Estate planning is not just for retirees.  Summer is a busy time in the office for completing wills of young parents.  Planning a summer vacation forces parents to think about who would look after their children if they both perished in an airplane or car accident.

The first step of the will is to name a Guardian avoiding the need for the Court to determine who should be responsible for their children.  In addition to naming a guardian, the parents usually select a Trustee to manage the money (usually life insurance proceeds) they have set aside to raise their children.  The question is always whether that person should be the same person as the Guardian.  The answer is always “It depends”.  A Trustee who is also a Guardian is in a position to watch over all aspects of the child’s development.  An independent Trustee provides a second opinion on the child’s “best interest” and splits the workload of raising the child.

Preparing for the common disaster is often the extent of planning that most young parents accomplish and it is the most important planning they can do.  However, statistics tell us that it is much more likely for just one of the parents to pass away before the children are independent.  A simple will that leaves everything to the surviving spouse may not be the best thing for the children.

My recommendation is to establish a trust for the benefit of the children at the death of either parent.  The trust can reduce estate taxes, provide a means to manage the money set aside for the children, provide creditor protection against the surviving parent’s creditors, and prevent the children’s money from being mixed into the new family’s funds if the surviving parent remarries.

A children’s trust can be setup in a will or by an Irrevocable Life Insurance Trust.  The Irrevocable Life Insurance Trust is going to become a very popular tax planning device with the Federal Estate Tax being reinstated in 2011. Estate planning is not just for retirees.  Think about meeting with an experienced Estate Planning Attorney before your summer vacation or your next business trip.

This year’s temporary repeal of the Federal Estate Tax has created a new set of problems for those inheriting appreciated assets.  Amy Feldman details these problems in her article “Trouble For Heirs” found in the April 25, 2010 issue of Bloomberg Businessweek.  There is no Federal Estate Tax in 2010, but stepped-up basis of assets is limited to:

1.  $1.3 Million of assets determined at date of death.

2.  An additional $3 million for the surviving spouse.

3.  Basis allocation based on the Executor’s discretion.

In addition, there exists the practical problem of finding all the records to determine the basis especially where dividends have been reinvested or improvements have been made to real property.  How many people have all those records that could go back 50 to 60 years or more.

Maryland heirs’ situation is further complicated by the State’s Estate Tax of up to 16% on amounts exceeding $1 million.  The Maryland Legislature did pass emergency legislation to protect the bypass exemption to the December 31, 2009 amount of $3.5 million.  The legislation solves one of the problems that Amy Feldman mentions in her companion article “Wills That Won’t”.  However, for most families putting up to $3.5 million in a bypass trust leaves nothing to pass outright to the surviving spouse creating even more unintended consequences.

Families with wills or trusts that contain bypass provisions should schedule an appointment with their attorney to review their documents.  Changes may be needed to comply with the 2010 Estate Tax Laws.  Most Estate Tax Lawyers predicted that Congress would act to extend the Federal Estate Tax at least by early 2010.  It is now May 2010 and time for astute families to act to ensure their legacy is protected.

I recently spent the afternoon with an elderly woman planning how to distribute her large real estate holdings fairly upon her death.  I asked her how she had accumulated all that property.  She said that her husband had died at fairly young age leaving her with life insurance proceeds.  She used that money to pay off her mortgage and purchase more land.  She worked the land and continued to buy more land as she had the resources to do so.  In contrast, that evening I visited with a  one of the county’s homeless as a volunteer in our church’s outreach to the homeless.  I asked her how she ended up in the shelter.  She said that her husband died and she lost her house as her income was not enough to cover her house payments.  That day made clear to me the lesson of the need for life insurance to protect your family.

Before purchasing a life insurance policy, I would recommend that you contact an attorney to see whether an Irrevocable Life Insurance Trust is right for your situation.  Although life insurance proceeds are exempt from income taxes, the amount is included in your total estate.  An Irrevocable Life Insurance Trust puts the money outside of your estate and in a trust where you specify how the money is used.  As an alternative, your revocable trust or trust setup by a will can be a beneficiary for your life insurance proceeds ensuring that the money is spent according to your wishes.  This is especially critical if you have a life insurance policy setup to take care of your children.  If you already have life insurance, a quick review of the beneficiaries is a prudent step to ensure that the government is not a beneficiary of your insurance.  If your estate is named as the beneficiary of your life insurance policy, as a minimum the cost of probate will be increased by the life insurance amount.  Putting that money in the estate will also allow creditors to make a claim on the life insurance proceeds.  Mistakes in beneficiary designations are becoming more common as life insurance policies are bought on-line or part of a company compensation plan without an insurance agent to advise the policy owner on proper designations.

Boris Veysman wrote an interesting article on Do Not Resuscitate orders from a Physician’s viewpoint that was published in the Washington Post.   A physician or nurse practitioner must sign a DNR order. Maryland Emergency Medical Services explains the effect of the order and you can download a form from their website.   Do Not Resuscitate Orders are different from medical powers of attorney, living wills, which are often combined in one document called an Advance Directive. An Advance Directive is available from the Maryland Attorney General’s site.    There is also an Advance Directive specifically written for Mental Health.  An Estate Planning attorney should be able to assist you in preparing these documents.

As an attorney, my job is to educate clients on all the options available so they can make their wishes known to their family. The key to this process is a family discussion on difficult issues.    In Veyman’s article, the family lost their will to fight before the patient did. You have to wonder if the patient had truly made his desires known to his family.  I cannot stress the importance of advance discussions so your wishes will be followed. I was recently quoted in a Financial Planning Association’s article on  “Making your Estate Plan Disaster Proof” on the importance of the estate planning process.    Sitting down with your family and discussing your values and choices is a key part of that process. Not only do you ensure that your wishes are follow, your leadership provides a positive example for your family to follow.

Would your personal representative be able to track down all your bank accounts and pay all your bills that are setup for web access? Could your family recover pictures and videos that you have stored with services such as Picasa or Flickr? Dan Rosenwald at the Washington Post ran interesting article on digital data and services that allow your heirs to take over your on-line accounts. Some of the sites mentioned were Legacy Locker, Bcelebrated.com, DataInherit, Entrustet, Parting Wishes, VitalLock, My Last Email and If I Die.

These sites serve a new need and the emphasis of the sites varies. All sites let you store your accounts and passwords. This is the critical item, but you must keep the information current to be of value to your executor. Similar information may already be stored with Password Keeper or Online Vault among others. The sites that focus on what to do in the event of your demise also allow you to store a letter to your family or some special wishes. Much of this information can be stored on paper. However, the sites assist you in gathering important information, storing it, and make updating the information easy. Some of the sites will assist your executor in taking down sites and closing out accounts. I think it is too early to tell which sites will be the survivors, but digital records are not going away. If you have valuable on-line records, you should consider one of these providers. In addition, have your attorney include a beneficiary for your digital assets in your will or trust.

The November issue of Money Magazine published an article “Marrying Finances – For the Second Time.”  Karen Cheney points out tree instances “When a Prenup makes Sense:

1. … have a family business.
2. … have vastly more savings than your spouse.
3. … have kids from a previous marriage.”

Premarital Agreements are enforceable contracts under Maryland Law.  However, the parties to a premarital in a fiduciary relationship requiring one of the two following elements to be enforceable:

• The agreement must be fair to the weaker party at the time of execution; or
• The agreement must be executed voluntarily and with fair financial disclosure.

In addition, the contract must contain all the necessary elements of a valid contract.  Three additional requirements necessary for a Premarital Agreement are:

• Both parties must have legal capacity to contract and the assumption is that an adult is mentally competent.
• There must be consideration for the contract.  However, marriage itself is a valuable enough benefit that no other consideration is necessary.
• The contract must be executed voluntarily, without fraud or duress.

Fairness and disclosure are key elements to the premarital agreement.  As Estate Planners the most common situation we deal with is the second marriage where both parties want to ensure that their assets pass down to their children.  Proper planning is necessary to ensure that all the children are treated fairly.  Adult children often have a difficult adjustment to seeing Mom or Dad getting remarried.  If they feel they are being cheated out of their inheritance, the resentment of the new spouse can hinder the family relationship.  Our office can coordinate the Premarital Agreement with as Estate Plan that accounts for the assets both parties are bringing to the marriage.

I recommend using this format: John Smith IRA/ Deceased 1/1/2009/ FBO (for the benefit of) Mary Smith as beneficiary.

Make sure that the financial institutions gets the titling right not only on the statements it sends to you, but also on the internal records it uses for reports to the IRS, he says. Some large IRA custodians use the beneficiary’s name on the statements sent to him or her, but use the formal titling (as in the “John Smith” example, above) on the information it sends to the IRS to avoid confusing beneficiaries.

After you have retitled the inherited IRA, you can stretch out withdrawals from the account across your lifetime, rather than being forced to withdraw the funds sooner. That action gives you a chance to extend the time that tax-deferred earnings can accrue which should reduce the tax burden on the distributions.  Distributions for an inherited IRA generally have to be made every year. The first has to be made by Dec. 31 of the year following the year of the original owner’s death.

If you inherit an IRA along with other heirs, such as siblings, you can split up the account, allowing each heir to spread withdrawals across his or her own life expectancy. Otherwise, you get stuck using the life expectancy of the oldest heir.

One other note: Just because you have to leave the IRA intact doesn’t mean you’re stuck with the original investment or custodian. You can use a trustee-to-trustee transfer to move the account directly to another financial institution.

2009 Wealth Counsel Symposium in Chicago

I just returned from a four day symposium on issues of concern to Estate Planning attorneys. The question of what will happen with the estate tax in 2010 seems to be overshadowed by healthcare issues. However, everyone is in agreement that Congress will not let the Estate Tax lapse in 2010. A big concern right now is Medicaid Planning as the recession has left many seniors without the assets to pay for long term care. Additionally, medical improvements have lengthened the time that seniors require assistance with their daily activities. The consensus is that our society needs to do more to help seniors continue to live in their own homes.

Ed Slott, PBS host of “Stay Rich Forever and Ever”, presented the strong argument for converting your IRA to a Roth IRA in 2010. Right now, Uncle Sam is a minority partner in your IRA and you have a chance to buy him out in 2010. Otherwise, tax increases will increase the government’s share of your retirement assets especially as we come out of the recession.

William Colby, a nationally known expert on end of life issues spoke on how medicine advances is effecting end of life decisions. The Baby Boomers are now facing these decisions and expect some changes. Mr. Colby’s point to families is to communicate your wishes and values to your families. You do need to have a planning document in place, but nothing can replace some frank discussion among family members.

Additional seminars on putting down personal values into wills and trusts can make bequests far more meaningful than just the money or personal property. Business owners need to have their buy-sell agreements reviewed and fixed to prevent death, disability, divorce, and a myriad of other factors that can destroy a viable business. Farmers and Ranchers need to have estate plans in place as their land really identifies the family and is more important than just the dollar value of their holdings.

Finally, we were able to take in some of the sights of Chicago. Valerie checked out the stores on Michigan Avenue, we listened to some jazz at the Shedd Acquarium, and we had some Chicago pizza and Vienna beef. I left feeling energized to take care of my clients and protect their legacy in this difficult financial environment.

1. Tax Savings – A trust established by the first spouse to die effectively doubles the estate tax exemption. For 2009 the Federal exemption is $3.5 million and the state exemption is $1 million in Maryland.
2. Keep the money in the family – The first spouse to die leaves the money for the survivor to use according to standards such as health, maintenance, and support. Ultimately, the money passes to their children. The survivor’s new spouse cannot inherit the trust money and does not have any right to the trust.
3. Administration – A trustee provides a check on how the trust assets are spent and provides a means to dispense funds in the event of a disability.
4. The trust can contain provisions to protect the assets from creditors.

Last month I was asked to speak at a retirement conference on the need for everyone to have an Advance Directive. An Advance Directive is a combination of powers of attorney for medical decisions and a living will. The powers of attorney names an agent who will make decisions for your medical care in the event you are incapacitated. The living will provides guidance to your medical providers in the event your condition is diagnosed to a defined medical state such as terminal or persistent vegetative state. The seminal case on the lack of a living will involved Terri Schavio in Florida which ended up before the Congress in 2005 in an effort to get her case before the Supreme Court. However, the Florida Supreme Court’s opinion was upheld and their opinion is available on-line. Most states have an advance directive form available on-line or you can fill out the form at the hospital. However, preparing the Advance Directive does require some serious considerations and your attorney can assist you in understanding how those decisions can impact your medical treatment. As a practical matter access to the form is a problem as it needs to be available in the event you end up in the hospital. Our office recommends a service that provides you with a wallet card showing access to an on-line depositary where your Advance Directive is stored. We use the company, Legal Directives, to provide this service and feel that ensures your wishes are carried out.