Cheryl Chapman Henderson, LLC

What Does the Tax Cuts and Jobs Act Mean for My Estate Plan?

What Does the Tax Cuts and Jobs Act Mean for My Estate Plan?

If you haven’t reexamined your estate plan in light of the changes in the Tax Cuts and Jobs Act, do so now, says The Kansas City Star in its article “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.”

A big change in the tax law is the doubling of the federal estate tax exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). In 2019, the federal estate tax exemption is $11.4 million per person (or $22.8 million per couple).

You should review any wills or trusts drafted prior to the passing of the 2017 legislation. If the trusts use formulas tied to the federal estate tax exemption, then there could be unintended ramifications because of the new larger exemption amount.

You should also look at trusts drafted prior to 2011 when portability was introduced. This legislation allows for “portability” of the deceased spouse’s unused estate exemption. Therefore, the surviving spouse’s estate can now use any exemption amount that wasn’t used by the first deceased spouse’s estate.

The Tax Cuts and Jobs Act didn’t change the step-up of basis. However, the unintended effects of this “non-event” are potentially more significant now. When the decedent dies, the heir’s cost basis of many assets becomes the value of the asset on the date of their death. Thus, highly appreciated assets that avoided income taxes to the decedent, could also avoid or minimize income taxes to the heirs.

Maintaining the ability for assets to receive a step-up in basis is a more important part of estate planning now, because of the larger federal estate tax exemption. However, note that beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death don’t benefit from a “second” step-up of basis. Instead, the basis of the heir’s inheritance would be the original basis on the first spouse’s death.

As a result, bypass trusts are much less useful than in the past and could have negative income tax impacts for the heirs. This is particularly true, if the assets appreciated significantly after the first spouse’s death or if there was a relatively long amount of time between spouses’ deaths. If your current trust establishes a bypass trust at your death, you might want to ask your estate attorney about restructuring how the bypass trust is funded for the larger federal estate tax exemption.

If you haven’t looked at your estate planning documents with an estate attorney recently, do it in 2019.

Reference: The Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

Are You in the "Sandwich Generation"?

“Have you ever wondered if you are part of the sandwich generation?”

The “sandwich generation” is a generation of people, who are usually in their 30s and 40s. They are caring for their aging parents while supporting their own children. If this sounds like you, then this means you’ve got a lot to worry about. Even if you are not taking financial responsibility for your parents, you are dedicating time and energy, usually willingly.  However, that means there’s less of both for you, your family and your career.

The Press-Enterprise’s article, “3 tips for anyone in the sandwich generation,” offers the following tips to make the “sandwiching” easier on you and your family:

1. Talk About Money Issues. Discuss finances with your children and parents. Perhaps you could go with them to meet with their estate planning attorney. He or she can make sure your parents have all the proper estate planning documents, such as a will, trust, living wills and powers of attorney.

This legal professional will create a plan to lessen or avoid estate taxes and work to ensure that your life's savings and assets are protected from your beneficiaries' creditors after your death and that your legacy is assured.

Estate planning attorneys are accustomed to working with families and navigating the issues between adult children and their aging parents. There is little chance that yours is a unique situation.  It does not mean it is easy, but a skilled attorney will be able to help you and your family deal with whatever situation you face, with dignity and compassion.

2. Get (More) Help. You may get support or assistance to help your parents, your kids, or even yourself. Odds are good that your parents will be reluctant to accept help, so start the process yourself. This could involve hiring a housekeeper for yourself to free up some of your time for things that are more important.

This will give you more time, and your parents won’t feel you are using your finances to assist them. If you have friends and relatives that offer help, take them up on it. Don’t try to do everything yourself.

If your children are old enough, you can also get them involved. Children are surprisingly capable, and sometimes grandparents are more comfortable having grandchildren help with minor chores around the house, where their children’s own actions may seem intrusive.

3. Don’t Feel Guilty. It’s impossible to get to everything. Be sure to take it one day at a time and to take care of yourself.

Reference: (Riverside CA) Press-Enterprise (June 28, 2018) “3 tips for anyone in the sandwich generation”

 

Special Needs Trusts Protect Government Benefits and MUCH More

Unfortunately, many parents of children with special needs wait until their child turns 18 to consider creating a Special Needs Trust. Sometimes, they even wait until their child eventually needs government benefits like SSI or Medicaid. However, Special Needs Trusts do a lot more than just protect the beneficiary’s access to government benefits and should be created as soon as possible.  Below are a few reasons why.

A Special Needs Trust secures the child’s future

The best reason for creating a Special Needs Trust before your child turns 18 is the same reason that parents of children without special needs should have an estate plan – to ensure the stability and security of their family members if something unexpected happens to them. Creating a Special Needs Trust before a child needs it ensures that the Trust will be there during all of life’s transitions. If a parent of a child with disabilities dies unexpectedly and a Special Needs Trust is not established, the direct inheritance could make them ineligible for any government assistance.  The Trust would also allow someone else, called a Successor Trustee, to immediately step in and start helping your child financially without having to wait for the courts to get involved.

They can receive gifts from parents or grandparents

Parents may decide to establish a Special Needs Trust for their minor child so that the grandparents and other relatives can fund it with gifts. Also, older relatives who are planning on leaving an inheritance for the child with special needs can bequest the funds directly to the Trust. Having a Special Needs Trust guarantees that if the child needs government benefits in the future, he or she will not have large amounts of money in their name that could negatively impact eligibility.

Life insurance benefits can be protected

One way that parents sometimes ensure that their child will have money for future care is to purchase a life insurance policy where the payout goes into the child’s Special Needs Trust. The earlier the parents start funding the life insurance policy, the bigger the financial benefit for their child with special needs. This funding can start well before a child turns 18, so it makes sense to create a Special Needs Trust to hold the proceeds even if the child is not yet receiving government benefits.

You can create a care management plan

Special Needs Trusts can provide a care management plan as well as a structure for family involvement in the daily life of the person with special needs. In addition, professional special needs trustees can serve as resources for families that are looking for additional care options for their child.

Creating your child’s Special Needs Trust and keeping it updated can be a very effective planning strategy for reasons that go way beyond preserving government benefits. Even if the Trust is unfunded during the parent’s lives, having it can create a solid, stable foundation for the child if it is needed. If you have not yet created a Special Needs Trust for your child, call our <Insert city> office at <insert number> to set up a consultation today.

California Real Estate Broker’s Children Sue on Living Trust

“The lack of a direct fiduciary duty to trust beneficiaries during the life of the settlor does not mean that a trustee is immune from reproach for his or her actions during this period.”

Mildred Vail was a successful California real estate broker who ran her own business and purchased various properties in her area over the years. She had four children—Steven, Michael, Jonatha, and Patricia.

Leagle.com recently published the case of “In re Mildred M. Vail Living Trust.” In this litigation, Mildred executed a Living Trust naming her four children as equal beneficiaries in 2003. The Trust instrument named Mildred as the "trust manager" and provided that her four children would become joint successor "Co-trust managers" in the event of her death, incapacity or resignation. It also gave Mildred the absolute power to revoke or amend the Trust during her lifetime and to add or remove property from the Trust at any time. Mildred placed several properties in the Trust.

In October 2004, before heart surgery, Mildred gave Steven her general durable power of attorney and a separate durable power of attorney "for banking and other financial institution transactions." In 2007, she revised her trust. She resigned as Trustee and named Steven as the "new trust manager."

In 2006, Steven led an effort to purchase and develop a property on behalf of the Trust. A family meeting was held to discuss the transaction. To obtain the money to buy the property, two Trust rental properties were sold, netting $466,000.

Mildred died on in 2011, at the age of 94. At that time, the four siblings, including Steven, behaved as though they had become successor co-Trust Managers. Steven later testified at his deposition that at the time of his mother's death, he hadn’t remembered her resignation as trust manager, but he later found the document making him the substitute trust manager.

Michael filed a petition to remove Steven as a co-trust manager, which alleged Steven was taking action without the consent of the other co-trust managers and refused to provide an accounting of his activities. In 2012, the court relieved all four siblings as co-trust managers and appointed Shelly Ocana as the interim trust manager.

Michael provided Ocana with a witnessed 2011 letter signed by Mildred that stated that Steven has been engaged in "rogue [activities]" and "secretive dealings" and was not authorized to act under her power of attorney. Ocana investigated the claims against Steven and ultimately sold the property at issue. The four siblings then entered into a settlement agreement providing for the distribution of Trust assets.

In 2015, Michael filed a suit accusing Steven of "numerous acts of injury to his mother and her trust involving elder abuse, conversion, breach of fiduciary duty, theft of trust assets, fraudulent transfer of assets, forgery, co-mingling trust assets, impersonating as trustee of the trust for personal gain, undue influence, conflict of interest, breach of trust, constructive trust for wrongfully retaining, secreting and/or appropriating trust assets and perjury." The trial court issued a statement of decision concluding that Steven had produced credible evidence that he had spent $71,000 for legitimate trust purposes.

The Court of Appeal of California reviewed Steven’s claim that the trial court applied the wrong legal standard, when determining whether he violated his duties as trustee.

Judge Henry E. Needham wrote the opinion of the Court and agreed with Steven that it was Mildred to whom he owed a fiduciary duty. “A revocable trust is a trust that the person who creates it, generally called the settlor, can revoke during the person's lifetime,” Needham explained. The beneficiaries' interest in the trust is contingent only, and the settlor can eliminate that interest at any time. When the trustee of a revocable trust is someone other than the settlor, that trustee owes a fiduciary duty to the settlor, the Court said—not to the beneficiaries, if the settlor is alive. During that time, the trustee needs to account to the settlor only and not also to the beneficiaries.

However, the judge did note that after the settlor's death, the beneficiaries have standing to assert a breach of the fiduciary duty the trustee owed to the settlor, to the extent that breach harmed the beneficiaries, and that the trustee's conduct can be attacked for fraud or bad faith. Therefore, Michael had standing to bring claims against Steven for his alleged breach of his duty to Mildred, while she was alive.

As a result, Judge Needham said he inferred that the court found Steven liable based on a breach of his duties to his mother as settlor of the Trust, which was supported by substantial evidence. The court found that Steven was not credible when he testified about expenditures for which he was claiming an offset, which included payments made on a property after it was sold, the down payment to purchase the same property, and the cost of building out his own office.

The judgment was affirmed.

Reference: Leagle.com (March 27, 2018) “In re Mildred M. Vail Living Trust”

Let’s Look at Family Trust Companies in Nevada

“Family Trust Companies (FTCs) have become an increasingly popular way for very wealthy families to manage and preserve great fortunes.”

In 2009, Nevada enacted legislation to allow a company to act as a trustee for family trusts, if the company doesn’t market its services to the public.

The Wealth Advisor’s recent article, “Family Trust Companies In Nevada,” explains that although a retail trust company can provide fiduciary services to the general public, an FTC is a corporation or LLC formed to provide fiduciary services to a single family.

FTCs are particularly useful in managing the type of assets put into a trust by creators of great wealth. Trusts with controlling interests in businesses put the trustee in control of the business, and they’re potentially liable for business activity. They also manage assets like private equity interests, hedge funds and real estate. FTCs are particularly well-suited for management of interests in regulated businesses, like gaming establishments for which the trustee could itself be subject to regulatory oversight because of its degree of control of the business. Many institutional trustees may not want to be trustee of trusts holding these types of assets. Others will accept these types of assets but charge high fees.

The FTC lets the family and its employees manage the family assets. An FTC is a company that has officers and directors and can employ both family members and outside experts to manage the assets in trust. Compared to an institutional trust company with a profit motive, the FTC just serves the family and doesn’t generate fees beyond its expenses.

FTC ownership structure varies with each family. Some will have the owner of the FTC be an LLC that is itself owned either outright by a family member or by a trust specifically designed to own the FTC during the entirety of its existence.

The FTC can be involved with inter-family financial transactions. These involve a variety of financial transactions between and among the FTC, the family trusts it administers, family members and family affiliates that could be prohibited as a conflict of interest for an institutional trustee. Privacy and confidentiality are important.

An FTC can also ask the court to order that a variety of documents be sealed from the public record, including inventories, listing of accounts, fiduciary statements and other documents related to its activities.

The FTC provides a situation where each generation can learn about the family businesses that led to the creation of the fortune within a family culture. It can provide a place for generations of family members to go to work—and that work is for the family’s benefit.

Reference: The Wealth Advisor (December 18, 2017) “Family Trust Companies In Nevada”

Should I Use a Trust to Avoid Probate?

“The vilification of probate extends nationwide and affects everyone’s perceptions.”

Progressive states like California have led the charge in finding and implementing methods and techniques to avoid probate, reports The PV Democrat in its recent article entitled “Avoiding probate - panacea or problem.”

We’ve seen numerous articles that discuss the role of trusts in estate planning, which frequently advise you to make every effort to avoid probate. But this isn’t always the right answer.

Probate is a court process that’s designed to protect your intentions for the distribution of your assets after death. It gives finality to creditor claims against the estate and authorizes the probate court to insure compliance with a decedent’s wishes. It requires that an individual’s financial assets be defined, insures that they’ll be given to the proper persons and provides a procedure for protecting the distribution that was planned by the decedent.

There are some risks in using a trust rather than going through probate. They include these items:

Legal Contests. When someone is left out of a trust or if the trust assets are improperly restricted in their use, then he or she can initiate a contest. Undue influence is frequently alleged when a trust is created just before death.

Probate Protections. A will requires two or more witnesses, written testimony of the witnesses and must be notarized in some states.  However, a trust can be created with just a signature and even implied in some instances with no written document. Therefore, it may be easier to create an improper trust than an improper will.

The Potential for Mistake and Misuse. If the document is a trust, a transfer on death account (TOD), a joint ownership or a simple deed, it is easier to have an elderly loved one sign a single document like a trust, instead of trying to have him or her pass the scrutiny of two witnesses and a notary, as required for a will.

The use of estate planning techniques other than a will and probate may often be simpler and perhaps easier to implement and administer after death.  However, they need to be carefully planned and completed well in advance of death. Otherwise, it can mean family conflicts and court challenges. Work with an experienced estate planning attorney and see if a trust is right for your situation.

Reference: (Pauls Valley OK) PV Democrat ((September 27, 2017) “Avoiding probate - panacea or problem”

 

Senators Question HUD Rules on Reverse Mortgages

“Advocates for the elderly persuaded federal housing officials two years ago to offer more rights and protections to the spouse of a borrower, who takes out a reverse mortgage and later dies.”

There’s a concern that a subtle wording change in the Trump administration’s proposed budget request for the Department of Housing and Urban Development (HUD) could undo some of the protections for the spouse of a borrower who takes out a reverse mortgage and then passes away. It could mean increasing the chances that a surviving spouse who didn’t sign the mortgage documents, could lose his or her home in a foreclosure.

The New York Times recently published an article, “2 Senators Question Effects of a Reverse Mortgage Proposal.” The article reported that two U.S. Senators sent a joint letter to Ben Carson, the Secretary of HUD and Mick Mulvaney, the Director of the Office of Management and the Budget. They sent the letter two months ago to get some clarity on the proposed wording in the budget request. Senator Marco Rubio (R-FL) and Senator Catherine Cortez Masto (D-NV) asked whether the agency was seeking to reverse the previous change in policy.

There’s been no response from HUD about its intent for reverse mortgages, which allow the elderly to use the equity they’ve built up in their homes. That is causing concern, because reverse mortgages are seen as crucial in helping an aging population plan for retirement. Before the change in policy two years ago, a surviving spouse who hadn’t signed the mortgage frequently had to pay what was left on the loan in full or risk being evicted in a foreclosure. The two senators say the old policy is a “loophole” that had “compounded the stress faced by widows and widowers at a time when they were already grieving the loss of their spouse.”

The specific language in question is a proposed change in the National Housing Act that says, in regard to reverse mortgages, that a mortgagor “shall not include the successors and assigns of the original borrower under a mortgage.” The phrase is in a section of the Act providing the types of reverse mortgages eligible for insurance guarantees from the Federal Housing Administration, a division of HUD.

The revised wording can be read as suggesting that a surviving spouse isn’t necessarily entitled to stay in the home.  However, at the same time, Trump’s budget proposal includes a new line that would give the Secretary of HUD broad discretion to determine if a loan is payable after the death of the borrower.

“HUD’s proposed changes to reverse mortgages included in the last budget raised concerns that the administration may be seeking to undo hard-fought existing protections,” Senator Cortez Masto said in an emailed statement on Tuesday. “I hope the administration can make clear that they’re not looking to push seniors out of their homes after the death of their spouse.”

HUD extended the protections to surviving spouses after several lawsuits and negative news coverage about spouses being thrown out of their homes after the death of a partner. Some experts say that with home prices increasing again and a growing number of baby boomers reaching retirement age, there will be renewed interest in reverse mortgages, as the elderly look to supplement their living expenses.

Reference: The New York Times (August 8, 2017) “2 Senators Question Effects of a Reverse Mortgage Proposal”

Does Your Trustee Have the Right Stuff?

“Setting up a trust for your estate can be an excellent financial move, but you have to find the right trustee.”

Many folks who have a sizeable estate will create a trust to protect it and their beneficiaries from probate. However, having a strong trust can depend on having the right estate trustee. This individual will be making all of the decisions after you're gone, so you’d better choose wisely. The Motley Fool, in its recent article, “How to Find the Right Estate Trustee,” gives some key qualities to look for in an estate trustee.

Fiduciaries. A fiduciary is an individual with a legal and moral obligation to put the clients' interests first. A new fiduciary rule requires that all advisors who work with retirement plans or provide retirement planning advice to consider themselves fiduciaries. However, some financial advisors may or may not act as fiduciaries. If they commit to being a fiduciary and have the necessary knowledge and experience to be a good trustee, any type of financial advisor can do the job.

Qualifications. A trustee may need to make critical decisions about how to manage the assets in your trust. He or she must possess the right background to make informed decisions. Estate trustees should have training in investing and taxes and possibly business management experience, if you are a business owner.

Diplomacy. A trustee takes control in a stressful family situation, so he or she must be sensitive and get along with your beneficiaries. When considering potential trustees, look at their interpersonal skills in addition to their business and financial skills. You might also get your beneficiaries together with the potential trustee to see if they get along.

On the Younger Side. Let’s be candid. You need to pick a qualified trustee who’s going to be around after you're gone. That means they should be people who are significantly younger than you are and in good health. You should also name a "successor trustee" who will assume control, if the first trustee is no longer available. You can also designate a law firm or financial firm as your trustee, but an institutional trustee will be more expensive than individual trustees. They often set their fees at 1% of the value of the estate. An institutional trustee may also be confined by its internal company policies and not your wishes.

Review Your Choice. Your choice may be ideal now, but not so five years down the road. They may be unavailable, estranged, have health issues or have other issues preventing them from serving. Revisit your estate plan on a regular basis, as your wishes may change. At the same time, reevaluate your trustees.

Take charge and take good care of your family even after you're gone.

Reference: Motley Fool (July 11, 2017) “How to Find the Right Estate Trustee”

The Fight Continues for Alan Thicke's Estate

“Alan Thicke's widow is firing back at stepsons Brennan and Robin Thicke, asking a judge to reject their ‘unnecessary’ request for court intervention in their effort to divvy up his estate.”

Her attorney filed a motion to dismiss last week, calling the sons’ May petition for "instructions" on their dad's living trust, a misguided maneuver “premised on a make-believe contest where there is no real controversy."

The lawyer said Alan Thicke's widow Tanya Callau never challenged the trust and isn’t planning to formally challenge the prenuptial agreement she signed when she married him in 2005, as reported in The New York Daily News article, “Alan Thicke's widow seeks court order to stop stepson Robin from challenging actor's will.”

Callau's filing comes two months after Thicke’s sons started the fight by contending that she was trying to get more of the late actor's estate than she deserved. They made news by alleging that Callau "threatened" adverse "tabloid publicity", if they didn't agree to mediation and "succumb to her demands."

Robin and Brennan said they felt compelled to "honor the memory of their father, protect his legacy and to prevent his testamentary intentions from being undermined by (the) avarice and overreaching of his third wife…." The filing says that Thicke's aorta ruptured after developing a tear, the reason he collapsed while playing ice hockey with their younger brother Carter Thicke.

The sons are the trustees of Thicke's multimillion dollar estate. They say their dad made Callau the beneficiary of a $500,000 life insurance policy, and his union and death benefits. Thicke also left Callau all the furniture at their ranch and said she could continue to live there, if she maintained it at her own expense—with its four parcels held as a single property by the trust. Thicke said his wife would then receive a 40% share of the balance of his estate, with his three sons each receiving a 20% share.

Tanya claims there are several problems with the trust and the prenuptial agreement, the sons’ paperwork filed in Los Angeles County Superior Court said. The sons said the Bolivian-born actress claimed Thicke promised to leave her the ranch.

"Now that the co-trustees have had their chance to smear Tanya in the tabloids, whose only crime was loving Alan with everything she had for seventeen years, it is time to dismiss this petition," her filing said.

Thicke and Callau met in Miami in 1999 and were married 11 years, when he died. They signed a prenup four days before their wedding. Tanya didn’t have an attorney review the document. Her attorney claims the prenup is so poorly drafted that invalidating it would be “a foregone conclusion.” But Tanya won’t challenge its validity, her new filing said. Nonetheless, her motion cites several alleged deficiencies in the prenup. Her lawyer noted that the document states that Thicke and Callau had been discussing the agreement for "___" amount of time and left the line blank. The lawyer also said the document erred when it claimed the parties "acknowledged" California law dictated earnings from "personal services" after the marriage would be treated as separate property. But under state law, the earnings are community property. Callau's attorney criticized the document's mutual waiver of spousal support, calling it "clearly unconscionable given Alan's representation of net worth of approximately $20 million at the time."

Reference: NY Daily News (July 13, 2017) “Alan Thicke's widow seeks court order to stop stepson Robin from challenging actor's will”

Create a Lasting Legacy in Your Community

“A charitable gift annuity provides a meaningful gift to charity, while improving your financial situation in two ways for the rest of your life: a steady stream of income and tax benefits.”

In addition to making a meaningful gift to a charity, you can create a lasting legacy in your community, says Hawaiian Business in its recent entry, “5 Steps to a Lasting Legacy.” Here are some ideas to consider when creating your lasting legacy.

1. Consider the Charitable Organizations or Causes That You Feel are Important. Think about how you’d like to make your community better for future generations. A legacy gift will benefit a specific nonprofit or cause.
2. Find out if you satisfy the Requirements. The charity may have some rules about its legacy giving. For example, the Hawaii Community Foundation requires that you be age 60 or older and able to donate $20,000 or more. That gift can consist of cash, funds earning low interest, or appreciated assets (securities and real property). For those younger than 60, they suggest a deferred annuity in which the payment is triggered at 60 or older, to allow you to coordinate your payment with your retirement.
3. Work with an Expert. Talk with an experienced estate planning attorney about how a charitable gift annuity would benefit you and meet your objectives.
4. Tailor the Agreement to Meet Your Goals. In many instances, a gift, such as an annuity, is simple to create. It’s a contract between you and the charity. The charity may offer to work with you and your attorney to customize an annuity that is based on your personal situation and charitable investments. One key decision is how to use the remaining balance upon the death of annuitant(s) designated by the original donor. Decide if the remaining balance is to be used for broad charitable purposes or to support a specific cause.
5. Enjoy It. You’ll get an immediate charitable tax deduction for a portion of the gift and a fixed annual payment for the rest of your life. Some of the annuity payments may be tax free, and there are no capital gains taxes owed on appreciated property used to start a charitable gift annuity. The reportable capital gains (if any) are spread out over the annuity payments.

Reference: Hawaiian Business (June 2047) “5 Steps to a Lasting Legacy”