Financial and Estate Planning Questions and Answers

Transcription

1 Financial and Estate Planning Questions and Answers Click on a question below to jump directly to the answer, or scroll through all of the questions and answers submitted.* 1. What is estate planning? 2. Do I need to have a will? What happens if I die without one? 3. Do I need to go to a lawyer to get a will or can I get one from the internet? 4. Does it matter what state I live in? 5. I have a will, but it hasn t been updated in 10 years. Is this a problem? 6. I don t have a lot of money. Do I still need to do estate planning? 7. I live in one state but I also own property in another state. Is this going to be a problem? Will I have to pay taxes to both states? 8. I want to make sure my disabled child is taken care of when I m gone. What should I do? 9. I want to give my house to my children. Will I have to pay tax on the gift? 10. I m a widow with a small income. I own my house. My bank says I should get a reverse mortgage. What is this? 11. My grandchild is in college and I want to help pay his tuition. Will I have to pay gift taxes if I pay his tuition? 12. My sister named me as the executor of her will. What do I have to do? 13. Will a living trust save me taxes? 14. I already have a will. Do I need anything else? 15. When should clients have their estate plans reviewed? 16. I have a small accounting practice and I want to expand my services to estate planning. What are the essentials I need to get started in this area? 17. When should clients have their estate plans reassessed? 18. I practice in a small firm, but am looking to expand my services to estate planning. I have a few clients within one state. What are the bare essentials I would need to expand in this arena? 19. What is intestate succession and what are its potential implications for clients? 20. What is considered the most difficult estate planning issue today what are practitioners spending the most time on? 21. What advice would you give practitioners who need to file Form 8939 since the final form and instructions have yet to be issued by the IRS? 22. Although generally there will be no extensions granted for filing Form 8939, are there certain limited exceptions to the filing deadline of Jan. 2012? 23. When will the carryover basis regime and step up basis options phase out into one permanent option? 24. Can I transfer ownership of a life insurance policy from one parent to child without paying a generation skipping tax? 25. What is your recommendation to provide for a disabled adult child? Consideration also given to not causing the disabled adult child to lose government benefits? 1

2 1. What is estate planning? ANSWER: Estate planning is the process of setting goals and objectives and developing strategies for disposing of assets, providing for family members and charities, and minimizing death taxes. 2. Do I need to have a will? What happens if I die without one? ANSWER: Every person, regardless of the size of his or her estate, should have a will. The will names the person who oversees the estate (the executor or personal representative). Even if a person has a trust intended to be a will-substitute, having a will is still a good idea because not all assets may be included in the trust (such as a wrongful death claim). If a person does not have a will, the state in which the person is domiciled at the time of death effectively writes a will for him or her. The laws of intestacy apply to say who inherits the person s property, regardless of what that person may have wanted or intended. 3. Do I need to go to a lawyer to get a will or can I get one from the internet? ANSWER: The law does not require a person to use a lawyer to write a will. Many online sites provide free or low-cost wills. However, because of the importance of the will, it is highly recommended that a person use an attorney or, at the very least, have an attorney review a self-prepared will. 4. Does it matter what state I live in? ANSWER: The laws of the state in which a person is domiciled determine a number of matters affecting a decedent. If, for example, the decedent dies without a will, state law dictates who inherits the property. State law may affect taxation of the estate (some states have no death taxes, while others have estate or inheritance taxes). 5. I have a will, but it hasn t been updated in 10 years. Is this a problem? ANSWER: A will should be updated from time to time, especially when family situations and/or tax laws change. A will that is older than a few years may need to be updated or completely revised. The failure to update a will can mean that property may pass to unintended heirs, some intended heirs may be effectively disinherited, or the estate may incur death taxes that could have been minimized or avoided. 6. I don t have a lot of money. Do I still need to do estate planning? ANSWER: The need for estate planning is not only for the wealthy. Regardless of whether a person has enough assets to be concerned about estate taxes, estate planning is still important. Estate planning includes naming a guardian for minor children, succession planning for a business, and other matters that are not dependent on wealth. 2

3 7. I live in one state but I also own property in another state. Is this going to be a problem? Will I have to pay taxes to both states? ANSWER: When a person is domiciled in one state but owns property in another state, this raises the possibility of ancillary probate. Ancillary probate means incurring additional time and expense in passing property in that other state to an heir. It may mean additional estate taxes. In some extreme cases when a person owns homes in more than one state, questions about domicile (the person s primary state) may arise and, in the worst case scenario, result in the estate being subject to death taxes in both states. 8. I want to make sure my disabled child is taken care of when I m gone. What should I do? ANSWER: A parent who has a disabled child wants to be sure that the child is taken care of after the parent s death. However, leaving money directly to the child may cause the child to become ineligible for various state and federal assistance programs. Fortunately, there is a solution: A special needs trust. This type of trust can supplement rather than supplant government assistance to give the child the best life possible. 9. I want to give my house to my children. Will I have to pay tax on the gift? ANSWER: Giving a home to children during one s life can result in gift tax. It depends on the value of the home and how it is given (e.g., outright or in a special type of trust). For 2011 and 2012, each person has a gift tax exemption amount of $5 million, likely there will not be any gift tax. However, using the exemption on a gift decreases the amount of the exemption available at death. To minimize gift tax exposure, consider gifting the home through a qualified personal residence trust (QPRT). By retaining an interest in the home for a period of time (e.g., 10 years), the value of the gift (and the amount of the exemption needed to be used) is minimized. 10. I m a widow with a small income. I own my house. My bank says I should get a reverse mortgage. What is this? ANSWER: A reverse mortgage is a way for a homeowner age 62 or older to take out the equity in the home without having to sell it. The reverse mortgage can give the homeowner a lump sum, a line of credit, or monthly payments based on the current value of the home, the homeowner s age, and certain other factors. No repayment generally is required as long as the homeowner remains in the home. If the homeowner dies or sells the home, the balance of the loan (the money borrowed by the homeowner plus accrued interest) is recouped by the lender at that time (the lender sells the home if it has not yet been sold). If any proceeds remain in excess of what is owed to the lender, they pass to the homeowner s heirs. 3

4 11. My grandchild is in college and I want to help pay his tuition. Will I have to pay gift taxes if I pay his tuition? ANSWER: There is no federal gift tax on the direct payment of tuition to a school on behalf of any individual. Thus a grandparent can pay tuition for a grandchild in any amount without regard to the annual gift tax exclusion ($13,000 in 2011 and 2012) and the lifetime exemption amount ($5 million in 2011 and 2012). Tuition is not limited to college; it can be made to school at any level (e.g., prep school or graduate school). However, this rule does not cover room and board. 12. My sister named me as the executor of her will. What do I have to do? ANSWER: An executor is the quarterback of an estate. It is the executor s job to gather and conserve the decedent s assets, complete the probate process where necessary, file a federal estate tax return and pay federal estate taxes (if the value of the estate exceeds the person s exemption amount), do the same for state death taxes, and distribute the assets according to the person s will. Whether an executor is paid for services depends on the terms of the decedent s will. 13. Will a living trust save me taxes? ANSWER: A living trust, which is a trust that is set up during a person s lifetime and can be revoked or changed at any time before death, is not by itself a tax-saving device. A living trust can have tax-saving provisions, such as giving property to charity, to the same extent allowed under the terms of a will. 14. I already have a will. Do I need anything else? ANSWER: A will does not a complete estate plan make. It is also advisable for everyone to have certain documents to help with lifetime or end-of-life matters, such as a durable power of attorney for handling financial affairs in case of incapacity and a health care proxy and living will to express wishes regarding medical treatment. In some cases, a trust may also be advisable to avoid ancillary probate, provide for certain individuals (such as unrelated partners), or for other purposes. 15. When should clients have their estate plans reviewed? ANSWER: It is always a good idea to have an estate plan reviewed periodically (at least every few years). However, it is essential to have it reviewed in these situations: Upon the birth, adoption, or death of a child Death of a spouse Divorce or legal separation Moving to another state A change in the tax laws affecting estates 4

5 16. I have a small accounting practice and I want to expand my services to estate planning. What are the essentials I need to get started in this area? ANSWER: It is vital for a tax practitioner to take a holistic view of estate planning. The practitioner cannot do everything (e.g., only an attorney can draw up a will or a trust; only an insurance agent can sell a life insurance policy needed for the estate). However, the practitioner can: Alert the client to the need for estate planning Review estate and gift tax concerns of the client Bring together a team of estate planning experts to assist the client in matters beyond the practitioner s area of expertise 17. When should clients have their estate plans reassessed? ANSWER: Please see question I practice in a small firm, but am looking to expand my services to estate planning. I have a few clients within one state. What are the bare essentials I would need to expand in this arena? ANSWER: Please see question What is intestate succession and what are its potential implications for clients? ANSWER: Please see question What is considered the most difficult estate planning issue today what are practitioners spending the most time on? ANSWER: The most difficult estate planning issue today is uncertainty about estate tax laws, about the economy, and about health issues. Practitioners must make sure that any estate plans remain flexible and can be adapted when the estate tax laws change, the client receives an unexpected inheritance, or any other unforeseen circumstance. 21. What advice would you give practitioners who need to file Form 8939 since the final form and instructions have yet to be issued by the IRS? ANSWER: The final version of the form and instructions are now available, along with links to related developments, at 5

6 22. Although generally there will be no extensions granted for filing Form 8939, are there certain limited exceptions to the filing deadline of Jan. 2012? ANSWER: Large estates, opting out of the estate tax, now will have until January 17, 2012, to file Form This special carryover basis form was previously due on November 15, 2011, but the IRS extended the due date because it was late in releasing the final version of the form and instructions. Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply. Details about making the election can be found in Notice at When will the carryover basis regime and step up basis options phase out into one permanent option? ANSWER: Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)(P.L ), the estate tax was repealed for decedents dying in In addition, EGTRRA replaced the long-standing stepped-up basis at death rules (Code Sec. 1014) with the modified carryover basis rules (Code Sec. 1022). The term modified refers to the fact that the law does allow certain exceptions to carryover basis for assets passing from a decedent, the most significant of which are the general step up allowance of $1.3 million for property passing to anyone and the $3 million spousal step up allowance for property passing to a surviving spouse. In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L ). The 2010 Tax Relief Act reinstated the estate and generation-skipping transfer (GST) taxes retroactive to January 1, 2010, but gave the estates of decedents dying in 2010 two choices. Those choices were: (1) let the estate be subject to the estate tax with a $5 million lifetime exclusion and a 35-percent maximum tax rate (the default option), or (2) elect out of the estate tax, but as per the EGTRRA amendments, subject the assets passing from the decedent to the modified carryover basis rules under Code Sec Consequently, the answer to your question is that the modified carryover basis rules have a very limited scope. First, they only apply if the decedent died in Second, they only apply to assets in estates that elect out of the estate tax rules. If a decedent died before or after 2010, the stepped-up basis at death rules apply. This will be the case even if the current law sunsets on December 31, This is because under pre-egtrra law or, under EGTRRA, as amended by the 2010 Tax Relief Act, Code Sec remains effective. The only way this could change is if Congress decides to affirmatively reinstate the carryover basis rules which, given the general unpopularity of the carryover basis regime, seems unlikely. 6

7 24. Can I transfer ownership of a life insurance policy from one parent to child; without paying a generation skipping tax? ANSWER: The transfer of a life insurance policy raises many potential tax ramifications, including those related to income, estate, gift, and GST taxes. Considering the GST tax first, generally, the transfer of a life insurance policy is subject to the same GST tax rules as other types of property. Code Sec. 2652(b)(3) states that certain types of arrangements will be treated the same as a trust for purposes of the GST tax, including arrangements involving life estates and remainders, estates, for years, and insurance and annuity contracts (emphasis added). Your question seems to contemplate a lifetime transfer of a policy from a parent to a child, which, by itself, should not trigger a GST tax since the GST tax is imposed on transfers in which the transferee is two or more generations below that of the transferor. However, even if such a transfer was potentially subject to the GST tax, there may still be an opportunity to allocate a portion of the GST tax exemption amount ($5 million for 2011 and $5,120,000, as adjusted for inflation, in 2012) to the transfer, assuming the transferor still has GST exemption available. However, that is not to say that such a transfer is without tax ramifications. For example, when considering the transfer of a life insurance policy it is necessary to review the income tax rules governing transfer for value under Code Sec Although Code Sec. 101(a)(2)(A) provides an exception to the transfer-for-value rule for gifts, this result could be different under certain circumstances. For example, the gift of a policy subject to an outstanding loan in excess of the transferor s basis in the property, coupled with forgiveness of the amount of the loan in excess of basis, could be construed as a part-sale, part-gift, and potentially trigger a transfer for value (see Reg and ; Rev. Rul , 69-1 CB 45; and IRS Letter Ruling ). Finally, with respect to the gift tax, the first question that must be answered is how do you value a life insurance policy for gift tax purposes? The answer to this question is really dependent on the type of policy involved (see Reg (a) and Rev. Proc , CB 962). Another consideration is whether there are outstanding loans against the life insurance policy at the time of transfer that could reduce the amount of the gift. To aid you in your research on this question please find the attached item, Recent Decisions and New Law Present Valuation Opportunities With Life Insurance, recently published in CCH s Estate Planning Review The Journal (March 2011). We direct your attention specifically to the section with the bold-face heading Valuation by Product. There is also a helpful chart provided on valuing various types of policies. Other questions, such as whether such a gift should be a direct gift or in trust, and whether part of the gift can qualify for the annual gift tax exclusion, must also be considered. In addition, non-tax issues, such as whether the transfer of the policy will adversely affect the liquidity needs of the transferor s family, must be addressed. In conclusion, the transfer of a life insurance policy is a complex issue that requires an analysis of many tax and non-tax considerations before implementing. 7

8 25. What is your recommendation to provide for a disabled adult child? Consideration also given to not causing the disabled adult child to lose government benefits? ANSWER: Parents of disabled children face a host of problems beyond the traditional estate planning issues, such as minimizing taxes and transferring assets to children and grandchildren. In general, parents of disabled children are primarily concerned with what will happen to their disabled son or daughter when they themselves die or otherwise become unable to care for their child. As your question implies, the potential loss of government benefits is one of the major hurdles in planning for the disabled child. And, related to that point, limiting cost-of-care liability to the disabled person s family may be a secondary issue. The planner will need an understanding of both federal and applicable state law governing these issues. The planner will also need to become familiar with the client s family situation, assets, and objectives with respect to the disabled family member. In particular, the planner should learn the specifics concerning the nature and degree of the person s mental or physical disabilities, special medical needs, assets and sources of income, educational and vocational plans, and housing needs, among other issues. Other major concerns are the need for a guardianship and the selection of a fiduciary. Although adoption of the Uniform Probate Code has generally streamlined guardianship proceedings, the law differs from state to state and it will be necessary to evaluate whether such an undertaking is necessary in your particular situation. With respect to the choice of a guardian and, if a trust is involved, the selection of a trustee, it may be advantageous to appoint the combination of a trusted individual and a corporate fiduciary taking into account possible succession issues. In any case, it is typical for the parents to provide the fiduciaries with a letter of intent outlining details about the disabled individual along with their wishes and desires for the disabled person. Outright gifts or inheritances to a disabled individual are generally to be avoided because of the potential adverse impact on qualification for government benefits and the cost-of-care liability issues mentioned above. Similarly, in the case of a minor, gifts to Uniform Transfers to Minors Act accounts, could cause similar problems when the disabled person reaches the age of majority. This brings us to one of the most popular planning tools for disabled persons and this is the so-called special-needs trust. These are third-party discretionary trusts, as opposed to support trusts, because support trusts may jeopardize the disabled person s eligibility to receive government benefits and subject the assets to cost-of-care liability. In other words, the trust must be drafted so that the trust income and principal are not simply available to the disabled beneficiary. These trusts can be created during the parent s lifetime or at death. Finally, an overriding concern is that the overall estate plan incorporate the goals of doing what is best for the disabled person. This may also involve communication with other relatives to assure that they do not make outright gifts or other moves that could effectively negate any planning that was done by the parent(s). *All questions were answered by both Sidney Kess and the CCH editorial staff. The answers provided serve solely as discussion on various tax topics, with the understanding that the publisher and the expert/author are not engaged in rendering legal, accounting, or other professional service and that they are not offering such advice in their responses. They do not constitute legal advice nor are they a substitute for legal counsel. Not all questions were answered. 8