Washington Estate Planning Law Blog

Washington State Set to Raise Estate Tax Rates

John Hugg — Tue, 02 Mar 2010 22:51:28 -0800

The Washington state legislature has recently proposed to double the estate tax rate. The current estate tax rates start at 10 percent and rise to 19 percent. The proposed increase doubles the current rate with a top rate reaching 38 percent. If signed into law the increase will take effect on April 1, 2010.

The Private Reverse Mortgage

John Hugg — Thu, 11 Feb 2010 18:14:36 -0800

The Wall Street Journal recently ran an article about the benefits of having a younger family member provide a “reverse mortgage” to a parent. A traditional reverse mortgage typically requires the borrower to be at least 62 years old and own and occupy the residence that will secure the mortgage. The private reverse mortgage is a similar type of contractual arrangement, but can be much more flexible. As a private transaction, the arrangement can be made with a person under age 62, it can be secured by a vacation property, rental property or the borrower’s former residence if the he or she has moved to an assisted living or other facility. Additionally, a private reverse mortgage is generally much more affordable than a reverse mortgage from a conventional lender. Of course you will need to weigh all the risks and benefits, but for those who can undertake this type of arrangement it can be very beneficial to parent who will not qualify for a conventional reverse mortgage.

February Estate Planning Events

John Hugg — Mon, 01 Feb 2010 09:25:22 -0800

On Tuesday, February 16, 2010, I will be conducting another “Are Your Affairs In Order?” class at Brittany Park in Woodinville, Washington. The class focuses on all aspects of Wills, Trusts, Powers of Attorney and Living Wills. The program is sponsored by Evergreen Healthcare.

Role of the Executor

John Hugg — Fri, 29 Jan 2010 11:21:53 -0800

The purpose of an executor is to administer a person’s estate according to the Will, or if there is no Will in accordance with applicable state law. In Washington State, generally any person age eighteen or over may act as an executor. The executor, also called a personal representative, is generally named in a person’s Will and is often a surviving spouse or other family member. In certain instances, the court requires the executor to post a bond to ensure performance of his or her duties and may require all actions to be approved by the court. To avoid the posting of a bond and the “intervention” of the court, a Will should specifically state that a bond is not required and the executor will have “non-intervention” powers. Of course, a determination should first be made that those waivers are appropriate, given the specific circumstances.

Your Will should also name an alternate person to act as executor if the first person selected is not able to act due to death or disability or is for any other reason unavailable. It is often best for the executor to be in the same geographic area. It can be a heavy burden to attempt to probate an estate from another state.

One concept used frequently is that of co-executors. Parents often want to name multiple children so as not to leave anyone out. This can be both a blessing and a curse. It can be good for a child to have a sibling’s support, but on the other hand disagreement can arise and cause unnecessary friction.

In Washington an executor is often required to undertake many of the following duties:

Open the probate estate with the court
File the Will with the court
Obtain Letters Testamentary
Provide various notices to beneficiaries, creditors and the State
Locate heirs
Determine estate assets
Create an inventory of those assets
Marshal all the assets of the estate
Collect all income, such as rents, interest, and dividends
Make demand for and collect all debts and claims due the decedent
Complete pending lawsuits
Represent the estate in a Will contest or other litigation
Liquidate those assets that will not be specifically distributed to heirs
Facilitate the distribution of various non-probate assets
Maintain estate records
Keep estate and personal assets separate
Open a bank account for the estate
Prepare and file state and federal inheritance, estate and income tax returns, if necessary
Pay the obligations of the estate, including taxes and expenses of last illness
Distribute the assets of the estate
Collect receipts from the heirs, and
Close the estate.

Generally, an executor is allowed “reasonable” compensation for his or her efforts. What is reasonable may not be so easy to determine and the court may have the final say. If the executor is a family member, such person may waive their fee in an effort to maximize the estate for all beneficiaries.

The role of the executor can be relatively simple or it can be very challenging depending on the complexity of the estate and the personalities of the family members. So you should choose your executor wisely and give him or her clear guidance in your Will.

Estate Planning Essentials - The Durable Power of Attorney

John Hugg — Mon, 18 Jan 2010 15:10:19 -0800

A Durable Power of Attorney is the best way to ensure your affairs are managed if you become incapacitated or disabled. A durable power of attorney will either become effective when you are incapacitated or remain in effect after incapacitation depending on how it’s written. Once the durable power of attorney becomes effective, the person appointed to act for you, called an attorney-in-fact, is allowed to pay bills, invest assets, file tax returns and sign contracts among other things. You should also include language so health care decisions can be made when you are unable to communicate. You may want to inform the attorney-in-fact what, if any, medical treatment you want administered at the end of your life. If you do not have a power of attorney, a guardianship proceeding may be necessary to appoint someone to manage your affairs. These proceedings can be long and costly so a well drafted power of attorney is definitely worthwhile.

Estate Tax Repeal and Washington State

John Hugg — Wed, 06 Jan 2010 09:05:15 -0800

On January 1, 2010, the federal estate tax was repealed. Currently, there is no federal estate tax. So, what does this mean for people in the State of Washington? It means several things. First, it means that if you die today, you may not owe any estate tax to the federal government; second, there is still an estate tax in Washington State that may apply; and, third your heirs may have to pay a substantial capital gains tax on property that is sold. Let’s look at each of these issues.

Federal Estate Tax

I say you may not owe federal estate tax because toward the end of 2009, Congress made a lot of noise about how they would simply bring the estate tax back in early 2010 and have it applied retroactively to January 1. So in actuality, if you die today and Congress creates a retroactive tax in May, you could still owe federal estate taxes.

If, however, Congress does nothing on the estate tax issue in 2010, the estate tax is automatically set to come roaring back in 2011. At that point, the estate tax exemption will be $1,000,000 per person as opposed to the $3,500,000 exemption in 2009. This means a lot more estates will owe taxes in 2011 than in 2009.

Washington State Estate Tax

Regardless of what happens with the federal estate tax, Washington still has its own estate tax. Here, the estate tax exemption is $2 million per person. So anyone with an estate in excess of that amount would owe estate tax to Washington State. Proper planning can minimize or even eliminate this tax in certain situations.

Capital Gains Tax

There is another wrinkle with estate tax repeal. This year, without the estate tax, you can only receive an increased tax basis on $1,300,000 worth of your property. What does that mean? Well, under the old estate tax laws, when a person died the tax basis in his or her property would increase from the amount paid for the item to the market value of the item at the time of death. But this is not the case in 2010. Now only $1.3 million of your property will qualify (with an additional $3 million exemption for property passing from one spouse to the other). If you have property worth more than that, a capital gain will be incurred on the sale of the asset, and that gain will be based on the original cost of the item.

Here’s an example under both the old and new systems: mom has $1.3 million in her retirement account; mom bought her house in 1980 for $50,000. Mom dies in 2009 and the house was worth $350,000. The tax basis increased from $50,000 to $350,000 and her heirs would owe no capital gains tax on the sale of the house in addition to having no estate tax to either the federal or Washington State governments.

Now let’s say mom died on January 1, 2010. If mom’s retirement account eats up her $1.3 million capital gain “exemption” then capital gain will be due on the sale of the house. The tax will be based on $300,000, the difference between the $50,000 original tax basis and $350,000, the current value of the property.

What will happen to the capital gains tax issue if the estate tax is reinstated retroactively? Presumably, it will go away. Confused? To deal with this mess I (with tongue in cheek) told one client earlier this week – “Don’t die in 2010!”

New Year Estate Planning Events

John Hugg — Mon, 04 Jan 2010 18:49:39 -0800

Happy New Year! On January 11, 2010, between 11:00 a.m. and noon, I will be conducting a class at the Kenmore Senior Center entitled “Are Your Affairs In Order?” We will cover all aspects of Wills, Trusts, Powers of Attorney and Living Wills.

Also, on January 19, 2010, I will lead a roundtable discussion on End of Life issues at this month’s Bothell Chamber Senior Resource Committee meeting. The discussion will center on Durable Powers of Attorney, Living Wills, POLST and DNR forms. Please see the Bothell Chamber Website for the time and location. Please contact us if you are interested in attending either of these presentations.

Estate Tax affects Family Businesses

John Hugg — Thu, 17 Dec 2009 18:17:41 -0800

In its article Amid Debate, Business Owners Struggle with Estate-Tax Strategies, the Wall Street Journal reported that the federal estate tax is a significant concern for family business owners even though few actually wind up paying the tax. Family Businesses in Washington State should be even more concerned because the estate tax exemption in here is $2 million and not $3.5 million as with the federal estate tax exemption. However, one reason so few family business owners pay estate tax is most likely due to the use of various estate planning techniques. These techniques can include annual gifts, trusts, intra-family transactions, life insurance and even a properly drafted Will. But early planning is essential. The estate planning process can draw out for years given the many complexities facing a family business. These complexities include, among many others: selecting and grooming a successor, family dynamics and squabbles, excess cash flow to fund life insurance policies, the desire to have children earn the business rather than simply inherit it by birthright and many more. Since it’s almost certain the estate tax isn’t going away, neither will these issues for family businesses.

Estate Planning Essentials: Your Will

John Hugg — Tue, 15 Dec 2009 16:51:59 -0800

Everyone has an estate plan, whether you know it or not. If you have a Will and/or related documents you know you have a plan. But even if you don’t have a Will, you still have a plan. That plan is set out by the government, and it is laid out in our laws of intestacy. Each state has its own laws of intestate succession. Generally those laws follow what the legislature thinks most people want. For instance, if you are married your property goes to your surviving spouse. If you are not married and have kids, your property goes to those kids in equal shares. If you are not married and have no kids, we look to parents, then siblings and so forth.

There are, however, major gaps in this “estate plan.” For instance, if you have a minor child, nothing says who will raise that child if both parents are deceased. Additionally, state laws leave property to a beneficiary outright even if a trust for such beneficiary would be more prudent (in the case of a minor child some form of conservatorship may be necessary). Another problem is a state’s laws of intestacy are not set up to deal with other major planning problems such as: estate tax issues, care for a disabled spouse or a special needs child and business succession issues for the self-employed.

This is where having a comprehensive Will that is tailored to your specific situation can be vital. Your Will sets out who will administer your estate, who will receive what property and in what percentages and who will raise your children. If you have a taxable estate, which in Washington today, is anyone whose estate is valued at more than $2 million, you can set up a trust for your spouse to make sure that you minimize or perhaps avoid estate taxes. If you don’t have a taxable estate, but think a surviving spouse may become disabled in his or her later years, a Will is one of the few tools that can be used to assist a loved one with care while not having to spend all your assets to qualify for assistance. In this instance we can often set up a trust for a surviving spouse or special needs child to assist with quality of life while allowing them to qualify or continue to qualify for Medicaid or other forms of assistance.

In short, your Will can accomplish many goals all at once. If you, like millions of other people, have put off making one, I encourage you to tackle this project in the new year.

Stepping Up

John Hugg — Wed, 09 Dec 2009 13:59:11 -0800

At some point most of us will have to step up and help our parents with their affairs. A recent Forbes article discusses how difficult it can be if your parents already have some memory loss or dementia when you first enquire about their situation. Since they may not be able to communicate with you effectively, it may take months to ascertain their financial situation because you won’t know what assets they have or where they are located. As the article mentions, a better way to go is to talk with your parents before it becomes necessary. Help get them organized. This task will also help you to find out what bank accounts, insurance policies and sources of income your parents have. And if your parents’ affairs are more complex, it will be even more important to know what’s happening in their financial lives. As with anything, if you prepare early and stay on top of things, you’ll be well served when you do have to help out.

Retirement Income

John Hugg — Tue, 08 Dec 2009 07:46:56 -0800

If you’re looking for a good informational article on variable annuities you may want to read Locking in Future Income. Leslie Scism does a good job explaining the ins and outs of these products. She covers their costs, benefits, gives an outline of how guaranteed variable annuities work and some of the companies that offer them. Anyone planning for retirement should give this a read.

Asset Protection?

John Hugg — Mon, 07 Dec 2009 13:49:36 -0800

One thing I see frequently with clients who have existing businesses is many overlook basic recordkeeping tasks. Often there are no annual meeting minutes, no consents to corporate actions, no stock certificates and no other way to know who has an ownership interest; and sometimes I find clients haven’t even kept their licensing updated and the company no longer exists. Generally, the reason for forming a corporation or limited liability company is to receive limited liability. This normally means that only the business is responsible for its debts and obligations and an owner’s personal assets are not at risk. However, if you fail to respect the corporate entity, you can lose that limited liability protection. One way this occurs is to fail to maintain your business records. So be sure to hold an annual meeting, sign a corporate consent when you undertake a significant obligation such as an office lease, implementing an employee benefit plan, etc. and make sure you act in your representative capacity as an officer or member of the company. All this will go a long way to protecting your other assets in the event the trouble arises with the company.

Online Estate Planning

John Hugg — Wed, 18 Nov 2009 09:10:38 -0800

The Wall Street Journal ran an article recently about purchasing Will forms from various online or self-help services. The article has received criticism from some in the estate planning community. Here’s what I think people should understand about the estate planning process and where potential traps may lie.

The article outlines a couple with a non-taxable estate and no children, a house, life insurance and retirement accounts. The hypothetical couple apparently want to leave the house to the surviving spouse, one-half of the other assets to the surviving spouse and simultaneously leave the other half of the remaining assets to nieces and nephews. The author seems to feel this is a very simple situation. Of course, every one of my client’s believes their own situation is just as “simple.” However, after I meet with a client, and we discuss everything most say “Wow, I never knew it was so complicated.”

If Mr. and Mrs. Hypothetical want such an estate plan, I’d first ask why they want that specific plan. I’d mention that most married couples want their entire estate to pass to the surviving spouse, not merely the house and half of the other assets. The reason is simple – most spouses want to have as many resources, i.e., money and other assets, as possible for their future financial security. I’d probably recommend that the nieces and nephews only receive something if both spouses are deceased.

The next question could be, Should those nieces and nephews receive their inheritance outright or in trust? If they are minors and they receive the inheritance outright, their parent or guardian may control the funds for them until they reach age 18 or perhaps a guardianship or some form of conservatorship could be set up. At age 18, however, they are free to spend the money as they please. Most of my clients don’t want their children to receive their inheritance at 18 with no strings attached. A better alternative is some form of trust where there is guidance as to how the funds are invested and distributed to the beneficiary.

Another issue is the life insurance. Life insurance passes to the beneficiary designated in the policy, not pursuant to a Will. So if our hypothetical couple thinks part of the insurance proceeds will find its way to the nieces and nephews, it probably won’t happen. IRAs and 401k’s, as well as any type of account with beneficiary or payable on death provisions, also bypass your Will in most situations, unless your estate is the beneficiary. In many cases, you do not want your estate to be the beneficiary of such assets.

These are just some of the issues that would need to be addressed to produce an estate plan that truly meets the clients’ needs. So will the online estate plans accomplish what our hypothetical client desires? And, is want the clients want the best estate planning option? In all likelihood, the answer to both is probably no. But these clients wouldn’t know that without competent guidance.

Bankruptcy can't save Executor

John Hugg — Mon, 26 Oct 2009 08:49:39 -0800

Executors are generally personally liable for estate taxes if they distribute property to beneficiaries before paying an estate tax obligation. And, according to at least one case, the executor may not discharge that personal liability in a later bankruptcy. Carroll v. United States, 2009-2 USTC par. 60,577 (May 6, 2009). In Carroll the estate elected to pay estate taxes on an installment basis. Over the years, the businesses inherited from the executor’s father performed poorly and the IRS installment payments stopped. During the same period, however, distributions from the companies were made to beneficiaries. The companies' poor performance ultimately lead to each of them ceasing business and personal bankruptcy for the executor. The court stated the executor’s liability could not be discharged if there was a willful attempt to evade or defeat the estate tax. Because the executor knew of the tax, was aware of his personal liability for the tax, actively transferred property out of the estate without adequate consideration and demonstrated an intentional disregard for the liability the debt could not be discharged.

Gifting LLC interests: Be safe rather than sorry?

John Hugg — Tue, 13 Oct 2009 07:53:45 -0800

Recently, a number of cases have come out addressing when a gift of an LLC interest is really a gift of an underlying asset owned by the LLC. Two of these cases were decided right here in Federal District Court in Washington: Heckerman v. U.S., U.S. Dist. Ct., W.D. Washington, Cause No. C08-0211-JCC (July 27, 2009) and Linton v. U.S., U.S. Dist. Ct. W.D. Washington, Cause No. C08-227Z (July 1, 2009).

To summarize the cases very briefly, families in each case formed an LLC and the senior generation contributed various assets to the respective LLCs. On the same day the LLC contributions were made, gifts of LLC interests were made to trusts for their respective children. Each family claimed a valuation discount of the LLC interests for gift tax purposes. The IRS applied the indirect gift and step transaction doctrines to attempt to eliminate the discounts. In effect, the IRS said the parents made a gift of an actual asset and not an LLC interest. Valuation discounts apply to the latter. The IRS was successful in both cases.

The primary basis for denying the valuation discounts was the indirect gift doctrine. Application of this doctrine can frustrate a valuation discount if there is insufficient evidence to conclude what occurred first, funding the LLC or making gifts. In each case, with funding and gifting occurring on the same day, the necessary evidence was absent. An additional basis was the step transaction doctrine where a series of separate ‘steps’ are seen in substance as integrated, interdependent, and focused toward a particular result. There are three different tests used to determine if the step transaction doctrine applies in a given transaction: the “binding commitment test” where there is a binding commitment to undertake several different acts that, when viewed as a whole, are really one transaction; the “end result test” where one gleans an overriding transaction based on achieving an end result, such as tax savings; and the “interdependence test” where one act is ultimately fruitless without additional acts.

Can these problems be addressed with proper planning and drafting? Ultimately, the answer is somewhat unclear. What seems obvious is to set up an LLC or partnership first, then subsequently fund it with the assets desired. Other case law also indicates that when contributing property to the LLC the value of the asset should be attributable to the contributor’s capital account only. At a later point in time, seemingly the more elapsed time the better, a person would make gifts of the LLC interests. Presumably, if you are gifting to a trust, as is often the case, setting up the trust subsequent to the creation and funding of the LLC would seem prudent. Conducting affairs in this manner should automatically avoid the indirect gift doctrine and, assuming proper drafting, the “binding commitment test.” It should also go a long way to avoiding the “interdependence test,” however, given that the “end result test” can be apparently be satisfied by evidence of the “subjective intent” of the parties, it is unclear how one would plan to avoid this part of the step transaction doctrine. Stay tuned for further developments.

What to do when a loved one dies

John Hugg — Tue, 29 Sep 2009 17:44:19 -0800

CBS Money Watch has a useful guide for initial steps to take when a person dies - Death In the Family: 12 Things to Do Now. This is a good list to follow. The article also includes a link to a more comprehensive list of actions that an executor may need to take to administer an estate.

No step-up for property in Irrevocable Grantor Trust

John Hugg — Thu, 24 Sep 2009 20:23:06 -0800

In PLR 200937028, the IRS concluded that property held in an irrevocable grantor trust that was not included in the grantor’s estate at death does not receive a step-up in basis. Most individuals who own property in their own name at death receive a step-up in the tax basis of that property. For example, if you paid $200,000 for your home in 1995 and you die today with the house valued at $500,000 the tax basis increases to today’s value. Therefore, capital gain on the sale or future sale of the asset is either eliminated or minimized. However, if you transfer an asset to an irrevocable trust, even a grantor trust where the trust income is still taxed to the grantor, the asset is out of your estate and not eligible for a step-up in tax basis upon death. The beneficial trade off is that with the asset outside your estate, it is not included for estate tax purposes.

Top reasons to make or change your estate plan

John Hugg — Tue, 22 Sep 2009 20:03:44 -0800

The birth or adoption of a child.
A child(ren) having reached the age of majority who may now be able to assist in your estate plan as an executor, trustee, or act on your behalf under a power of attorney.
A power of attorney that addresses only financial issues and not health care decisions.
A power of attorney that does not have language that complies with the Health Insurance Portability and Accountability Act.
A Living Will/Health Care Directive that no longer addresses all the relevant issues surrounding life sustaining treatment.
The desire to provide for grandchildren.
The potential for one spouse to require continuing care either at home or in an assisted living facility.
The acquisition of assets located outside the State of Washington, such as a second home.
Death of a spouse, sibling or other beneficiary.
An increase in assets or the value of those assets that can cause an estate tax issue.
An outdated estate plan developed for tax reasons that no longer apply.
The need/desire to change the guardianship provisions in your Will.
The desire to leave a business to your children.
Changes in the law. For instance, the federal estate tax rules have changed almost every year of this decade.

Estate Tax Reform?

John Hugg — Mon, 21 Sep 2009 19:47:12 -0800

We’ve been waiting for changes to the federal estate tax for some time, however, we really have no idea what the changes will look like. Over the weekend the Wall Street Journal reported the issue is stalled in Congress with seemingly no consensus about what to do. The administration apparently wants to lock in the current exemption level of $3.5 million per person with a 45% tax rate and some Republicans are still looking for a complete repeal. Now there is a newer proposal for a $5 million dollar per person exemption with a 35% tax rate. But with so many members of Congress focused on the health care debate, this issue is decidedly low priority. Another very real possibility is that the Bush tax cuts will run their course as planned. With no action, the estate tax will be repealed for 2010 only, then return with only a $1 million federal exemption per person. Regardless of what happens at the federal level, Washington State appears wedded to its current $2 million per person exemption. If the federal exemption is rolled back to $1 million, I would expect a large number of estate plans will need to be updated.

Rolling Roths gather no moss

John Hugg — Wed, 09 Sep 2009 18:00:06 -0800

This past weekend, the Wall Street Journal ran an interesting article about rolling a Roth 401k to a Roth IRA on an annual basis. This strategy can be useful for small business owners saving for retirement or just about anyone looking to maximize their retirement contributions. Click here to read the article: Roth 401K to Roth IRA Transfer Sound Move