Category Archives: Tax Planning

Planning for Long-Term Care (Part 2)

Written by Evan Farr

“Long-Term Care” refers to the broad spectrum of medical and support services provided to persons who have lost some or all capacity to function on their own due to a chronic illness or disabling condition, and who are expected to need such services over a prolonged period of time. Long-term care can consist of care in the home by family members (assisted by voluntary or employed help), adult day health care, or care in assisted living facilities or nursing homes.

In Part 1 of this series I mentioned that 60% of us will need long-term care at some point in our lives. When this statistic is put in perspective with the relatively low likelihood of making an automobile or homeowner’s insurance claim, the risk that you or I will need long-term care at some point in the future is shocking. Unfortunately, the majority of Americans are either unaware of these statistics or refuse to plan for the often catastrophic costs of long-term care. Part 1 of this series outlined the necessity to create a good Long-Term Care Plan in addition to, or as part of, your Estate Plan; Part 2 will now discuss the three most essential documents found in a good Long-Term Care Plan, as well as two additional documents that are often also part of a Long-Term Care Plan.

General Power of Attorney

A General Durable Power of Attorney (POA) containing Asset Protection Powers is the first essential document. Not all POA’s are created equal; it is crucial that this document be prepared by a knowledgeable and experienced Elder Law Attorney. One way to ensure the qualifications of your attorney is to look for one who is Certified as an Elder Law Attorney by the National Elder Law Foundation, the only organization accredited by the American Bar Association to certify lawyers in the specialty area of Elder Law. For a list of Certified Elder Law Attorneys, please visit http://www.nelf.org/findcela.asp.

A POA (always “durable” when used in connection with estate planning and long-term care planning) authorizes your “Agent,” sometimes called an “Attorney in Fact,” to act on your behalf and sign your name to legal and financial documents. It is an essential tool in the event that, due to age, illness, or injury, you are unable to carry on your legal and financial affairs. Asset Protection Powers written into the POA are essential in order for your Agent to protect your assets from the often-catastrophic expenses of long-term care. Attorneys who are not experienced Elder Law Attorneys often fail to put these essential Asset Protection Powers into the POA.

A properly-drafted POA is designed to avoid the need to go through a court-supervised conservatorship proceeding, which is a time consuming, expensive, and publicly embarrassing process whereby someone goes to court to have you declared incompetent and to be appointed as your Conservator. The Conservatorship process is often referred to as a type of “living probate” because the Conservator is subject to all the rules of the probate court, including the onerous requirement of filing annual accountings with the Court. State laws vary regarding the use and acceptance of a power of attorney.

Advance Medical Directive

The second essential document in a good Long-Term Care Plan is an Advance Medical Directive (AMD) containing a Long-Term Care Directive. As with General Powers of Attorney, every lawyer drafts AMDs differently, and most attorneys do not include a Long-Term Care Directive within the AMD. Therefore, it is again in your best interest to have your AMD written by an attorney who specializes in long-term care planning, such as a Certified Elder Law Attorney.

An AMD (also called a Medical Power of Attorney or a Health Care Power of Attorney) authorizes another person (called your “Medical Agent”), to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so. This document includes the type of provisions that used to be in what was commonly called a “Living Will,” allowing you to indicate your wishes concerning the use of artificial or extraordinary measures to prolong your life in the event of a terminal illness or injury. In the AMD you will also appoint a “Medical Agent” and give that person the power to consent to medical and health care decisions on your behalf with regard to providing, withholding, or withdrawing a specific medical treatment or course of treatment when you are incapable of making or communicating an informed decision on your own behalf. A comprehensive AMD will also allow you to indicate your wishes with regard to organ donation, disposition of bodily remains, and funeral arrangements.

A properly-drafted AMD is designed to avoid the need to go through a court-supervised guardianship proceeding, which is a time consuming, expensive, and publicly embarrassing process whereby someone goes to court to have you declared incompetent and to be appointed as your Guardian, typically at the same time they are requesting appointment as your Conservator.

Long-Term Care Directive

Most importantly for your Long-Term Care Plan, your AMD should include a Long-Term Care Directive (or this could be drafted as a separate document), which will allow you to make your desires known in the event you need long-term care in the future. For instance, do you want to remain at home and receive home-based care as long as possible, regardless of cost, even if it drastically reduces or entirely depletes your estate? Or would you prefer to remain at home and receive home-based care only if it doesn’t drastically reduce or entirely deplete your estate? If nursing home care is absolutely required, would you like to protect as much of your assets as can be legally protected so that you can qualify earlier for publicly-funded Medicaid benefits? If so, do you prefer that the protected assets be used to enhance your quality of care, or to provide an inheritance for the beneficiaries of your estate?

In order to be easily accessible when needed, your AMD should be registered with an electronic archive service that can immediately fax the document to any desired destination. Some Elder Law Attorneys, including our firm, provide such registrations to clients at no charge.

Lifestyle Care Plan

The third essential document that is found in a good Long-Term Care Plan is a document called a Lifestyle Care Plan, also known as an Advance Care Plan.  The Lifestyle Care Plan is a document that is created by special software that gathers, organizes, stores and disseminates information provided by you in an interview, in order to guide those who you will depend or for future care. The Lifestyle Care Plan identifies your specific needs, desires, habits and preferences and incorporates all of this information into a document that your future caregiver can use to provide you with the best possible long-term care.

As an example, Alice wrote in her Lifestyle Care Plan that if Alzheimer’s disease or some other type of dementia inhibited her mental abilities to communicate or recognize her surroundings, she wished to be in a respectable facility and only asked that she be visited and brought chocolates. To her children this request seemed silly at the time, but when her mental capacities did diminish, the instructions were there. No one had to wonder if they should try to take care of Alice at home and how they would do it. Without guilt or question they placed her in a respectable facility that took care of her needs. All they had to do was make loving visits, and of course they brought chocolates.

Because of the importance of the Lifestyle Care Plan, the Farr Law Firm provides one to all of our clients as part our comprehensive Long-Term Care Planning services. To learn more about the benefits of having an Advance Care Plan, please click here or visit our Web site at:  www.farrlawfirm.com/advance-care-plan.htm

Living Trusts

A good Long-Term Care Plan will always include the three documents mentioned above, and will typically also include a Living Trust — either a Revocable Living Trust (RLT) or the  Living Trust Plus™ (LTP).

An RLT generally provides for the creator of the trust to have full use of the trust income and principal for life. On the death of the creator, the assets may continue to be held in trust (or may be distributed) for the benefit of the named beneficiaries, such as the grantor’s children. Although the most important benefit of the RLT is to avoid probate, a well-drafted RLT also can help protect from incapacity and can therefore be an important part of a Long-Term Care Plan. Similar to a General Power of Attorney, an RLT can provide uninterrupted management of your assets by your trustee if you become incapacitated, sparing you and your family from having to go through the expense and complexities of a court-appointed conservatorship. It is important to note that an RLT does not protect your assets from the expenses of long-term care. On the contrary, the assets in an RLT must be spent, if necessary, in providing long-term care, even if that means spending down all of the assets in the RLT to provide such care. For more information on RLTs, please click here or visit our Web site at: www.farrlawfirm.com/revocable.html

The Living Trust Plus™ is a living trust that is designed to protect your assets from probate PLUS lawsuits, PLUS nursing home expenses.  In other words, the LTP protects your assets from the complications and hassles of probate and from other financial risks, including the threat of lawsuits, auto accidents, creditor attacks, extended hospitalization, and — most importantly – the catastrophic expenses associated with nursing home care. Part 4 of this series will explore the LTP in detail.

Conclusion

A good Long-Term Care Plan will always include a General Power of Attorney, Advance Medical Directive, and Advance Care Plan, and will typically also include a Living Trust — either a Revocable Living Trust or the Living Trust Plus™.   However, as mentioned in Part 1, these essential legal documents are only part of the requirements for a good Long-Term Care Plan. The other important component is a plan for how to pay for long-term care. The next installment in this series will discuss protecting your assets by purchasing long-term care insurance.

The Farr Law Firm specializes in long-term care planning and we would be happy to assist you in your preparations. Please visit us at www.VirginiaElderLaw.com or call us at 703-691-1888.

Online Estate Planning: Is It Enough?

Written by Evan Farr

Trust lawyers are well aware of the variety of online estate planning tools available to those in Virginia and beyond, such as Quicken WillMaker, LegalZoom and Rocket Lawyer. The variety of products available can create a false sense of security, however, when an individual believes he or she has made adequate plans for the estate.  Recent Consumer Reports findings determined that the tools they reviewed were not robust enough to plan for situations that were even slightly complex.

For example, the high divorce rate in the US means that many individuals wish to provide for children from multiple relationships.  Most of the software reviewed by Consumer Reports could not meet the hypothetical clients’ specific wishes when it came to this subject.  In these “blended family” situations, the estate planning tools were too rigid in their options. This can result in accidentally leaving out a child, or favoring them unequally and causing hurt feelings.

A number of other problems were uncovered in this experiment, which is not a big surprise to most estate planning lawyers.  Each family and individual’s situation is highly dependent upon so many factors that it is nearly impossible for a computer program to anticipate them all.  Additionally, engaging with a live person means that there is a capacity for human understanding that the programs simply cannot replicate.

This interpersonal relationship is every bit as important as the documents that are created as a result.  From the lawyer’s extensive education and experience, he or she is able to guide clients into creating documents that are truly relevant to their particular circumstances.  In the world of estate planning, “one size fits all” simply doesn’t work.

One of the biggest problems with online estate planning tools is the fact that they seem to open so many estates up to the probate process.  As a result, families are left waiting for the courts to rule on decisions that the deceased believed had already been made.  Unfortunately, those decisions don’t always reflect the true wishes or spirit of the documents generated through the software.  Just as devastating is that fact that the probate process can be very expensive, thereby decreasing the amount of inheritance that beneficiaries do eventually receive.

It is commendable that so many people are now taking an interest in the estate planning process.  It is an unfortunate reality, however, that using online tools generally won’t be enough to plan for the actuality of your given situation.  Without a doubt, the best and safest approach is to develop a relationship with a trusted estate planning lawyer who can provide the expertise required to truly meet the needs of today’s modern families.

Learn more about Basic Estate Planning Here!

Three Tips to Outsmart Timeshare Reps

Written by Evan Farr

If you and your family are fortunate enough to go on that well-deserved resort vacation this year, then there is a good chance you’ll find yourself listening to the all-too-familiar ‘timeshare marketing pitch.’   Most people are familiar with the concept of a timeshare, but there is more to it than meets the eye.  The repercussions of owning a timeshare can vary tremendously depending on many things, including whether it is a real property interest, a mere right to use the property, or some other arrangement. Read on for more.

#1 Timeshares are not Inherently Bad Investments. If a timeshare really interests you (and they are legitimate and worthwhile investments for many families), you can plan in advance to take ownership the right way and avoid legal traps and snares down the road.  Most people do not realize the thicket of possible legal ramifications inevitable to owning one (or more).  Timeshares are typically sold in a high-pressure environment, chock full of free food, gifts, and even vacations; these tools are all part of an intentional business model designed to encourage vacationers to make impulsive buying decisions.

#2 – Type of Ownership is Critical. If you own real property outside of Virginia and die without proper estate planning documents in place (no, a simple Will is not enough!) then the representative of your estate must appear in every state where such property is located.  This means that even if you live in Virginia but you own a timeshare for one week in Florida, if it is considered “real property,” then the Florida courts must determine how it is disposed. Combine that inconvenience with the fact that each state has slightly different estate administration laws and the representative of your estate could have a messy complication on their hands.

If a timeshare is in the form of a deeded contract, it is considered ownership of real property.  As you may know, real estate may be sold, rented, and gifted among other things.  And as you may have guessed by now, also incident to ownership are real estate taxes and probate.  Usually, taxes are included in the timeshare maintenance fee, but probate is another issue.  If you die without a trust to dispose of your assets, then the court system will “probate” the Will, or follow the statutes of the state if there is no Will.  In any event, dying without a trust and with real property can cause major headaches for your executor.  Luckily this can all be avoided.

If the deed to your current or prospective timeshare is a “leasehold deed,” then it means ownership only lasts for a specified period of time.  A “right to use” contract means what it sounds like – the purchaser acquires a right to use and enjoy the rights of the property owner (usually a resort).  However, the pitfall of a “right to use” contract is the fact that it is possible for “other” benefits you may not care about, like a club membership, to be included.  The “right to use” form of timeshare acquisition is used heavily overseas and in Mexico, because the ownership of foreign real property interests opens the door to many more legal issues.

#3 – You Do Not Have to Decide Then and There. Do not sign anything before you leave, unless you have a revocable living trust and have already met with your lawyer regarding the timeshare you are considering.  The concept of a timeshare is attractive, but before saying “yes,” it is absolutely imperative to speak with a good estate planning attorney.  For those who own timeshares already, it is still equally as important to not purchase another one until you have consulted an attorney, and also equally as important to talk to a good estate planning attorney if you own a timeshare but do not intend to purchase another.

Revocable Living Trusts Explained

Consult an Estate Planning Attorney Now!

August is “What Will Be Your Legacy?” Month!

Written by Evan Farr

Many of us are so caught up in the here-and-now of the present that we fail to consider our distant future. We may get around to it later in life, after we have lived awhile–wondering what we might be remembered for, or what we will leave behind. Others are born with this innate sense of purpose, this desire to create a lasting legacy for themselves, or perhaps their children.

Whichever group you fall into, August is “What Will Be Your Legacy?” month and should spur you to ponder that question for yourself. While we can’t control what others think of us after we’re gone, we can make sure that we lay the groundwork for a lasting legacy. Proper estate planning can be key to many of your goals. Is there a charity or cause that you believe can change the world? Charitable gifting from a trust can ensure that you play a vital part in its mission even after you’re gone. Do you have children? Planning ahead to give them the ultimate gift of a good education will change their lives, and you don’t have to wait until the end of your life to do it!

Choose to ignore this, and your legacy could turn into a nightmare you never dreamed of. Do you want your loved ones to have to go through “the nightmare of probate” after you’re gone, because you didn’t have the right documents in place? Is that the final impression you want to leave with them? Probably not. This month gives us a prompt to make the right choices in our lives, for ourselves and our loved ones. You might think this approach only applies to the here and now, but you can make the right choices for what you leave behind you as well. After all, isn’t that what a legacy truly is?

What is Probate?
What is a Revocable Living Trust?
How Does a Revocable Trust Avoid Probate?
What About Irrevocable Living Trusts?
Choosing a Trustee
Protect Assets from Lawsuits PLUS Divorce PLUS Nursing Home Creditors

New Property Tax Exemption for Disabled Veterans

Written by Evan Farr

Good news for veterans!

On April 6, 2011 a new statute was made Virginia law, awarding a real property tax exemption for permanently service-related disabled veterans and their surviving spouses. Originally approved by voters in November 2010, this statute will positively affect an estimated 7,350 disabled veterans living in the state of Virginia, according to the U.S. Department of Veterans Affairs. The exemption applies to the sole dwelling and land (not more than one acre) of the veteran, but not to any vacation homes or rental properties. For most people living in the city or suburbs this will be a sufficient and appreciated break. However, if your locality exempts more than one acre under its tax relief program for the elderly, then veterans will receive this new property tax exemption for the same number of acres as allowed for the elderly.

The application is a fairly simple one-time process that does not need to be re-submitted annually, unless you move or have another change in circumstance. First, you must obtain the required disability documentation from the VA by submitting VA Form 21-4138 . Second, after you have received the appropriate paperwork that proves your 100% service-related disability, download the “Disabled Veteran Exemption Application” from your county website and submit to your county’s Department of Tax Administration along with your VA documentation for approval. Lastly, once approved, make sure to alert your mortgage company (if applicable) so that they may adjust your monthly mortgage payment according to this property tax break.

The Farr Law Firm and the Elder Law Institute for Training and Education appreciates the military service of our veterans and are proud to offer a 15% discount on our Level 1 and 2 packages to all active duty, reserve and retired military members. Our Level 1 and 2 packages include incapacity protection planning documents and living trusts, as well as optional add-ons like wills and child protection plans. This is a substantial savings of up to $1000! If you’re a veteran in need of estate planning services, please contact us at 703-691-1888 to see how we can help.

 Photo by Maggie Smith.

A Mixed Bag in Virginia: Federal Law Prohibits 2011 Social Security Increases, but Federal Agency Grants Millions to Disadvantaged Groups

Written by Evan Farr

As Halloween approaches this year, I can’t help but draw an analogy between the nights I spent meandering my neighborhood as a kid looking for handouts, and our current economic times.  I recall my grade-school friends and I operating our minds at their collective capacities, as we planned the best streets to target and the best routes to take to get from house to house most efficiently. Some of the parents surpassed expectations and gave out the good stuff — like king size candy bars! Others doled out the less-desirable treats, such as candy corns, smarties, or the dreaded raisins.  Some neighbors, when they were gone for the evening, left out giant bowls of candy for us trick-or-treaters to help ourselves.  Other neighbors were always gone, and their houses completely dark.  But fortunately for us candy-loving kids, most or our neighbors participated in the fun of Halloween. In fact, many of our neighbors offered a variety of different candy to choose from each year.  We never knew how much candy we’d wind up with at the end of the night, or how much of the “good stuff” we’d have in our bag.

Similar to the unpredictability of household Halloween generosity encountered by children, the Federal Government is providing the public with what can appropriately be called a “mixed bag” of economic solutions. It might just depend on what house, or rather, what state you live in.

Social Security and Supplemental Security Income recipients will not receive an increase in 2011 because there has been no increase in the federal Consumer Price Index.  Read the Social Security News Release Here (released October 15, 2010).

Though the federal Social Security Administration is not able to provide an increase for its beneficiaries because of long-standing federal law that ties Social Security and Supplemental Security to the Consumer Price Index, other federal agencies, and some state agencies, are doing what they can to help alleviate the financial struggles of the elderly and disabled.

One prime example:  the federal Administration on Aging and the Centers for Medicare and Medicaid Services (both part of the U.S. Dept. of Health and Human Services) recently awarded more than $2 million in grant funding to the Virginia Department for the Aging and the Virginia Department of Medical Assistance Services, the latter being the Virginia agency that runs our state’s Medicaid system.   Read the Commonwealth of Virginia Press Release Here (released October 6, 2010).

This grant funding to Virginia’s Medicaid system comes with high hopes and great expectations. The over $2 million in funding will be used to bolster services for two key underprivileged groups – the elderly and the disabled – by alleviating burdens in the following areas:

•    Prescription drug coverage
•    Long-term care services
•    Transition support from nursing homes to community based services
•    In-home support services for sufferers of Alzheimer’s disease

In providing these much-needed funds to Virginia for the improvement of Virginia’s Medicaid program and the development of additional services for the elderly and the disabled, the Federal Government has demonstrated its continuing commitment to improving and strengthening the Medicaid system throughout the United States.  As Senator Rockefeller wrote in 2005, on the 40th anniversary of the Medicaid program,  ”taking care of our most vulnerable people is a moral obligation . . . our representative democracy has a responsibility to do for the future what we have repeatedly done in the past: protect, preserve, and strengthen Medicaid.”

Medicaid is what pays for the vast majority of nursing home care in the United States. With both the Federal Governemtn and the Virginia State Goverment now strenghtening the Medicaid program, smart long-term care planning (i.e., Medicaid Asset Protection Planning) has never been as important as it is now. According to the Virginia Department for the Aging, the population of elderly adults in Virginia will double in less than 20 years — to the point where one in five residents of Virginia is expected to be aged 65 or older.

A statistic I cited in a previous article demonstrates the importance of Medicaid Asset Protection Planning — about 70% of Americans who live to age 65 will wind up needing long-term care at some point in their lives.  For the more than 40% who will require long-term placement in a nursing home, the cost of such care will be financially devastating without a smart Medicaid Asset Protection Plan focused on structuring assets in a way that protects those assets while allowing earlier Medicaid eligibility.

For most seniors over age 65, Medicaid is the equivalent of government-subsidized long-term care insurance, just as Medicare is governement-subsidized health insurance.  But remember — the fact that Medicaid is “government-subsidized” does not mean that it’s a “handout.” On the contrary, it’s your tax dollars that fund the Medicaid program, just as it’s your tax dollars that fund Medicare.  It’s also important to note that the Federal Government and Virginia State Government both encourage Americans to engage in smart Medicaid Asset Protection Planning — for example:  there are laws that protect spouses of nursing home residents; there are laws that encourage Americans to engage in Medicaid Asset Protection by purchasing Long-Term Care Insurance “Partnership” policies; there are laws that allow the exemption of certain types of assets when applying for Medicaid; there are laws that permit individuals to qualify for Medicaid even after transferring assets to a spouse, or to a disabled family member, or to a caregiver child.  To smartly plan and protect assets while accelerating qualification for Medicaid is no different than planning ahead to maximize your income tax deductions in order to minimize your income taxes.   It is no different than taking advantage of tax-free municipal bonds.  It is no different than planning your estate to avoid estate taxes (which, incidentally, a lot more people are going to be doing again next year when the Federal Estate Tax returns with a vengeance – with an Exemption Equivalent Amount of only $1 million – but that’s for another article . . . ).

At a time when much federal spending leads to controversy, Medicaid is an example of the government legitimately promoting the best interests of society.  Similar to how my mom always made sure I ate a well-balanced dinner before embarking upon my annual October 31st sugar binge, our Federal Government and State Government are truly looking after the citizens of America (even in these gloomy economic times) by directing funds to programs that benefit and protect our most fragile citizens — the elderly and disabled.

The Farr Law Firm specializes in Family Protection Planning (i.e., Estate Planning, Incapacity Planning, and Medicaid Asset Protection Planning), and we are here to help you.  If you have not yet done your Family Protection Planning, I encourage you to call us to take advantage of a free consultation to determine the planning solution that’s best for you and your family.

Upcoming Seminars for Lawyers and Clients

Written by Evan Farr

 

I’m conducting two seminars this week on the topic of Income Only Trusts. The first one is a teleseminar for attorneys around the country who are members of the professional group ElderLawAnswers.  Entitled Using Income Only Trusts for Medicaid (and General) Asset Protection, this teleseminar is Thursday, Feb. 11, at 2pm Eastern. If you’re a member of ElderLawAnswers, you can click here to register for the Teleseminar

The other is a free seminar I’m teaching on Saturday morning for clients and potential clients, entitled How to Protect Your Assets from the Expenses of Probate and Long Term Care.  This will be held at the Tysons Corner Mariott, 1960-A Chain Bridge Road, McLean, VA 22012.  Please click here to register for the Saturday morning seminar. 

The answer to the question “How Can You Protect Your Assets from the Expenses of Probate and Long Term Care?” is, of course, to use the Living Trust Plus™ Asset Protection Trust, my highly-developed and proprietary income only trust that’s currently used by dozens of successful Estate Planning and Elder Law Attorneys across the country. 

 As stated by Elder Law Answers, “Income Only Trusts have been around since the 17th century, but have only recently gained in use and popularity, in large part due to the publications and educational efforts of our speaker and long-time ElderLawAnswers member, Certified Elder Law Attorney Evan Farr.”

What most Elder Law attorneys don’t understand is that income only trusts also provide clients with protection from lawsuits and other general creditors, and in the ElderLawAnswers teleseminar, I will be demystifying the income only trust, explaining how and why it works, and explaining to my fellow ElderLawAnswers Members the dos and don’ts of income only trusts so that they may properly serve clients in this exciting and growing practice area.

For middle class Americans seeking asset protection, the income only trust is the preferable form of asset protection trust because, for purposes of Medicaid eligibility, the income only trust is the only type of self-settled asset protection trust that allows a trust settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies.

 For my clients and potential clients in the Washington, DC Metro area, by coming to my FREE class on Saturday, you’ll learn what thousands of my clients already know . . .

- That a Will puts your assets through probate, and is a very poor estate planning document.
- That a regular living trust protects your assets from probate, but offers you no asset protection.
- That my proprietary Living Trust PlusTM Asset Protection Trust protects your assets from the expenses of probate PLUS lawsuits PLUS the catastrophic expenses of nursing home care.

If you answer YES to any of the questions below, you need to attend this class:

 - Is someone in your household over age 65?
- Does someone in your household have a serious medical condition?
- Has someone in your household been turned down for long-term care insurance, or found it too expensive?
- Do you want to protect your assets for your family from the devastating expenses of long-term care?
- If you need long-term care in the future, do you want to receive the best possible care?

To learn all the details and find out if the Living Trust Plus™ is right for you, please register now at http://VirginiaElderLaw.com/seminars.html 

Protect and Prosper! 


Evan H. Farr,
Certified Elder Law Attorney
Creator of the Living Trust Plus:  http://www.LivingTrustPlus.com
ALI-ABA Co-Author, Planning and Defending Asset-Protection Trusts (2009): http://www.ali-aba.org/bk64
ALI-ABA Co-Author, Trusts for Senior Citizens (2009): http://www.ali-aba.org/bk65
Farr Law Firm, 10640 Main St., Suite 200, Fairfax, VA  22030

Tel: 703-691-1888 | Fax: 703-940-9160
www.VirginiaElderLaw.com & www.VirginiaEstatePlanning.com
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Major Change in Estate Tax and Capital Gains Tax for 2010

Written by Evan Farr

Because of a Congressional failure to act before the end of 2009, there’s good news and bad news to report on the Estate Planning and Elder Law front.  The good news is there’s no Estate Tax if you die this year.  The bad news is you may owe significant capital gains taxes if a loved one dies this year and leaves you significant appreciated assets. If you have total assets of around $1 million or more (including face value of life insurance, retirement plans, home equity, etc.) you should make sure your estate plan is up to date.

Congress has had nine years to prevent this from happening, but has failed to act. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the estate tax exemption has been gradually raised over the past eight years while the tax rate on estates has been reduced. For estates of those dying in 2009, only assets worth $3.5 million or more were subject to estate taxed, at a rate of 45 percent. But now, for the year 2010, the estate tax has disappeared entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is exactly where things stood before the 2001 change.

Everyone — lawyers, politicians, and political commentators — has expected for the past 9 years that this law would be “fixed” before the end of 2009, but it wasn’t.  According to some commentators, the Republicans concluded that it was in their interest to let the estate tax repeal occur; and the Democrats apparently don’t agree among themselves as to what they think the estate tax law should be, as Democrates have differing opinions over what the tax rate and the exempt amount should be. Senate Democrats tried to persuade Republicans to extend the 2009 estate tax law for a couple of months until a more permanent solution could be devised, but even that effort failed.  Accordingly, there is currently no tax on the estates of those dying during 2010. Congress could reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, but this is not likely according to many commentators.

As the law stands, a few thousand very wealthy families have great financial incentive to hope that their loved ones die this year.  On the other hand, tens of thousands of taxpayers of more modest wealth may have great incentive to keep their loved ones alive into 2011, because if their loved one dies in 2010 and they inherit an appreciated asset, they may have pay capital gains on that inherited asset, and someone acting as an executor will face additional and confusing administrative burdens.

Loss of Step-Up in Basis May Be Quite Expensive for Many Taxpayers

For most people, the main concern with the law as it now stands is not that the estate tax is repealed for 2010; a bigger problem for many is that it’s replaced with a 15 percent capital gains tax on inherited assets that are later sold.  Previously, someone inheriting an appreciated asset (for example, a house that had greatly appreciated in value over the lifetime of your parents) upon a loved one’s death got a “step-up in basis” in the property. A step-up meant that heirs could sell the inherited, appreciated asset right away without owing any capital gains taxes, because the tax “basis” in the property was “stepped-up” to the value of the property at death.

If you inherit an asset now (in 2010), only the first $1.3 million in assets gets a step-up in basis. Anything over the $1.3 million in assets (plus $3 million for assets transferred to a surviving spouse) will not get a step-up in basis.  Instead, when you sell the property you’ll have to pay capital gains taxes based on the original cost basis (typically the price paid for the asset). This raises an additional concern — having to determine what the cost basis of the asset was.  This in itself could be quite expensive, not to mention time-consuming in trying to ascertain the original price paid for assets, including any renovations or improvements made to real estate over the years.

The capital gains tax rules can be quite complicated, but let’s look at a relatively simple example:  a client called me a few days ago with a home worth approximately $1 million and 40 acres of commercial land that her father gifted to her prior to his death, now worth approximately $2 million. The home was originally purchased by my client for $8,000 in 1961 and she put a $40,000 addition on the home in 1982, so her tax basis in the home is $48,000. Her father originally purchased the 40 acres of land around 1943, for $1,000; at the time of his death in 1992, the 40 acres was worth about $600,000.  Had he left the land to his daughter upon his death, she would have taken a stepped-up basis under the old law, but because he gifted it to her prior to his death, she took over his cost basis of $1,000.  So now her two parcels have a total cost basis of $49,000.  If my client had died last year, then her heirs would have received a step-up in basis, meaning if they sold the properties for their current value of $3 million, they would pay no capital gains tax.  Under today’s law, if my client dies this year, in 2010, her heirs will inherit her cost basis of $49,000, meaning that if her heirs then sell these properties for their current value of $3 million, they will pay a 15% capital gains tax on $1,651,000 ($2,951,000 – $1,300,000), or $247,650 in tax.

The chief tax counsel for the House Ways and Means Committee estimates that continuing the estate tax at its 2009 rates would have affected about 6,000 people, but the new capital gains provisions that we now have will affect more than 70,000. And, in general, these 70,000 will be far less wealthy than the heirs who would have been affected by a continuation of the estate tax.

Couples With Credit Shelter Trusts at Risk

The new world of no estate tax places at particular risk certain couples who have built in “Credit Shelter” trust provisions (also called ”Bypass Trust” or “Family Trust” provisions), that are designed to allow both spouses to take advantage of their estate tax exemptions. These are common arrangements used in estate planning for married couples. With the estate tax gone, one possible problem is that the wording of some of these trusts could cause all assets to completely bypass the surviving spouse when the first spouse dies, meaning a surviving spouse might get nothing without the expensive process of claiming her “elective share.” For a more detailed explanation of this potential problem, click here.

Why Did This Happen?

The House passed a bill in early December permanently extending the 2009 estate tax rules, which would have brough in an estimated $25 billion for 2009 by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of 2009, but they were blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

“Republicans who claim to have accomplished something by blocking an extension need to explain why raising taxes on the middle class while lowering them for the very rich is something to be proud of,” the Los Angeles Times editorialized.

For more on the implications of the disappearance of the estate tax, see CBS MoneyWatch’s “Estate Tax: What You Need to Know for 2010,”SmartMoney’s “The Federal Estate Tax Is Dead: Now What?,”and Kiplinger’s “FAQs on the Death of the Estate Tax.”

Everyone — Especially Married Couples — Should Have Their Estate Planning Reviewed ASAP

Because of these somewhat unexpected tax changes, a review of your existing estate planning documents is essential.  If you are a member of the Farr Law Firm’s Estate Plan Protection Program or Lifetime Protection Program, you are entitled to a free review (and, if necessary, a free modification) of your existing estate planning documents every year, and you should call us to take advantage of this annual review as soon as possible.  Most of our trusts will not need to be modified because of special language we inserted in the document, but changes to some trusts may be required.  If your estate planning was done by a different attorney, you should consider going back to that attorney for a review; alternatively, please feel free to contact our office and we will be happy to do a free review of your estate planning documents, determine if any changes are required, and quote you a fee for us to prepare the necessary revised documents.

Important Elder Law and Estate Planning Numbers for 2010

Written by Evan Farr

Under current law, there will be no cost-of-living adjustment (COLA) in Social Security in 2010 — the first time that has happened since automatic cost-of-living adjustments began in 1975. Several bills before Congress would grant a special increase in Social Security payments for 2010.

In addition, when no Social Security COLA is provided, Medicare Part B premiums — which are deducted from Social Security checks — are frozen for most beneficiaries so that the Social Security checks do not drop (click here for more information).

Below are figures for 2010 that are frequently used in the elder law practice, including the new Medicaid spousal impoverishment figures, the long-term care insurance deductibility limits, and Medicare premiums and co-pays, and Social Security Figures:  

Medicaid Figures for 2010 

Divestment Penalty Divisor $ 6,654.00 – Northern Virginia (Arlington, Fairfax, Loudoun and Prince William Counties and the Cities of Alexandria, Fairfax, Falls Church, Manassas and Manassas Park.)
$ 4,954.00 – All Other
Individual Resource Allowance $ 2,000.00
Monthly Personal Needs Allowance $ 40.00
Minimum Community Spouse Resource Allowance $ 21,912.00
Maximum Community Spouse Resource Allowance $ 109,560.00
Minimum Monthly Maintenance Needs Allowance $ 1,821.25
Maximum Monthly Maintenance Needs Allowance $ 2,739.00
Shelter Standard $ 546.38
Standard Utility Allowance $ 141

Estate Tax Exclusion / Exemption Equivalent Amount: 

Unlimited Exemption (Estate Tax Temporarily Repealed for 2010).  Exemption currently set to revert to $1 million in 2011.

 Annual Gift Tax Exclusion: $13,000  

Attained age before the close of the taxable year Maximum deduction
40 or less $330
More than 40 but not more than 50 $620
More than 50 but not more than 60 $1,230
More than 60 but not more than 70 $3,290
More than 70 $4,110
Beneficiaries who file an individual tax return with income: Beneficiaries who file a joint tax return with income: Income-related monthly adjustment amount Total monthly premium amount
Less than  or equal to $85,000 Less than or equal to $170,000 $0.00 $110.50
Greater than $85,000 and less than or equal to $107,000 Greater than $170,000 and less than or equal to $214,000 $44.20 $154.70
Greater than $107,000 and less than or equal to $160,000 Greater than $214,000 and less than or equal to $320,000 $110.50 $221.00
Greater than $160,000 and less than or equal to $214,000 Greater than $320,000 and less than or equal to $428,000 $176.80 $287.30
Greater than $214,000 Greater than $428,000 $243.10 $353.60
 

Social Security Figures for 2010

         (Click here for SSA Press Release)
         (Click here for SSA Fact Sheet)
 

  • Cost of Living Increase: 0 percent 
  • Maximum Taxable Earnings: $106,800   

SSI Federal Payment Standard:  

  • Individual: $674/mo.
  • Couple: $1,011/mo.

What Does the Bible Teach us About Estate Planning?

Written by Evan Farr

Sorry for the last minute notice, but I just found out that my church, Fairfax United Methodist Church (10300 Stratford Avenue, Fairfax, VA  22030), has space left for a course I’m teaching tomorrow evening entitled What Does the Bible Teach us About Estate Planning?This is a brand-new two part course seminar that I’ve just put together as part of my church’s Paths of Faith educational outreach program.  

 

 Did you know there are hundreds of mentions of the word “inheritance” in the Bible, but there is very little information available to families seeking to plan and protect their estates.  Every person’s estate is different, and each estate plan must be designed to meet the needs of that family’s situation, but we should look not just to the law, but also to the Bible for direction in planning our estates and protecting our wealth (and not just our material wealth).

Part 1 of this course (tomorrow evening, October 6, from 7 to 8:30) will examine and summarize the Biblical perspectives on estate planning, elder law, and asset protection and explain what the Bible teaches us about these complex and ever-changing areas of the law. 

Part 2 of this course (next Tuesday evening, October 13, from 7 to 8:30) will examine how families, through the use of traditional and not-so-traditional estate planning tools, can legally and morally take the steps they need to plan and protect themselves, their families, and their estates, while glorifying God in the process. 

I’d love for you to attend if you’re able to make it, and bring your friends and family! Tuition for both sessions is $25.  To register, please call the church at 703-591-3120 ext. 105.  I hope to see you there!