Winter 2006

FEDERAL ESTATE TAX AND GIFT PLANNING

This January, the Federal Government increased the amount of money that a person can pass on to their heirs, estate tax-free from $1,500,000 to $2,000,000. The amount is scheduled to increase again in 2009 to $3,500,000 and unless the government changes its direction, the estate tax will be eliminated in 2010.

However, the government won’t be giving families a free break forever. In 2011, the threshold is scheduled to be set at $1,000,000.

The legal community expects there to be a compromise on future amounts. However, to date, all votes on the issue have been postponed and there is no word as to when it might make it back on the agenda. Most practitioners, myself included, recommend that people continue to do advanced planning, such a gifting plans, Irrevocable Life Insurance Trusts and Family Limited Partnership or Family Limited Liability Companies. If you take a wait and see attitude, something may happen that will affect your ability to implement a plan later, such as an illness that would suddenly make life insurance astronomically expensive.

ADVANCED PLANNING TECHNIQUES

You can reduce your tax-estate burden to your beneficiaries by giving taxable gifts. Taxable Gifts are gifts that exceed the "Annual Exclusion Gifts." Annual Exclusion Gifts are gifts that the law allows to be ignored. In 2006, the amount allowed is $12,000 per donee. This means that a married couple with three children and one grandchild, could gift $48,000 each, $96,000 in total, for 2006. Families with more donees will be able to make even larger gifts.

Annual Exclusion Gifts can be made directly to individuals, or to special Irrevocable Trusts that may be held for the long-term benefit of children.

The Annual Exclusion allowance made directly to medical care providers and educational institutions for qualified purposes can be made gift tax-free.

Keep in mind that college savings plans, 529 plans have special income, gift, and estate tax advantages.

A Spousal Benefit Annual Exclusion Trust permits a husband or wife who is married with three children to transfer $96,000 for 2006 into a Trust for the lifetime benefit of the other spouse, children,and future grandchildren. The beneficiary spouse could be the Trustee of this Trust and receive funding, as she or he may need for health, education, and maintenance during his or her lifetime. The remaining spouse may also have the right to appoint how the Trust assets would be divided among children and grandchildren at the time of his or her eventual death. This is called a Lifetime By-Pass Trust, and is a variety of what may be established as an Irrevocable Life Insurance Trust.

I often recommend Family Limited Partnerships or Limited Liability Companies to gift discounted, non-controlling interests into this type of trust each year.

Most clients wish to assure that on the death of one spouse an appropriate portion of overall family assets are locked up in a By-Pass Trust. This can benefit the surviving spouse and descendants in a protected manner, without being subject to Federal Estate Tax on the death of the surviving spouse. It is important to coordinate asset ownership and tax planning in order to facilitate proper funding of such a trust on the first death.

Another option is to separate the assets into a Revocable Trust for the husband and a Revocable Trust for the wife. On the first death, the Revocable Trust of the deceased spouse can lock up to provide a Protective Trust for the surviving spouse and children.

Assets can be held jointly as Tenants by the Entireties, individually, or under a Family Limited Partnership or a Limited Liability Company mechanism to allow gifting of entity interests and enhance creditor protection. In this scenario, on the death of one spouse, a portion of the joint assets can be disclaimed into the Revocable Trust of the first dying spouse. Another option is the establishment of Joint Trusts that allow for all assets held under and payable to a jointly held Trust to be locked up for protective purposes in the event of the first death.

Finally, Irrevocable Life Insurance Trusts are an easy way to give beneficiaries money to pay estate tax. Using this trust, the life insurance proceeds are not included in your gross estate at your death. The beneficiaries can then use the proceeds to pay any estate tax due at your death without having to liquidate or use any of the assets left to them as part of your gross estate.

It is important to examine your assets and your needs before choosing any gifting option. Federal regulations are subject to change and it may be necessary to update your estate plan every few years.

UPDATING YOUR ESTATE PLAN

The most frequently asked question I get is, “When should I update my Estate Plan?” The most obvious answer is every time you have a major life change, such as marriage, divorce, additional children, grandchildren, etc. A life change can also include a change in your income or assets, such as purchasing rental property, selling something of significant value, or starting your own business. These events, to name a few, need to be addressed in your Estate Plan.

However, you may not need to amend your documents. There may be a simple solution available, such as filing the appropriate paperwork: Assignment of Business Interest or Quit Claiming the Rental Property into your Trust. You can update your Estate Plan with these changes without needing an entire rewrite.

FIVE-YEAR RULE

If you haven’t had a life change, either family-related or financial, I recommend that trusts be reviewed every five years.

Chances are that within the five years since your trusts’ creation or last review, there will be significant changes in the tax law that needs to be addressed. There are also issues raised by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). I am sure many of you have had to sign paperwork in a doctor’s office or at a pharmacy reflecting this law. It is important to review your estate plan to make sure this law will not prevent your Agent or Successor Trustee from securing a letter from a doctor as to incapacity. At this time, my documents are still valid. However, if you have friends and loved ones with an estate plan drafted by another attorney please suggest that they have the plan reviewed.

In general, touching base with your attorney every five years is a good idea. I certainly enjoy catching up with my clients and more importantly I like to know that my clients’ estate plans are still in good working order. I am always happy to review estate plans written by other attorneys so please refer any friends or family members this might pertain to.

NEW LEGAL PRODUCT NEWS

I always like to stay on the forefront of the estate planning practice. I am excited to offer a new trust that may be a good fit for many of my older clients. In the past, if you have had a Pre-Tax Account, such as an IRA or a 401K, there were no good ways for parents to leave the money to younger children. If you name a Revocable Trust as the beneficiary, all of the money has to be taken out of the Pre-tax Account within five years. This can cause higher income tax. However, this was a better alternative than naming the minor child as the beneficiary. The result of doing that meant that once the child turned 18, he or she would have complete control over the sum of money.

Now there is a better solution, the Qualified Plan Trust. A Qualified Plan trust is designed to accomplish two objectives: (1) allow or compel your descendants to take only required minimum distributions from inherited Qualified Plans. These minimum distributions can be kept in trust until the children reach an appropriate age. Income tax only has to be paid on the minimum distribution. The results in tax deferred growth can be dramatic if children, or more remote descendants leave (or are forced to leave) assets in inherited Qualified Plans as long as allowed under the minimum distribution rules; (2) protect inherited Qualified Plan proceeds from the creditors (including ex-spouse’s) of your children, or more remote descendants. The IRA proceeds can also be excluded from your descendants’ estates for estate tax purposes.

This Trust is a great solution for parents of young children or parents of older children who want to make sure their children have a saving plan. Essentially, this plan forces beneficiaries to be good stewards of their money.

If you think this new trust is right for you, or you have any questions about it please call me.

LEGAL PRACTICE UPDATES

To my Virginia clients, please keep an eye out for the next issue of Northern Virginia Living magazine where I am featured in an article on eldercare and estate planning.

Rhonda Miller has serviced hundreds of estate plans and business entity plans. She recognizes that developing estate plans and legal business structures involves highly sensitive materials, emotional decisions, and confidentiality. She takes the time to get to know her clients and their needs and she goes a step further. Rhonda makes house calls. Unlike traditional law practices where clients meet in intimidating and busy legal offices, Rhonda works with clients in their homes or remotely to provide them with a sense of ease and comfort. In this way she is better able to serve her clients’ needs and recommend solutions that work for them.

Your life and your business are unique. Your legal services should be too!

This newsletter is intended to be a guide about legal issues and it is not intended to be legal advice, legal representation, or advice that can be relied on to avoid any penalties that the Internal Revenue Service may assert because of a successful challenge to any position taken on a tax return. Due to the rapidly changing nature of the law, I make no warranties or guarantees of the accuracy or reliability of the information contained herein.

PROFESSIONAL AFFILIATIONS

Virginia State Bar
California State Bar
Northern Virginia Estate Planning Council
Fairfax County Bar Association
Orange County Bar Association
Soroptimist International
Canine Support Teams
Herndon Dulles Chamber of Commerce
Reston Chamber of Commerce
Schedule your California Office
Appointment Today!
Call 714.527.7147 or email info@rhonda4law.com


Back to Publications