estates, eliminating the need for a credit shelter trust to pass and protect the exemption of the first spouse to die. Or so it would seem.

There are two conditions that limit the effectiveness of portability. The first is obvious: portability will expire at the end of 2012, unless Congress acts to preserve it. The second is that the surviving spouse must file a timely estate tax return in order for the IRS to assess and transfer the exemption, even if the estate value wouldn't have otherwise triggered an estate tax return. So this simple, automatic portability thing is not as simple, nor as automatic as many would like believe.

Moreover, portability as a technique lacks many estate planning advantages, especially in the cases of blended families, appreciating assets, or where sprinkling taxable income to beneficiaries in lower brackets could result in a net tax savings.

Lastly, remember that portability will sunset for people dying on or after January 1, 2013. Relying on portability will be effective only in those situations in which both spouses die prior to that date. In most situations, a properly planned credit shelter trust will offer significant advantages over reliance on automatic portability.

Reference: The Journal of Financial Planning (August 2011 ed.) "Why Portability Isn't a Cure-All"

Revised Government Website Makes Nursing Home Comparisons Easier

The federal government recently overhauled one of its web services to help families better evaluate nursing homes.

If you and your family are screening nursing homes for a loved one, then you already know what a daunting process it can be. It may just be a little easier now with the federal government's newly-revised Nursing Home Compare web service.

As Forbes recently pointed out, the comparison tool offered through Medicare.gov has been simplified and expanded. Under advisement from the Centers for Medicare and Medicaid Services, the old criteria of 17 points has been replaced with a new set of 21 points based on specific issues like infections, falls, general well-being, and pressure ulcers – the very issues that residents and families may deal with directly once admitted to the facility. The idea is to make it easier for families to research their area and get an accurate understanding of quality and performance in possible nursing homes for their loved ones. Hopefully it can help you and your family as well.

Reference: Forbes (August 1, 2011) "Feds Update Website to Help Families Choose Nursing Home"

Combined Insurance Policies A Mixed Bag for Long-Term Planning

Sales of insurance policies that combine long-term-care with other forms of insurance are booming. But before buying, it's important to understand the possible drawbacks.

Insurance, in its many forms, has been referred to as the Swiss Army Knife of estate planning – providing cash just when needed, and for pennies-on-the-premium-dollar. A solid life and estate plan may include long-term care insurance for advanced health care needs, life insurance to cover at least your final expenses, and even annuities to guarantee income. Rather than deal with two or three separate policies, though, there is a growing trend toward the use of combined insurance policies, but before buying, a recent Wall Street Journal article warns of potential drawbacks.

Combined insurance policies come in a few shapes and sizes, but are generally based around long-term care insurance combined with a life insurance policy or an annuity. In the event that the policy holder requires long-term care, the funds come from the other component(s). Extra long-term care protection can often also be purchased.

These policies may be a good deal for some. As the Journal points out:

They allow those who don't use their long-term-care coverage to recoup money spent on premiums. Because many combined policies guarantee coverage at a set price, they also offer policyholders a way to hedge against the premium increases that have plagued holders of conventional long-term-care policies. Another benefit: For those in poor health, a combined policy may be easier to obtain.

Nevertheless, since the policies are combined, using one policy effectively nullifies the other. There will either be no death benefit or no more steady income in the respective policies if the policy holder needs long-term care.

Further, there may be other complications with a combined policy, depending upon your specific situation. Finally, these combined policies can be quite expensive.

You can learn more about long-term care insurance in the Long-Term Care Practice Center on our website. Be sure to sign up for our free e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning.

Reference: The Wall Street Journal (July 31, 2011) "'Combined' Insurance Policies Grow"

Dynasty Trusts Offer a Unique Estate Planning Opportunity

A dynasty trust is used to pass money on to multiple generations of descendants while paying as little in taxes as possible.

There are many strategies – or tools – available to the savvy estate planner to help protect and preserve the fruits of a lifetime of accomplishment, and pass them along to future generations. Bloomberg recently wrote about a specific type of trust known as the Dynasty Trust – a little known strategy that you might have thought was only suitable for the ultra-rich. However, in today's tax environment, Dynasty Trusts are gaining popularity as a valid strategy for those of more modest means.

Trusts can be powerful tools for overcoming transfer taxes to include the estate tax, the gift tax, and the generation-skipping transfer tax – but there are always limitations. A dynasty trust is used to pass money on to multiple generations of descendants while paying as little in taxes as possible. The trusts have no expiration date and there are no required minimum distributions, meaning their assets may grow for an unlimited number of future generations.

This year represents a pretty good opportunity to set one up too, thanks in no small part to the generous gift tax exemptions in effect until the end of 2012. Currently the exemption is set at $5 million, and effectively $10 for married couples, which is a nice hefty amount to begin a trust. Since the trusts last indefinitely and avoid taxes, the money can simply accumulate over the remainder of your lifetime, offering a huge advantage over other transfer methods.

Bloomberg offers some math:

A dynasty trust funded with $10 million from a couple today could be worth as much as $184 million in 50 years, assuming no intergenerational transfer taxes and a 6 percent annual return, and before subtracting any federal income or capital-gains taxes paid on the trust's investment returns. By comparison, assets not placed in a trust and taxed twice as an estate in that period could be worth $39 million at the end of 50 years, assuming a $1 million exemption and 55 percent top rate.

Because of their unique nature, dynasty trusts can't be set up in all states – most states have restrictions on the life of a trust – so setting one up might mean doing so across state lines. Still, if you are looking to set up this kind of family wealth, or transfer a large family business, then this planning strategy may make sense for you.

Reference: Bloomberg (July 28, 2011) "Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever"

Debt Deal is a Mixed Bag for Older Americans

The deficit deal passed by Congress and signed by President Obama is a mixed bag for older Americans, with Social Security and Medicaid protected from cuts at least for now but many other federal programs likely to be trimmed.

For months we've been on the edge of our seats trying to figure out what Congress would do about the debt ceiling, and how their actions would affect the nation's seniors. Finally, we can all breathe a quick sigh of relief … then go back to waiting. The recent debt deal did not raise taxes and it did not make the threatened cuts to Social Security or Medicare, but it does lay the groundwork for renewed discussion in the future.

The AARP says the deal is mixed bag for older Americans, but not as bad as it might have been. Proposed cuts to Social Security and Medicare did not make it into the final bill. Of note, too, is that the proposed changes for calculating the Social Security Cost Of Living Adjustment (COLA) – a less generous formula that effectively cuts the benefit – did not make it into the final bill either. But in order to preserve these programs many other programs were slashed, including those emphasizing nutrition, senior job placement, and home and heating assistance.

Nevertheless, the debt discussion was not put to rest, merely put on hold. One of the biggest results of the law is to create a congressional super-committee of six Democrats and six Republicans who must make significant budgetary recommendations by late November. By Christmas-time this year, Congress must act on these recommendations, or find a better solution, or else severe cuts will go into effect across both military and entitlements spending like Medicare and Social Security.

For now, seniors can breathe a bit easier. But, clearly, the debt crisis has been postponed rather than resolved.

Reference: AARP (August 2, 2011) "Debt Deal: No New Taxes and No Social Security or Medicare Cuts – Yet"