Retirement Estate Planning Preview

FEBRUARY 13, 2014

What exactly is retirement estate planning? Tonight will be filled with inquisitive action items to get your mind thinking about a difficult subject most people do not want to think about or believe that they can put off until they retire.

Estate planning involves deciding how you want your assets distributed after you die or become unable to make your own financial decisions. It is important to have a basic estate plan in place regardless of your net worth. The benefits include getting to name the people to whom you wish to give your assets; you can arrange it so that taxes siphon as little as possible from your estate; and you have the satisfaction of knowing that your financial affairs are in order so you won’t bequeath a costly administrative nightmare to your loved ones.

It’s never too early to start your estate planning. First, take stock of all your assets, including your investments, retirement accounts, insurance policies, real estate, business interests and valuable items (jewelry, cars, baseball card collections, china.) I can walk you through the next steps. It’s a good idea to review your Will, Trust and other estate planning documents every year or so to make sure it remains current with your wishes and the law. Also check it after major life changes, including death of one of your heirs, birth of potential new heir, significant shift in your financial situation, major adjustments to your investment portfolio; real estate purchases and sales, divorce and changes to the tax code. Also make sure to review the beneficiary designations on your 401(k), IRA, pension and insurance policies. If you have any questions in this area, I have provided an article in your folders entitled “Naming Your Life Insurance Beneficiaries” that provides you with further information. Next – start completing your Estate Planning Worksheet, a copy of which I have provided to you.

You’ve worked hard for many years. You’ve planned and invested wisely. Just because you’ve reached all or most of your investment goals doesn’t mean that you’ve crossed the financial planning “finish line.” Now you’ve got to take necessary steps to ensure that your assets will be protected in life and in death. And if you’re interested in leaving an inheritance, you want to make sure that the bulk of your estate gets passed onto your heirs, not the government. So how do you achieve these goals? Careful retirement and estate planning. I have outlined some of the key factors to consider in managing your retirement and estate in the article “Key Factors to Consider in Managing Your Retirement and Estate” found in your folder. We are only going to scratch the surface with a quick preview of what are rather complex subjects. I suggest that you confer with a financial advisor – Mark Wendell and estate planning attorney – me – to make sure that you achieve your retirement and estate planning goals.

As you grow older and your estate grows larger, you need to shift part of your focus to making sure your loved ones will be provided for after you’re gone. Estate plans are not only for the rich and famous and you don’t need to be a multi-millionaire to want to protect your loved ones. A properly prepared estate plan should allow you to pass along what you own to whom you want to receive it, the way you want them to receive it, and when you want them to receive it. A great place to start is with a will. Amazingly, about 70% of Americans don’t have wills. A properly prepared estate plan will also include a HIPAA-CMIA Declaration, Advance Health Care Directive, Durable Power of Attorney and Trust(s), Life Insurance, Irrevocable Life Insurance Trusts, QTIP trusts, Charitable trusts, Qualified Personal Residence trusts and many other sophisticated planning tools. One quick note – people often ask me if I leave all my property to my spouse, there is no tax, so why do I need estate planning. This ignores a situation of simultaneous death, but also the advantage of the Bypass Trust.

Bypass Trusts – If you die and you’re married, the proceeds of your estate can be passed on to your spouse tax free thanks to something called the “unlimited marital deduction.” But if you’ve bequeathed a sizable estate to your spouse, all you’ve really done is shift the estate tax burden. One way to address this problem is by creating bypass trusts for you and your spouse. Bypass trusts allow the spouse to take advantage of the $5.34 million federal estate tax exemption (2014). In other words, the IRS allows up to $5.34 million to “bypass” your estates. This simple arrangement can save your children hundreds of thousands of dollars in estate taxes. So for 2014, up to $5.34 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any excess over the exemption amount.

The best way to make sense of the myriad of options available to you is to consult with professionals – financial advisors, attorneys, accountants – who specialize in estate planning. They can help you make the right choices for your family, ensuring that the lion’s share of your estate gets passed onto your heirs, not Uncle Sam.

How many of the audience have estate planning? A trust? Is your trust funded?

• Have you transferred your assets into trust at the time of creating the trust? Have you refinanced any of your trust assets? When is the last time you reviewed your deed and other assets for their title description?

• Have you had a divorce, death or birth in the family? Has your spouse predeceased you? Have you inherited any property or assets? Have you updated your Will, Trust and other estate planning documents since 2010? Did you cause to be drafted any of these documents during the years 2001 through 2010? Do you know that the California law changed on December 27, 2013 concerning no contest clauses? Did you know what the American Taxpayer Relief Act of 2012 (ATRA) passed on 1/1/2013 changed about your estate planning?

• Do you have enough assets, disability insurance and long term care insurance to weather the storms that you may face in the sunset of your life? Will you need to rely on the government plan? Are you aware of the look back period for MediCal? Are you aware that you cannot transfer assets for the sole purpose of qualifying for MediCal? What will you do if you have to choose between your home and MediCal for long term care? Are you aware of your options? Have you discussed an Irrevocable Grantor Trust and Occupancy Agreement with your attorney?

• Do you have at least two layers of asset protection? Do you know what these layers are? Are you concerned that you have an estate above the current exemption rates? Do you know how to value your estate for purposes of estate planning, probate and trust administration? Irrevocable trusts shelter assets from creditors and tax. The assets in the irrevocable trust are not included in the value of your estate which is taxed currently at 35% and jumps to 55% after 12/21/2012. There are several types of these trusts. Some of these are a GRAT (Grantor Retained Annuity Trust); QTIP (Qualifying Terminable Interest Property Trust); CRT (Charitable Remainder Trust); QPERT (Qualified Personal Residence Trust); SPAT or SPA (Special Power of Appointment Trust) to only name a few. Each should be considered and discussed with your counsel.

A primary purpose of a trust is to avoid probate through a present transfer of assets during your lifetime. A probate asset is any asset that is in the decedent’s name, and not in joint tenancy or in a trust. Assets that are not subject to probate include IRAs, 401Ks, and life insurance, assuming that a beneficiary has been named to receive the assets involved. Even these assets might be subject to probate if the beneficiary listed is the “estate” of the decedent or if no beneficiary is listed. Joint tenancy assets become the property of the surviving joint tenant, regardless of the provisions of the decedent’s will or trust.

ATRA affects the federal estate, gift and generation skipping transfer taxes and resolve the uncertainty over the federal transfer tax system, created by prior law. The 2013 Tax Act basically adjusts the tax rate and maintains the exemption amounts, while generally continuing the existing structure of transfer tax laws established by the 2010 Tax Act and the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Tax Act”). The maximum federal estate tax rate increased to 40% for amounts above the exemption amount. The 2013 exemption amount, or applicable exclusion amount for federal estate and gift tax is 5.25M and is adjusted annually for inflation. WHAT DOES THIS MEAN FOR YOU? It means that you need your estate planning documents to be drafted taking into consideration all of the changes made by these laws. Any estate planning done prior to 2013 is most likely outdated. Any will or trust with a no contest clause drafted prior to 12/27/2013 is most likely unenforceable.

This is a very cursory overview and there were many other changes which impacts estate planning. If you estate planning was done between the years 2001 and 2010, it needs to be updated.

His, yours, mine and ours. Do you want to make sure to take care of your second spouse after your death but want to insure that your children from your first marriage inherit and are provided for? Are you concerned that your new spouse can change your estate planning after your death and disinherit your children? These are all valid concerns that can be addressed by proper estate planning. Do you have a disinheritance clause in your current estate plans? Do you want to disinherit someone? Do you have a no contest clause in your current plan? Do you want to make sure your no contest clause is current, valid and enforceable? Do you want to protect your separate property you owned prior to marriage? Do you know that you need to have a separate property trust? Are you familiar with the terms commingling? Transmutation?

Donkin vs. Donkin case. No contest clauses in trust documents. This case has legal implications on every estate plan with a no contest clause drafted before December 26, 2013. Your no contest clause in your existing estate plan may be unenforceable under the current law. The former no contest law was repealed operative 1/1/2010 for all instruments that became irrevocable on or after 1/1/2001. The former law seemed like it was gone, but it’s not, as least for cases filed before 2010. Under current law, a no contest clause is generally enforceable only with respect to a direct contest brought without probable cause on specified grounds, which do not appear in this Donkin case. (Prob. C. §21310-21315). Arbitration clauses in trusts have also recently been ruled on by the court of appeal in the Diaz v. Bukey case.

These recent changes are brought to you by way of example to show that drafting trusts are complicated, require state of art drafting expertise, cannot be done in a boiler plate or pre-canned fashion and require staying abreast of the law and the statutory changes as they evolve. I welcome the opportunity to review your existing estate planning with you and to go over and answer these questions posed here tonight s they relate to your unique situation. If you have not yet started the estate planning process, I have included in your folder an estate planning worksheet to help you get started on this process. I look forward to working with you to protect your assets.

These questions are common everyday questions that are fairly applicable to most everyone. By now you should be aware or at least thinking that a basic will is not enough. I invite you to read our recent article in your handouts tonight of the same name.

Explaining all the above in detail would be too cumbersome and not applicable to everyone. Each estate plan is unique and should be custom tailored and drafted from scratch considering your unique situation and anticipated future changes.

I invite you to have a personal discussion with myself and welcome a collaborative team approach to such initial discussions with your CPA, investment advisor – Mark Wendell and myself. Proper and effective estate planning will avoid probate costs and fees, prevent family heartache, maintain privacy and confidentiality, asset protection and avoid unnecessary taxes.

I have asked you a great deal of questions tonight. Let it be my turn to answer your questions in a private one on one meeting. I welcome meeting with you.

Good night and thank you for giving me this opportunity to give you a sneak peak at retirement estate planning.