Wisconsin Estate Planning and Tax Law Blog

Federal Estate Tax in 2010

I intentionally waited until after President Obama's State of the Union Address to post my commentary of current state of the federal estate tax because a part of me was hoping that either Congress or the President would have clarified the situation by now.  Unfortunately for me, my fellow estate planning attorneys, and everyone affected or potentially affected by the estate tax, things are no clearer today than they were on January 1, 2010. 

The reality is this:  At the present time there is no federal estate tax for deaths occurring between January 1, 2010 and December 31, 2010.  This estate tax "repeal" is part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") (also affectionately/unofficially known as the "Bush Tax Cuts."  As I have discussed previously on this blog the EGTRAA is set to sunset (i.e. expire) on January 1, 2011, roughly 10 years after the it was signed into law.  I will not go into exhaustive detail as to why the sunset provision was included in the bill, but I will say that it was added to the bill as an end run around the Byrd Rule (a Senate rule), which allows Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten-year term. 

On the surface the fact that we have reached 2010 with EGTRRA still in full-force seems like a good thing for individuals with large estates.  In fact it may well play out to be a good thing depending on Congress's actions this year.  However, therein lies the problem for a couple of reasons.  One, since Congress has not acted we are in an unenviable position of not having anything resembling clarity in regards to the current, let alone, the future federal estate tax system.  Given this uncertainty, it is extremely difficult to advise clients on matters related to the estate tax so it is difficult to be proactive in the estate planning realm at the moment.  Second, there is a thought shared by many commentators that Congress may look to make any changes to the federal estate tax system retroactive to January 1, 2010.  This makes it difficult to properly administer estates for individuals that die after January 1, 2010 and the date the any new estate tax law is passed.  Therefore, even reactionary planning and tax compliance are complicated by the uncertainty in the estate tax arena.

It does not give me great joy to deliver this state of the federal estate tax system to this blog's readers or to my clients.  Unfortunately, it is the reality we find ourselves in for the foreseeable future.  We simply do not know when or if Congress will revisit the federal estate tax issue this year.  In the event that they do not act the entirety of EGTRRA will expire, which will mean the pre-2001 federal estate tax system will return in full force.  That means the estate tax exemption returns to $1 million per person, the estate tax rate will be 55%, step-up basis returns after a one year hiatus, and the federal estate tax credit for state death taxes paid returns.  The return of that last item will in turn reignite numerous state estate tax systems that have been dormant since the federal estate tax credit of state death taxes was transitioned to a deduction.  Wisconsin is on such "pick-up" estate tax states that will go from having no estate tax on December 31, 2010 to having an estate tax on January 1, 2011.

I will do my best to monitor the situation and I will pass on any commentary or thoughts that I come across on the federal estate tax matter as we move forward.  We have less than 11 months remaining in 2010 so presumably the window of opportunity is closing quickly.  However, Washington had almost 9 years to plan for this and yet here we are, so I would not recommend holding one's breath. 

   

Funding a Revocable Living Trust

As we've discussed previously on this blog, the term Estate Planning can be a somewhat confusing term if taken without additional explanation.  Estate Planning, in my mind, is approach we must all take to properly direct who will inherit our assets and whether they will inherit directly or in trust.  It is also the process through which we nominate a person or persons to be in charge of everything from caring for minor children, managing our finances or making healthcare decisions while we are alive but unable,  administering trusts, or administering the probate estate.  The term itself does not describe whether a Will or a Revocable Living Trust is the main document in the plan.  I will elaborate on that topic in the near future, but for the purposes of this post I want to discuss what may well be one of the most important steps in the estate planning process that tends to be overlooked.

The step I am referring to is where assets are transferred or retitled to the revocable living trust.  The fact is that one of the reasons that the cost of a revocable trust based plan exceeds that of a will based plan is the additional work required to fully fund the trust.  A revocable trust operates at its utmost efficiency and effectiveness when the attorney and the client work to retitle and fund the revocable trust during the client's lifetime.  Accomplishing this step prior to death will keep the estate out of probate and ensure that the process is private and as seamless as possible.  In the end the additional work up front will go a long way toward limiting administration expenses and eliminating many of the difficulties that families may face if the estate planning is not proactively addressed.

Over the next two weeks I will discuss the various "typical" asset classes that I see in my practice and the different ways to deal with those asset classes to maximize the effectiveness of a revocable living trust.  As I publish those additional posts I will provide update links below.

Will Estate Planning go Digital?

The idea of eliminating the need for paper copies of estate planning documents such as Wills or Trusts may at first glance seem natural to clients given our society's trend toward limiting the use of paper and problematic to estate planning attorneys who see the authentication process as a major stumbling block.  I personally like the idea in theory, but only if the technology exists to guarantee that the authenticity of the Will or Trust is preserved and even then it is a risky proposition.

Right about the time this idea was bouncing around my head I noticed a couple of great posts from Professor Gerry Breyer on the Wills, Trusts & Estates Prof Blog titled "Digital Wills - Good, Bad or Ugly?" and "Star Trek and Digital Wills."  Professor Breyer was kind enough to send me a copy the article he and Claire G. Hargrove authored titled "Digital Wills:  Has the Time Come for Wills to Join the Digital Revelution?" which appeared in Ohio Northern University Law Review this Fall.  This is not the proper form for me to present my review of Professor Breyer's article, but I did want to mention his conclusion since I very much agree with it.  The article concludes that the uniqueness and expected application of a Will differentiates estate planning documents from commonly prepared legal documents.  A Will is often not implemented for many years after the Testator executes the document.  Therefore, it is absolutely essential that the document is preserved for many, many years.  The article goes on to say, "...[T]he current fragility of the electronic storage mdium, and the rapid development and lack of standardization of computer systems makes the concept of an electronic will a risky enterprise." 

The conclusion as I see it at this time is relatively simple.  The idea of Digital Wills or Digital Anything for that matter carries an unknown amount of risky with it.  Will your Word 2007 or PDF version Will be accessible in 20 years after 15 new software updgrades?  There is no way of knowing for sure.  That is why, at least for now, there is no option better than a paper Will.  However, the future is coming whether we like it or not and that will likely mean this will not be the last time we entertain this topic.

How much does a Will or a Revocable Trust cost?

This is probably the most commonly asked question during the first five minutes of any initial conversation I have with a potential estate planning client.  I believe it is a justified and important question to ask an attorney before deciding whether to work together.  However, the question is both difficult to answer and that answer can be difficult to appreciate in those early stages.  The reason it is difficult to answer is because five minutes is not near enough time to accurately determine the specific needs of a particular client that will need to be addressed in their estate plan.  Everyone's estate plan is different, which means each plan will require a different amount of work relative to the drafting and implementation of the plan.  This is the central reason that I am hesitant to answer this question with any specificity.  It is not because I want to hold out on discussing fees, but rather I just simply do not know what that specific estate plan requires at that time.  As my clients can attest, I always discuss fees during our first in-person meeting.  In fact, I always provide at the very least a narrow fee quote range.  In nearly all cases I quote a flat-fee that covers the comprehensive estate plan that I have recommended. 

Therefore, in practice I cannot and typically do not directly answer this question because the answer would not be sufficiently accurate based on the limited amount of information I have at that time.  I understand that some people do not like this answer and quite honestly I wish I did not have to give the typical lawyerly answer of "It Depends."  But in most cases I do have to say "It Depends" because it is in the client's and, admittedly, my best interest to explore the situation in greater detail before we all commit to a fee schedule.  I can assure you that the initial estate planning meeting is well worth the time and expense even if you do not ultimately decide to proceed after I make a recommendation and quote a fee.  In the initial estate planning meeting I provide an overview of estate planning, which serves as both an opportunity to learn about the process and to get you thinking about how you would like to plan your estate. 

Estate Planning for Vacation Homes, Part II

Soon after I published my planning for vacation homes post I came across this post by Bill Gratsch over at Blawg.com titled Finding a Niche: CottageLaw.com.  Mr. Gratsch's post discusses the work of Michigan Attorney Stuart Hollander who has developed a niche practice area involving planning for the family cottage.   Attorney Hollander's firm is located in Suttons Bay, Michigan and his website is www.cottagelaw.com.  The fact that Hollander and his firm can concentrate on such a narrow niche area of estate planning is evidence of just how involved and important the family cottage or vacation home is from a planning perspective.  The article and Attorney Hollander's site may be worth exploring for additional information on the topic of Vacation Homes, especially if you or your cottage are located in Michigan.    

Who do you want to get your "stuff" when you die?

The class of assets in one's estate that is often the cause of the majority of familial disputes is also often the least focal point of an overall estate plan.  This class of assets is what it referred to as tangible personal property.  Tangible personal property used to describe assets such as automobiles, collectibles, jewelry, household goods, etc.  Basically, it is all of your "stuff" that you can touch, feel and smell.  It does not include real property such as your home, cottage, or land.  It also does not include intangible personal property such as stocks, bonds, bank or brokerage accounts, etc.  The "stuff" in a person's estate can be the source of a large amount of family fighting if it is overlooked in an estate plan.

To eliminate any possible family strife in the future it is important to address the issue of tangible personal property in your comprehensive estate plan.  This is often accomplished in one of two ways.  The first way a testator (maker of the Will) or the grantor (maker of the Revocable Trust) can provide for the disposition of tangible personal property is through a specific bequest in the Will or Revocable Trust.  The specific bequest could be as simple as "I leave my baseball card collection to my son, James Fielder."  The second way is through the use of a tangible personal property list, which is incorporated by reference into the Will or Revocable Trust.  This method is authorize in Wisconsin by § 853.32, Wis. Stats.   The most recently signed and dated list will control the ultimate disposition of your property.  To complete the list you simply write the asset and who you would like to receive it.  For instance you entry on the tangible personal property list would read "My Wedding Ring" on the asset line and "My Daughter, Emma Braun" on the recipient line.  A tangible personal property list along with instructions is included in any estate plan that I write.

As I mentioned above, your "stuff" may not be at the front of your mind when you first think about updating or creating your estate plan, but it should not be overlooked in the process.  Just as the estate planning documents require occasional updating over the years, your tangible personal property wishes should be revisited from time to time as circumstances change.  As with much of the estate planning process, the time spent today will prove priceless when your loved ones are settling your estate in the future.

Estate Planning for Vacation Homes

Aside from the relaxation and vacation related elements of our recent trip, I couldn't help but think about a growing area in the estate planning arena.  The specific area that I am talking about it planning for vacation homes.  In my research and experiences I have found no single asset that serves more as a lightning rod for family disputes than the vacation home.  Although, it is still surprising to see the infighting over certain items of tangible personal property, but on a grander scale the vacation home is on a whole different level.  I believe this to be the case because the family vacation home holds many fond memories for each member of the family.  The intention is typically the same:  We want to keep this vacation property in the family for many generations to come.  I think that is a great intention to have and great plans have been designed to ensure just that.  But as they say, "The best-laid plans of mice and men often go awry." 

The point of this post is not to provide a checklist of exactly what every vacation home owner should do to ensure that the family cottage stays in the family.  More than anything I am hoping that it will spur the vacation home owners to spend some time thinking specifically about this asset so they can evaluate their current estate plan or design a new estate plan that furthers their objectives.  Once the owners determine what is important and what they hope to accomplish it is much easier to design an estate plan to provide a solution.  The solution may involve a Family Limited Partnership ("FLP"), a Revocable or Irrevocable Trust, a Limited Liability Company ("LLC"), or an outright bequest at death or gift during the grantor's life.  Deciding upon the proper approach and structure requires much more than an understanding of the tax and legal aspects.  It depends on the family dynamic, sibling relations, and financial abilities of the next generation.  In the area of estate planning for vacation homes, as is the case in many areas of estate planning, one thing tends to be true more often than not:  Failure to plan is planning to fail. 

Video Link: Wills and Estate Planning

I came across this short (5 minutes and 35 seconds) video put together by PBS 39 in Pennsylvania that provides a nice summary of Wills and Estate Planning. The segment originally appeared on the PBS 39's program, Tempo, and the guest is Financial Advisor, Gene Dickison, with the Valley National Group.

I would generally agree with almost all of what Mr. Dickison discusses in this short segment.  One point that I did want to make though was that the terms Executor and Executrix are used in some jurisdictions, but here in Wisconsin that person is generally referred to as a Personal Representative.  That is nothing more than semantics since the duties and responsibilities are the same in each case.

As this video and some of my previous posts indicate, it is extremely important for certain individuals and couples to create, review and/or update their estate plan.  Please take a few minutes to watch the video and let me know what you think. 

 

Common Mistakes in Estate Planning

Link:  Morningstar.com: Top 10 Estate-Planning Mistakes.  This article by Sue Stevens, CFA, CFP, CPA highlights the top ten mistakes that she has observed in the course of her practice as a financial advisor.  Generally speaking, from my experiences I would agree with Ms. Stevens' observations.  The areas that can lead to the least desirable results are not updating an estate plan, choosing the wrong trustees and personal representatives, not funding the inter vivos trusts, and not coordinating beneficiary designations.  This is not to say that the other areas are unimportant.  I single those four areas out because they are rather easy to address with proper reflection and planning. 

I would also expand the trustees and personal representatives area to include the appointment of guardians for minor children and agents under powers of attorney.   The selection of trusted people to act in these capacities can be very difficult and understandably so.  But just because it is difficult, that does not mean it should be avoided.  The same can be said for fully funding trusts.  It will take some leg work to make sure real estate, bank accounts, and other assets are retitled in the name of the newly created trusts.  That is all time well spent.  Coordinating beneficiary designations with your overall estate plan ensures that your intentions are fully carried out.  This need arises because assets with beneficiary designations, such as life insurance, 401k or retirement accounts, are not distributed according to the terms of your Will or Trust. 

It is also worth noting that this list is certainly not all-inclusive.  Estate planning involves numerous issues that work together to apply to your unique situation.  The best way to ensure that your estate plan addresses these and other issues is to develop a lasting relationship with your trusted advisors, including an estate planning attorney, a CPA and a financial advisor well versed in estate planning issues.  Just as one would regular meet with a CPA or a financial advisor for periodic reviews, it is a worthwhile practice to review your estate plan with your attorney every two to five years as circumstances change.       

What is Estate Planning?

Often times professions develop their own vocabulary and when you are around that all of the time you lose your frame of reference from the outside world.  I believe that to be the case with the legal profession on many occasions.  For instance, we often refer to the areas of law that we focus on as our "Practice Areas".  Then within that category we have a descriptive title for our particular focus including, Tax Controversy, Business Organizations, Title XIX Planning or Elder Law, and Estate Planning.  The truth is that other attorneys and some clients actually understand what those areas cover, but many clients may be left in the dark when attorneys use this legal vocabulary.   My hope is that this post will help everyone gain an understanding of what is meant by the term of art "Estate Planning".  For those of you that already know this will just be a basic review, which is not a bad thing since a review every now and then can do some good.

Estate Planning can be defined broadly as the process through which one memorialized his or her wishes for the disposition of assets upon his or her death.  Although this definition does not encompass other important aspects of the overall plan including naming someone to help out in cases where the individual is still living but unable to manage finances or care for his own wellbeing.  A comprehensive estate plan will also address these situations by naming individuals to make health care and financial decisions for an individual if there are ever incapacitated or adjudged incompetent.  Estate planning covers topics that many people would rather not openly discuss as you can imagine including what will happen when I die, who will care for my minor and/or disabled children, who will manage my finances if I cannot or who will make health care decisions if I am in a coma or incompetent, etc.  We all want to believe we will live forever or at least for a long, long time.  I cannot nor would I want to dissuade people from feeling this way.  The reality is there are at least two certainties in the mortal world we live in and the title of this blog is appropriate in that regard.  An additional aspect that is increasing in regularity and probability in recent years is the fact that people are living longer with the advances in medicine.  This increases the likelihood that people will need long-term care or related services and assistance at some point in the future. 

Estate planning is probably best known to the general public by the particular documents that one would typically execute including a Will, Revocable Trust, general durable powers of attorney for finances, health care power of attorney and instructions to a health care agent (also known as a living will or advance directive to physicians).  The combination of the various documents ensure that the individual has planned not only for disposition or assets and care of minor children after death but also for his or her care and financial management during life should something unforeseen occur.

As is often the case when working with attorneys, the individual does not leave the office will a product or other tangible asset other than the documents mentioned above.  From my perspective that is not the valuable service provided by estate planning attorneys.  Instead, I believe that the main service received by an individual is the peace of mind that comes with knowing that she has completed a plan that memorializes her wishes and after signing the documents she no longer needs to worry about things in that arena.