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 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.
On January 1, 2010, the federal estate tax was repealed.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.
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.
The Wall Street Journal ran an article recently about purchasing Will forms from various online or self-help services. The article has received criticism from some in the estate planning community. Here’s what I think people should understand about the estate planning process and where potential traps may lie.
The article outlines a couple with a non-taxable estate and no children, a house, life insurance and retirement accounts. The hypothetical couple apparently want to leave the house to the surviving spouse, one-half of the other assets to the surviving spouse and simultaneously leave the other half of the remaining assets to nieces and nephews. The author seems to feel this is a very simple situation. Of course, every one of my client’s believes their own situation is just as “simple.” However, after I meet with a client, and we discuss everything most say “Wow, I never knew it was so complicated.”
If Mr. and Mrs. Hypothetical want such an estate plan, I’d first ask why they want that specific plan. I’d mention that most married couples want their entire estate to pass to the surviving spouse, not merely the house and half of the other assets. The reason is simple – most spouses want to have as many resources, i.e., money and other assets, as possible for their future financial security. I’d probably recommend that the nieces and nephews only receive something if both spouses are deceased.
The next question could be, Should those nieces and nephews receive their inheritance outright or in trust? If they are minors and they receive the inheritance outright, their parent or guardian may control the funds for them until they reach age 18 or perhaps a guardianship or some form of conservatorship could be set up. At age 18, however, they are free to spend the money as they please. Most of my clients don’t want their children to receive their inheritance at 18 with no strings attached. A better alternative is some form of trust where there is guidance as to how the funds are invested and distributed to the beneficiary.
Another issue is the life insurance. Life insurance passes to the beneficiary designated in the policy, not pursuant to a Will. So if our hypothetical couple thinks part of the insurance proceeds will find its way to the nieces and nephews, it probably won’t happen. IRAs and 401k’s, as well as any type of account with beneficiary or payable on death provisions, also bypass your Will in most situations, unless your estate is the beneficiary. In many cases, you do not want your estate to be the beneficiary of such assets.
These are just some of the issues that would need to be addressed to produce an estate plan that truly meets the clients’ needs. So will the online estate plans accomplish what our hypothetical client desires? And, is want the clients want the best estate planning option? In all likelihood, the answer to both is probably no. But these clients wouldn’t know that without competent guidance.
CBS Money Watch has a useful guide for initial steps to take when a person dies - Death In the Family: 12 Things to Do Now. This is a good list to follow. The article also includes a link to a more comprehensive list of actions that an executor may need to take to administer an estate.
In PLR 200937028, the IRS concluded that property held in an irrevocable grantor trust that was not included in the grantor’s estate at death does not receive a step-up in basis. Most individuals who own property in their own name at death receive a step-up in the tax basis of that property. For example, if you paid $200,000 for your home in 1995 and you die today with the house valued at $500,000 the tax basis increases to today’s value. Therefore, capital gain on the sale or future sale of the asset is either eliminated or minimized. However, if you transfer an asset to an irrevocable trust, even a grantor trust where the trust income is still taxed to the grantor, the asset is out of your estate and not eligible for a step-up in tax basis upon death. The beneficial trade off is that with the asset outside your estate, it is not included for estate tax purposes.
We’ve been waiting for changes to the federal estate tax for some time, however, we really have no idea what the changes will look like. Over the weekend the Wall Street Journal reported the issue is stalled in Congress with seemingly no consensus about what to do. The administration apparently wants to lock in the current exemption level of $3.5 million per person with a 45% tax rate and some Republicans are still looking for a complete repeal. Now there is a newer proposal for a $5 million dollar per person exemption with a 35% tax rate. But with so many members of Congress focused on the health care debate, this issue is decidedly low priority. Another very real possibility is that the Bush tax cuts will run their course as planned. With no action, the estate tax will be repealed for 2010 only, then return with only a $1 million federal exemption per person. Regardless of what happens at the federal level, Washington State appears wedded to its current $2 million per person exemption. If the federal exemption is rolled back to $1 million, I would expect a large number of estate plans will need to be updated.
Here’s a brief article from the Wall Street Journal outlining the use of a trust as a beneficiary for an IRA. Many people name a spouse or children as outright beneficiaries of their IRAs. However, if properly set up those same people can receive their IRA benefits through a trust. As mentioned, this strategy can be particularly useful for beneficiaries who are minor children or those who have special needs.
These words seem self evident. However, in See v. Hennigar, Wash. App. 2009, the concept wasn’t so clear. In that case, a widow received a life estate in a farm from her late husband who died in 1984. A life estate is a form of property ownership that lasts for a set period of time, in this case the remaining lifetime of the widow. Under the husband’s Will, she had the power to sell, mortgage or convert the property. She remarried in 1989 and later executed a community property agreement, also referred to as a “CPA,” with her new husband. A community property agreement is a form of “Will substitute” that passes property directly to the surviving spouse and not pursuant to a Will, Trust or by operation of law.
After the widow’s death in 2007, both her new husband and the remaining beneficiaries of her first husband claimed title to the farm – her second husband under the community property agreement and the beneficiaries of her first husband under his Will. The trial court found in favor of the new husband on the basis that entering into the CPA had the effect of a sale of the farm from the widow as her separate property to her and her new husband as community property. Under the CPA, the widow’s community interest passed to her new husband when she died. However, the Washington State Court of Appeals reversed. The court stated, “[I]t is axiomatic that a person cannot convey a greater interest in real estate than she owns . . . [the deceased] simply could not transfer to the community a greater interest than she held.” The widow, owning a life estate, did not possess the farm in “fee simple.” Fee simple is generally viewed as absolute ownership of property with no time limit on ownership. Therefore, she could only transfer an estate that lasted for the duration of her lifetime. When her life ended, so did the estate she owned. A person cannot transform an estate for a limited period of time into an unlimited fee simple estate merely by signing a community property agreement (at least under these circumstances). The appellate court, in reversing the trial court, awarded the property to the beneficiaries of the widow’s first husband. This certainly seems to be the right result and meets with the well settled law that you can pass title only to what you own.
In the last week or so, I’ve had multiple people ask me if having a Will allows one to avoid probate. In Washington, and to my knowledge in every other state, the answer is no. When a person dies all of her property is subject to probate. Probate is a legal proceeding that generally occurs in the county where the decedent resided. The general purpose of probate is to permit an Executor to take possession of the decedent’s property, preserve that property, pay all debts, claims and taxes, determine who is entitled to estate property and distribute that property. A Will is merely a document used to give guidance to the court and the Executor as to how to administer and distribute the decedent’s property. A court administered probate is also the only mechanism to give an Executor named in the Will the power to act on behalf of the deceased’s estate. Only by court order can an Executor named in a Will be granted the legal power to sell real property, deal with creditors, institutions and settle the estate. For a more detailed explanation of Executor duties please see my forthcoming blog post: Role of the Executor.
Will your family members be able to step in and effectively run the family business and settle your affairs, or will your family be lost in a maze of business and personal dealings they didn’t even know existed? A short time ago, Family Business Magazine ran an interesting piece that shows the value of being prepared and the difficulties that stem from not having your ducks in a row. The Mazzaro brothers had to take over the family business in the wake of tragedy. Their parents built up a successful food business. Then one day both mother and father died in a car accident. Both boys dived into the family business. But it took them a year just to unearth the most basic information, such as the names of customer accounts, how much money the company made, charged or billed. They didn’t know if they could even keep the business. Much of the business information was stored in their father’s head.
A solid plan is the best way to address not only retirement and business succession, but the problems arising out of a tragedy. Such a plan is slightly more involved than simply having a Will. Your Will should be the starting point for what happens with the family business. It should state who gets your ownership interest and provide, among other things, that the executor is authorized to continue running the family business during the period between your death and the end of probate. You should also have a Durable Power of Attorney that will function in the event you are incapacitated. In this case, since you are still alive, a Will won’t cover this situation. You need to appoint someone who can vote your shares and handle business matters; and, be sure to give that person clear authority to do what is necessary for the business to function.
Finally, a written contingency plan is vital. You should include information about where everything is located and how to access it. Set out a document that includes: the places where you bank and the account numbers; accounting information; any brokerage firm(s) where you maintain an account; the location of all corporate and other business records; a statement showing the assets of the business; computer login IDs and passwords so the system (and the accounting, customer, payroll and other information) can be accessed; lists of vendors and accounts payable; names and address of your key advisors: attorney, accountant, financial advisor, insurance professional and others. You should also create procedures for producing, selling and delivering your product or service so another person can step in and maintain business flow.
Remember, you don’t need to do everything at once. Pick one thing that you haven’t addressed such as your estate plan, then move on to another task. Soon enough everything will be in place.
I hear this statement often from people who have written their own Will or pulled something off the Internet. Only problem is, notarization is not a requirement for a valid Will in Washington State. I’ll generally respond with . . . “Good, did you have two witnesses?” Some say yes, some say no. The reason I ask of course is in Washington you must have your signature witnessed by two competent persons to ensure your Will is valid and enforceable. Those witnesses should also be “disinterested,” which is generally someone who does not stand to benefit from your estate. So if you live in Washington State and want to make sure your Will isn’t as worthless as the paper it’s written on, reprint it and sign in front of two disinterested, adult witnesses. Or, better yet, contact a qualified attorney to assist you.
In the coming months we will no doubt, hear lots and lots about Michael Jackson’s estate. Is he the father of all his children? Will other Wills pop up as in almost every other celebrity probate? Who will control his estate? And on and on. But all the tawdry details aside, we can learn something about how to set up our own estates.
Michael Jackson’s Will did at least one thing very well. In it, he named a guardian, in this case his mother, to care for his minor children. Everyone with a minor child, regardless of the size of your estate, should have a Will and name an appropriate Guardian.
A recent Wall Street Journal article reported that Mr. Jackson left the bulk of his estate to a Family Trust. The trust purportedly provides for his children, his mother and various charities. Based on the language used in the WSJ article, it sounds as if Mr. Jackson set up a Revocable Living Trust where he was the creator of the trust and the trustee while he was alive. This type of trust is commonly used to avoid probate (although not in all cases), reduce costs and maintain privacy. The privacy aspect is why we may never know the full extent of the family trust and what it says. A Revocable Living Trust is not appropriate in all circumstances and does have a few drawbacks, but it's often a useful estate planning tool, especially if you own property in more than one state.
Aside from your love, probably the greatest gift you can give your children to provide for them. But how do you provide for your kids if you’re not alive? Basically, you need a plan. It doesn’t have to be complicated or unduly expensive.
First, have a qualified attorney prepare your Wills. In your Wills designate who will raise your children if something happens to you and your spouse. Also in your Wills, include a trust for your kids’ benefit. This trust can take many different forms depending on your specific needs and circumstances, but essentially it will create a pot of money from which your kids can draw for all the daily necessities of life. This pot of money will be used for food, clothing, shelter, school supplies. It can also be used for college, graduate school, starting a business, buying a house, travel and basically anything else important to you and your children.
You’ll want to select a responsible trustee to oversee the money and dole it out at the appropriate times. And you will probably want to set an age, the older the better in my opinion, for the trust funds to be paid outright to the child. Remember, the child will always have access to the funds in the trust, but while those funds are locked up in the trust they are protected from creditors, spouses and con artists.
One of the most important decisions you may ever make as a parent could be selecting a guardian in your Will to raise your children. First, a little background about naming a guardian for your minor children. In Washington, the only method where you can be certain your guardianship wishes are honored is through your Will. Stating orally or in a separate writing who you want to raise your children may give a court some guidance, but is not required to be honored. If, however, your Will says who will raise your children when you are gone, a court is required to honor that designation. There are only limited situations where your selection would not be honored: such as if the person chosen is deceased or incapacitated. Such a selection will certainly minimize the risk of a custody battle between competing individuals.
So who is a good choice for this role? That is different for every family. Many of my clients choose a sibling; some choose a parent. Here are some things to keep in mind in making the selection:
A question I am almost always asked is – “Can I name my brother and his wife as co-guardians?” The answer, of course, is yes. But you should consider the ramifications of such a choice. If your brother dies while raising your child his wife, to whom you have no relation, is now raising your child. Another issue arises from the unfortunate possibility your brother and his wife may divorce. If you’ve named co-guardians, the next question is who will continue to raise your child? Of course, your attorney can easily write language in your Will that can solve these thorny little issues.
One last thing to keep in mind if you do not have a family member capable of raising your children, is the potential for the guardian to move out of the geographic area where grandparents may live. If the guardian is relocated out of state and away from a grandparent, you may want to consider language that terminates the guardianship and provide for the alternate guardian to assume that duty (assuming the alternate lives near the grandparent).
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