from Gary Kershner, Law Offices of Gary Kershner
A few years ago you made the call. No not to your dentist. You called an estate planning attorney and created your estate plan. You created a will, a fully funded revocable trust, gave medical power of attorney to someone you trusted, and took care of all the details that goes along with making sure the people you love will be taken care of after you pass away, and that your personal wishes are clearly spelled out. You even popped a bottle of champagne because you managed to convince your parents to set their affairs in order as well.
You felt confident that if something happened to you or the people you love, the estate would avoid probate, the money would go to the people who would benefit from it (as opposed to being claimed by the government), and the proper guardians would take charge of your children. Then 2013 came along.
The year 2000 got a lot of publicity. We were all pretty convinced that our world was going to implode, or that at the very least it would be weeks before we could use a credit card. In its own way, 2013 deserves just as much publicity as 2000, but for a very different reason. 2013 saw the implementation of some major changes in federal gift and estate law. And anyone who created their estate plan prior to 2013 would be well served to contact their estate plan attorney to make sure they are taking advantage of these new laws that could actually protect their money better than ever before.
What your estate plan may contain that may complicate the situation:
Mandatory Bypass Trust
• Definition: In layman terms a Mandatory Bypass Trust is an irrevocable trust. When a person dies, a portion of what is in the trust is passed on to the surviving spouse. The remainder of the trust is held, well, in trust for designated heirs (e.g. children or grandchildren) who will inherit this portion of the trust upon the death of the surviving spouse.
• Reason Bypass Trust was originally created: While there are several reasons a bypass trust may have been created, the primary reason any estate plan featured a bypass trust was because, prior to 2013, it allowed for the circumvention of gift tax and the minimization of taxes upon death of a married couple.
• Why this could be costly now:
• Problem #1 - Under the new rules, a mandatory bypass trust means your heirs lose a step-up in basis.
Definition: Step-Up In Basis means that when you inherit property, the base value of that property (for taxation purposes) is whatever the current value of the property is. For example, if your parents bought a house in 1940 for 50,000 and it is valued today at 200,000, the state says the starting value of the house is $200,000. If you sell the house a year later for $250,000, you pay capital gains tax on the $50,000 profit, not $200,000 profit. If you pass away however with your assets in a bypass trust, capital gains tax would be calculated based on the original purchase price of the house.
• Problem #2 - Even if your heirs will inherit no property that has increased in value, under the new laws having a bypass trust actually makes administration of your estate after you die more complicated, not less. And since the goal of an estate plan is to make the administration of your estate as simple as possible, the last thing you want is a trust that complicates the whole issue.
Major changes have also occurred in the realms of gift and generation-skipping transfer taxes.
• Each year you can gift up to $14,000 to an individual without occurring taxes. Lifetime tax exemption totals have been made permanent at $5,000,000 – adjusted yearly for inflation.
• Gift giving can be a great way to save on high estate taxes after your death. Just because the feds have changed the laws, it doesn't mean individuals states have also done so. Estate tax laws vary by state. New York for example taxes estates in excess of $1,000,000 at rates of 5% to 16%.
• If these taxes apply in your state, you wish to take advantage of these new high minimums by putting expensive assets into trusts that will benefit your children and even your grandchildren, while helping to avoid high estate taxes at your death.
• Married couples needing to ensure that they have enough income for themselves can even make gifts to each other. Talk with your estate planner about whether a Spousal Lifetime Access Trust makes sense for your financial future.
Income Taxes:
Here's where things get fun. When you create a trust, you will need to consider which assets need to be put into your trust and which would better remain apart.
• Income taxation rates for trusts are comparable to individual income tax rates, but the tax brackets are extremely compressed. For example a married couple filing jointly with an income of $450,000 pays income tax the rate of 39.6%. Your trust's income only needs to reach just under $12,000 annually to be taxed at the same rate.
By taking the time to create an estate plan, you showed that you genuinely care about ensuring that your family, friends, loved ones, and even institutions that you care about, will be taken care of after your death. By failing to ensure that your plan stays up to date and reflects current changes in state and federal law however, your loved ones may not be provided for in the way that you intended. Call Darcey Wong today for a review of your estate plan and ensure that your loved ones, and not the government, are the beneficiaries of your estate.
What To Do Next
Estate planning can be deceptively complex. Not only do state and federal laws change, but every family situation is different. Seemingly small choices in how planning is done can have profound tax and family implications, and not having a plan in place can be worst of all.
Gary Kershner offers clients a No Hassle Trust and Estate Strategy Meeting, where they get experienced guidance on how to achieve total asset protection, long term security, and peace of mind for themselves and loved ones.
If I cannot meet your needs; you have my commitment that I'll point you in the right direction. Just call my office at 510-336-9500 to schedule.