Washington Estate Planning Law Blog : Washington Estate Planning Lawyer & Attorney : John Hugg Law Firm : WA Elder Law, Wills, Trusts : Seattle, Woodinville, Bellevue

For many people, making large gifts to children and grandchildren may not be the wisest action to take. For example, if you are a married couple aged 70 with a nicely sized combined estate, gifting may ultimately do more harm than good. Remember that if you are now on a fixed income, inflation will significantly eat into your purchasing power over time. Also, certain costs have historically increased far faster than the overall rate of inflation. Long term care is one such cost. Medical expenses are another fast rising cost. So before you give everything away, think about how much money you will really need to live on during your golden years.

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If you are a business owner you need to think not only about routine estate planning but also what will happen with your business when you retire, die or become incapacitated. Recent studies show that approximately 27% of family owned or family managed businesses worldwide will change hands in the next five years. However, less than 50% of such businesses have any sort of succession plan in place.

There are a number of different succession planning options available to business owners. One option is to sell your ownership interest to a partner or partners. If you do not have a business partner, or you want a child to take over your share of the business, you can bequeath your ownership stake to your children through your will, or use any number of lifetime transfer techniques to gift some or all of the business to your children. Other options include selling the business to a child or children, to employees or to an unrelated third party. Any one of these options may allow you to achieve your goals. However, depending on your situation one of the preceding options will generally stand out as the best choice.

If your business is small and one or more children are interested in the business, you may want to simply pass ownership through your will. If the business is larger and you need to reduce the size of your estate for tax purposes or you need money for retirement, some form of gift or sale to a child may be the optimal strategy. Lastly, if you do not have a child with any desire for the business, he or she is not the proper person to run the business or you foresee years of friction and squabbling between family members, you may want to sell out to an unrelated party. Most importantly, you should start thinking about business succession early and consult with qualified advisors to assist you with planning and implementation.
 

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The changes to the federal estate tax laws on January 1, 2011, include a wonderful opportunity to gift away a portion of your estate without incurring gift taxes. Along with the increase in the federal estate tax exemption limit to $5 million per person, Congress increased the gift tax exemption limit to $5 million per person. The previous limit was $1 million per person. The annual exemption limit remains $13,000 per person, however, you may now give away up to $5 million of your estate while you are alive without paying any gift tax. Any gifts made in excess of this amount would incur tax at the newly reduced rate of 35%. Adding to the benefits of implementing a gifting strategy, Washington State does not currently have a gift tax. One caveat, this opportunity may not last. The current estate and gift tax laws are set to expire at the end of 2012.

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I’m frequently asked: “How much can I give away tax free?” In 2010 you can give up to $13,000 in cash or property to any one person completely gift tax free. If you are married, you and your spouse can double that tax free gift to $26,000 per recipient. So if you have two children and four grandchildren a married couple could give a total of $156,000 ($26,000 to each of the six individuals). You may also pay for a person’s educational expenses or medical bills in the same year in addition to the direct gifts of $13,000 per person. Therefore, you could pay your grandchild’s college tuition and give him or her $13,000 ($26,000 if you are married) in 2010 without incurring any gift tax. One word of caution regarding tuition and medical – you must pay the institution or provider directly. Do not write the check to the individual and have them pay the school or hospital.

For individuals with substantial estates this can be an effective strategy to help your family members while reducing the value of your estate. You can therefore minimize your estate tax burden and still enjoy helping out your family.

There are a couple of things to keep in mind with gifting programs. First is that you are not entitled to get any of that money back. If you ultimately need those gifted funds, the recipient, if he or she still has the money, is under no legal obligation to help you out. The moral: be sure your gifting will not impoverish you. Second, if you have reason to believe you may need to qualify for Medicaid in the future, the state will look at all gifts within the five year period of time prior to applying for Medicaid. If there are gifts during this five year period, you may be ineligible to receive Medicaid for a period of time.
 

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An increasingly important aspect of a person’s financial life is that many people now receive and pay bills online and/or through email. Similarly, bank, brokerage and retirement accounts may also be maintained and accesses electronically. A bill may come via email and if an executor or attorney-in-fact does not know the password access may be difficult if not impossible to gain. Even worse if you cannot check a person’s email, you may never know an account exists. It is now increasingly important for people to maintain a list in of online business activities and the passwords that correspond with those activities. Such a list will go a long way toward helping your family administer your affairs if you are unable, or after you pass on.

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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.

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If you’re looking for a good informational article on variable annuities you may want to read Locking in Future Income. Leslie Scism does a good job explaining the ins and outs of these products. She covers their costs, benefits, gives an outline of how guaranteed variable annuities work and some of the companies that offer them. Anyone planning for retirement should give this a read.

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This past weekend, the Wall Street Journal ran an interesting article about rolling a Roth 401k to a Roth IRA on an annual basis. This strategy can be useful for small business owners saving for retirement or just about anyone looking to maximize their retirement contributions. Click here to read the article:  Roth 401K to Roth IRA Transfer Sound Move

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