The Washington state legislature has recently proposed to double the estate tax rate. The current estate tax rates start at 10 percent and rise to 19 percent. The proposed increase doubles the current rate with a top rate reaching 38 percent. If signed into law the increase will take effect on April 1, 2010.
The Wall Street Journal recently ran an article about the benefits of having a younger family member provide a “reverse mortgage” to a parent. A traditional reverse mortgage typically requires the borrower to be at least 62 years old and own and occupy the residence that will secure the mortgage. The private reverse mortgage is a similar type of contractual arrangement, but can be much more flexible. As a private transaction, the arrangement can be made with a person under age 62, it can be secured by a vacation property, rental property or the borrower’s former residence if the he or she has moved to an assisted living or other facility. Additionally, a private reverse mortgage is generally much more affordable than a reverse mortgage from a conventional lender. Of course you will need to weigh all the risks and benefits, but for those who can undertake this type of arrangement it can be very beneficial to parent who will not qualify for a conventional reverse mortgage.
On Tuesday, February 16, 2010, I will be conducting another “Are Your Affairs In Order?” class at Brittany Park in Woodinville, Washington. The class focuses on all aspects of Wills, Trusts, Powers of Attorney and Living Wills. The program is sponsored by Evergreen Healthcare.
The purpose of an executor is to administer a person’s estate according to the Will, or if there is no Will in accordance with applicable state law. In Washington State, generally any person age eighteen or over may act as an executor. The executor, also called a personal representative, is generally named in a person’s Will and is often a surviving spouse or other family member. In certain instances, the court requires the executor to post a bond to ensure performance of his or her duties and may require all actions to be approved by the court. To avoid the posting of a bond and the “intervention” of the court, a Will should specifically state that a bond is not required and the executor will have “non-intervention” powers. Of course, a determination should first be made that those waivers are appropriate, given the specific circumstances.
Your Will should also name an alternate person to act as executor if the first person selected is not able to act due to death or disability or is for any other reason unavailable. It is often best for the executor to be in the same geographic area. It can be a heavy burden to attempt to probate an estate from another state.
One concept used frequently is that of co-executors. Parents often want to name multiple children so as not to leave anyone out. This can be both a blessing and a curse. It can be good for a child to have a sibling’s support, but on the other hand disagreement can arise and cause unnecessary friction.
In Washington an executor is often required to undertake many of the following duties:
Generally, an executor is allowed “reasonable” compensation for his or her efforts. What is reasonable may not be so easy to determine and the court may have the final say. If the executor is a family member, such person may waive their fee in an effort to maximize the estate for all beneficiaries.
The role of the executor can be relatively simple or it can be very challenging depending on the complexity of the estate and the personalities of the family members. So you should choose your executor wisely and give him or her clear guidance in your Will.
A Durable Power of Attorney is the best way to ensure your affairs are managed if you become incapacitated or disabled. A durable power of attorney will either become effective when you are incapacitated or remain in effect after incapacitation depending on how it’s written. Once the durable power of attorney becomes effective, the person appointed to act for you, called an attorney-in-fact, is allowed to pay bills, invest assets, file tax returns and sign contracts among other things. You should also include language so health care decisions can be made when you are unable to communicate. You may want to inform the attorney-in-fact what, if any, medical treatment you want administered at the end of your life. If you do not have a power of attorney, a guardianship proceeding may be necessary to appoint someone to manage your affairs. These proceedings can be long and costly so a well drafted power of attorney is definitely worthwhile.
On January 1, 2010, the federal estate tax was repealed. Currently, there is no federal estate tax. So, what does this mean for people in the State of Washington? It means several things. First, it means that if you die today, you may not owe any estate tax to the federal government; second, there is still an estate tax in Washington State that may apply; and, third your heirs may have to pay a substantial capital gains tax on property that is sold. Let’s look at each of these issues.
Federal Estate Tax
I say you may not owe federal estate tax because toward the end of 2009, Congress made a lot of noise about how they would simply bring the estate tax back in early 2010 and have it applied retroactively to January 1. So in actuality, if you die today and Congress creates a retroactive tax in May, you could still owe federal estate taxes.
If, however, Congress does nothing on the estate tax issue in 2010, the estate tax is automatically set to come roaring back in 2011. At that point, the estate tax exemption will be $1,000,000 per person as opposed to the $3,500,000 exemption in 2009. This means a lot more estates will owe taxes in 2011 than in 2009.
Washington State Estate Tax
Regardless of what happens with the federal estate tax, Washington still has its own estate tax. Here, the estate tax exemption is $2 million per person. So anyone with an estate in excess of that amount would owe estate tax to Washington State. Proper planning can minimize or even eliminate this tax in certain situations.
Capital Gains Tax
There is another wrinkle with estate tax repeal. This year, without the estate tax, you can only receive an increased tax basis on $1,300,000 worth of your property. What does that mean? Well, under the old estate tax laws, when a person died the tax basis in his or her property would increase from the amount paid for the item to the market value of the item at the time of death. But this is not the case in 2010. Now only $1.3 million of your property will qualify (with an additional $3 million exemption for property passing from one spouse to the other). If you have property worth more than that, a capital gain will be incurred on the sale of the asset, and that gain will be based on the original cost of the item.
Here’s an example under both the old and new systems: mom has $1.3 million in her retirement account; mom bought her house in 1980 for $50,000. Mom dies in 2009 and the house was worth $350,000. The tax basis increased from $50,000 to $350,000 and her heirs would owe no capital gains tax on the sale of the house in addition to having no estate tax to either the federal or Washington State governments.
Now let’s say mom died on January 1, 2010. If mom’s retirement account eats up her $1.3 million capital gain “exemption” then capital gain will be due on the sale of the house. The tax will be based on $300,000, the difference between the $50,000 original tax basis and $350,000, the current value of the property.
What will happen to the capital gains tax issue if the estate tax is reinstated retroactively? Presumably, it will go away. Confused? To deal with this mess I (with tongue in cheek) told one client earlier this week – “Don’t die in 2010!”
Happy New Year! On January 11, 2010, between 11:00 a.m. and noon, I will be conducting a class at the Kenmore Senior Center entitled “Are Your Affairs In Order?” We will cover all aspects of Wills, Trusts, Powers of Attorney and Living Wills.
Also, on January 19, 2010, I will lead a roundtable discussion on End of Life issues at this month’s Bothell Chamber Senior Resource Committee meeting. The discussion will center on Durable Powers of Attorney, Living Wills, POLST and DNR forms. Please see the Bothell Chamber Website for the time and location. Please contact us if you are interested in attending either of these presentations.
In its article Amid Debate, Business Owners Struggle with Estate-Tax Strategies, the Wall Street Journal reported that the federal estate tax is a significant concern for family business owners even though few actually wind up paying the tax. Family Businesses in Washington State should be even more concerned because the estate tax exemption in here is $2 million and not $3.5 million as with the federal estate tax exemption. However, one reason so few family business owners pay estate tax is most likely due to the use of various estate planning techniques. These techniques can include annual gifts, trusts, intra-family transactions, life insurance and even a properly drafted Will. But early planning is essential. The estate planning process can draw out for years given the many complexities facing a family business. These complexities include, among many others: selecting and grooming a successor, family dynamics and squabbles, excess cash flow to fund life insurance policies, the desire to have children earn the business rather than simply inherit it by birthright and many more. Since it’s almost certain the estate tax isn’t going away, neither will these issues for family businesses.
Everyone has an estate plan, whether you know it or not. If you have a Will and/or related documents you know you have a plan. But even if you don’t have a Will, you still have a plan. That plan is set out by the government, and it is laid out in our laws of intestacy. Each state has its own laws of intestate succession. Generally those laws follow what the legislature thinks most people want. For instance, if you are married your property goes to your surviving spouse. If you are not married and have kids, your property goes to those kids in equal shares. If you are not married and have no kids, we look to parents, then siblings and so forth.
There are, however, major gaps in this “estate plan.” For instance, if you have a minor child, nothing says who will raise that child if both parents are deceased. Additionally, state laws leave property to a beneficiary outright even if a trust for such beneficiary would be more prudent (in the case of a minor child some form of conservatorship may be necessary). Another problem is a state’s laws of intestacy are not set up to deal with other major planning problems such as: estate tax issues, care for a disabled spouse or a special needs child and business succession issues for the self-employed.
This is where having a comprehensive Will that is tailored to your specific situation can be vital. Your Will sets out who will administer your estate, who will receive what property and in what percentages and who will raise your children. If you have a taxable estate, which in Washington today, is anyone whose estate is valued at more than $2 million, you can set up a trust for your spouse to make sure that you minimize or perhaps avoid estate taxes. If you don’t have a taxable estate, but think a surviving spouse may become disabled in his or her later years, a Will is one of the few tools that can be used to assist a loved one with care while not having to spend all your assets to qualify for assistance. In this instance we can often set up a trust for a surviving spouse or special needs child to assist with quality of life while allowing them to qualify or continue to qualify for Medicaid or other forms of assistance.
In short, your Will can accomplish many goals all at once. If you, like millions of other people, have put off making one, I encourage you to tackle this project in the new year.
At some point most of us will have to step up and help our parents with their affairs. A recent Forbes article discusses how difficult it can be if your parents already have some memory loss or dementia when you first enquire about their situation. Since they may not be able to communicate with you effectively, it may take months to ascertain their financial situation because you won’t know what assets they have or where they are located. As the article mentions, a better way to go is to talk with your parents before it becomes necessary. Help get them organized. This task will also help you to find out what bank accounts, insurance policies and sources of income your parents have. And if your parents’ affairs are more complex, it will be even more important to know what’s happening in their financial lives. As with anything, if you prepare early and stay on top of things, you’ll be well served when you do have to help out.
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