Portability of the Gift and Estate Tax Exemption

By Attorney Christine S. Anderson

February 1, 2012

 

A limited amount of a person’s wealth can be transferred to his or her loved-ones free from gift and estate tax. Currently, the amount exempt from gift and estate tax is $5,120,000 for each transferor. This exemption will drop to $1,000,000 on January 1, 2013, unless Congress acts to extend the $5,120,000 exemption.

 

Historically, the gift and estate tax exemption had to be used by transfers occurring either during lifetime or at death. "Use it or lose it" was the rule. For example, if a wife died in 2009 and left her entire estate to her U.S. citizen spouse, there would be no estate tax upon her death, because of the unlimited marital deduction for transfers to a U.S. citizen spouse. When the spouse later dies, he will only have one estate tax exemption to shelter his estate from tax. The wife in this example wasted her estate tax exemption by leaving her entire estate to her husband.

 

When Congress passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act") the use it or lose it rule with respect to the gift and estate tax exemption changed dramatically. The concept of portability of a person’s unused estate and gift tax exemption became law. The 2010 Tax Act provides that a person now can use the estate and gift tax exemption not used by his or her deceased spouse, in addition to his or her own exemption.

 

So what does this mean to our clients? If the portability provisions of the 2010 Tax Act become permanent, many of the hoops that our clients jump through to minimize gift and estate tax will no longer be necessary. This can best be illustrated by example. Consider a married couple in their late 80’s. The wife had been a financially successful stock broker who accumulated $6,000,000 over her career. The husband, a talented musician and now retired teacher, has a more modest net worth of $1,000,000. The couple meets with an estate planning attorney because the husband has been diagnosed with a life threatening illness and he is not expected to live more than a couple of months. Traditionally, the estate planning attorney would have advised this couple to establish separate revocable trusts and make sure that the husband has assets in his revocable trust with a value up to his gift and estate tax exemption. The revocable trusts would be designed to hold the first-to-die spouse’s assets in trust for the benefit of the surviving spouse and children in a manner designed to limit the surviving spouse’s control over the assets so that the assets would not be included in the surviving spouse’s taxable estate at the time of the second death. The revocable trusts would have to be drafted and signed, assets transferred from the healthy spouse’s name into the trust of the spouse more likely to die first. All of this process consumed valuable time during the husband’s last weeks of life, adding stress at a most inopportune time. By comparison, if the portability provisions are applicable, the estate plan could be designed to minimize probate and gift and estate taxes, but the scrambling to re-title assets would not be necessary. If the first spouse to die does not use his estate tax exemption, it can be allocated to the surviving spouse on an estate tax return filed after the first spouse’s death. If, in the example, the husband dies in 2012,and leaves $1,000,000 in trust for his children, his remaining $4,120,000 can be allocated to his surviving spouse to be used by her to shelter either lifetime gifts or transfers at death.

 

Unless Congress extends the portability provisions beyond December 31, 2012, they will expire. It is widely anticipated that, regardless of whether the gift and estate tax exemption drops to $1,000,000, remains at $5,120,000 or is some other amount, the portability provisions will be extended after 2012. This would be good news for our clients.

 

 

 

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Modern Families

By Attorney Ruth Tolf Ansell

January 3, 2012

 

Whether a family resembles "Ozzie and Harriet," "The Brady Bunch" or the current "Modern Family" sitcom, most people look forward to getting together with their extended family over the holidays.  Nevertheless, it is probably not coincidental that the holiday season often causes people to re-consider their estate plans.  Guardians and executors are frequently changed at this time of year.  The age for distribution for children or grandchildren might be re-evaluated.  The new year may bring a fresh approach to the choices made in prior years.

 

Although conflicts can arise among members of a more traditional family, the potential for dispute is significantly greater for families with more varied relationships.   In these situations, careful planning may be needed in order to avoid a "Family Feud."

 

One of the most important considerations in an estate plan is the designation of the person who will handle your affairs, either during a lifetime incapacity or after your death.  This person may be the executor, a trustee, the guardian for a minor child, or an agent under the power of attorney.  In some cases, it may be appropriate to designate different people to handle these responsibilities.  In all cases, however, this person should be able to communicate with all of the family members without controversy or hostility, and to handle all decisions fairly.  Although it is most common for our clients to designate a spouse or children to handle these tasks, this may not be the best choice if the spouse is the step-parent of the children, when children have not attained an age of maturity, or when children have not grown up together.  Even when a family doesn't resemble Cinderella or Sleeping Beauty, it is natural for some family members to favor others.  It just may not be consistent with your intentions. 

 

Of course, the most important consideration in any estate plan is the intended disposition of estate assets.  If you can anticipate the most likely disputes, you can direct a distribution which is designed to minimize potential conflicts.  Surprisingly enough, most families divide personal possessions without controversy, although it is often helpful when clients decide on the distribution of the most valuable or sentimental items, such as an engagement ring or family heirlooms.   The most common dispute, however, relates to the rights of a step-parent who is living in the family home, especially if the children are anxious to sell this property after their parent's death.  Waiting for a step-parent to die or otherwise vacate the home doesn't always foster a loving relationship.  Similar issues can arise when a child is living in the home, or when the property is to be shared by multiple children and their families, such as a vacation home.  Although many clients would like to think that their family will get along after their deaths, this is not always the case. 

 

There is no right answer, and even the best solution may change over time, as circumstances change.   In recent years, our office helped administer an estate where the outdated estate plan included a significant gift to a former girlfriend, but neglected to provide for the decedent's fiance.  We have also been involved in an estate where a decedent's Will included a multi-million dollar gift of property that he no longer owned.  Needless to say, this was not the intended disposition at the time of death and litigation ensued in both estates.  Although we did not draft the documents involved in either of these estates, our clients were unhappy spending a significant portion of their inheritance on legal fees.

 

As you begin the new years, please take a few minutes to review the choices that you have made in your estate plan and consider the changes which are needed at this time.

 

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Making the Most of your Charitable Gifts in 2011

By Attorney Ruth Tolf Ansell

November 18, 2011

 

It’s that time of year again. Snow has already fallen in Bedford. Holiday decorations are starting to appear in our stores. Charitable organizations are hoping that you will feel generous and make a contribution before the end of the year. I know that I receive daily solicitations by mail, email and phone.

 

Although all donations to public charities will qualify for a charitable deduction on your income tax return, an even more attractive alternative is available for certain direct distributions from a traditional IRA before December 31, 2011. (A similar rule has been available for the past few years, but it is set to expire at the end of this year.) If you have already attained the age of 70 ½, you can authorize the custodian of your IRA to make a direct distribution to one or more charitable organizations, either as part of your required minimum distribution for 2011, or in addition to this amount. It’s as simple as telling the custodian bank or brokerage firm to send a check to the designated charity.

 

Under the special rule applicable in 2011, the amount distributed directly from a traditional IRA to a qualified charity will be revenue neutral: it will not be taxable as income to the taxpayer or deductible as a charitable contribution. This treatment is especially useful for taxpayers who do not itemize their deductions, who are subject to the alternative minimum tax or who make charitable gifts in excess of the deductible limits. The direct distribution will, however, count as part of your required minimum distribution for 2011.

 

This special rule is limited to $100,000 for each taxpayer in 2011, for all distributions from an IRA to one or more public charities. Of course, not every taxpayer will be this generous. Smaller amounts will also qualify.

 

Please contact your personal tax advisor for information about the application of this special rule to your income tax return for 2011.

       

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Mixed messages.

By Attorney Ruth Tolf Ansell

November 4, 2011

 

For the past several years, the Republicans have proposed significantly increased estate tax exemptions or a total elimination of federal estate taxes, while the Democrats have proposed a reduction in the federal estate tax exemption. The exemption was incrementally increased from $675,000 in 2001 to $3,500,000 in 2009. Entirely different rules were applicable in 2010. Last December, the exemption was set at $5,000,000 for 2011. The IRS recently announced that this exemption will be indexed for inflation to $5,120,000 in 2012. Unless further action is taken within the next year, however, the exemption is scheduled to decrease to $1,000,000 in 2013.

 

By comparison, the gift tax exemption remained at $1,000,000 from 2002 until 2011, when it was abruptly increased to $5,000,000. However, the annual gift tax exclusion has remained at $13,000 since 2009.

 

Currently there is speculation that the gift tax exemption will be decreased before the end of November back to $1,000,000 as part of the Congressional super-committee proposal. Although we have no confirmation of this proposal, it follows the Congressional tug-of-war which we have seen on most tax matters this year.

 

Estimating the applicable exemption is like shooting fish in a barrel: we’ll probably hit something but we’re not sure what it will be. Given the uncertainty of the future exemption, however, we encourage you to consider whether or not to make significant gifts before Congressional action may limit your ability to do so.

 

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Estate Planning for Same-Sex Couples                                               

By Attorney Christine S. Anderson

November 2011

          For many years, we have assisted lesbian and gay couples with their estate plans.  Before 2008, this planning was similar to the planning that we did for unmarried heterosexual couples.  New Hampshire passed legislation authorizing same-sex civil unions effective on January 1, 2008 and effective on January 1, 2011, same-sex marriage is authorized in New Hampshire.  While same-sex couples are treated the same as heterosexual couples under state law at this time, federal law does not extend the benefits of heterosexual married couples to same-sex married couples.  The Defense of Marriage Act (DOMA) provides that same-sex marriages are not recognized under federal law.  While much of the planning that we do for same-sex married couples is the same as the planning that we do for heterosexual married couples, there are some issues that require special attention.

       Estate and Gift Tax Law. Each person has a credit against federal gift and estate taxes which allows the transfer property to beneficiaries without tax.  A $5,000,000 exemption is applicable in 2011 and 2012. [1]  Married heterosexual couples are also allowed an unlimited marital deduction for assets passing to the spouse.  To the extent that a person’s estate exceeds the estate tax exemption, estate taxes will be assessed at the flat rate of 35%.   Annually each person can gift up to $13,000 to another person with no gift tax consequences. 

       Lesbian and gay spouses must be careful about the transfer of assets from one spouse to another.  To the extent that one spouse transfers more than $13,000 to the other in a calendar year, it will result in a taxable gift that should be reported on a gift tax return and that will reduce the transferor spouse’s $5,000,000 exemption.  If joint accounts are used, special care should be used to document the source of deposits and the purpose of withdrawals.   Ideally, we recommend that both spouses deposit the same amount into the joint account and that the funds are used for their common living expenses.  Gifts and separately owned assets would be purchased with funds other than joint account funds.

        When a spouse’s name is added to a deed and the donee spouse does not provide consideration for the transfer, this will result in a completed gift of one-half of the value of the real estate for gift tax purposes.  In many cases, we recommend that the spouse who owns the real estate should transfer the real estate to his or her Revocable Trust.  The Revocable Trust would provide for the real estate to pass to the spouse following the owner’s death, if that is the intended result, which is the same as joint ownership, but without a completed gift during lifetime.

         Prenuptial Agreements.  No one likes to think about divorce before a wedding, but we advise all of our clients to consider the benefits of a prenuptial agreement.  See our October 2010 blog article.

         Wills.  Wills are a fundamental part of any estate plan.  Under a Will, a person designates who will be the executor of his or her estate, who will be legal guardian of any minor children and how his or her probate assets will be distributed at the time of death.  Many assets can be designated to pass outside of probate and outside of the Will through beneficiary designation or transfer on death designation.  Following a person’s death, his or her Will is filed in the Probate Court and it becomes a matter of public record.

         Revocable Trusts.  Revocable Trusts are an integral part of many of our clients’ estate plans.  They are used in New Hampshire to hold title to property so that the property titled in the Trust does not pass through probate at the time of death.  An added benefit of Revocable Trusts is that they are not a matter of public record and they remain private following a client’s death.

         Powers of Attorney.  Powers of attorney are the mechanism used to avoid a guardianship proceeding in the event a person becomes incapacitated.  A guardianship proceeding is required if a person becomes incapacitated and has not designated an agent to act on his or her behalf.  Guardianship proceedings, which can be contentious and expensive, occur in Probate Court.  All family members, including siblings and parents, must receive notice of the proceeding and copies of all documents that are filed with the Court in connection with the guardianship. 

        Financial powers of attorney designate someone to act as agent to handle the checkbook, pay bills, cash checks, file tax returns, etc., in the event that the principal becomes incapacitated. 

        New Hampshire’s Advance Directive for Health Care, which can be downloaded here, is the document under which a person designates an agent to act on his or her behalf with respect to health care decisions, in the event of the person’s incapacity.  The Advance Directive for Health Care also includes a HIPAA release which authorizes the medical care provider to disclose all health information to the agent.  

[1] We anticipate that Congress will extend the $5,000,000 exemption after 2012, but we recommend that you remain watchful.  If Congress does not extend the exemption before 2013, the exemption will revert to $1,000,000.

  

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Protecting Your Assets from Nursing Home Costs

By Attorneys Ruth Tolf Ansell and Christine S. Anderson

October 2011

 

Like miracle diet ads, we have all seen ads which claim to help people avoid nursing home costs, without sacrifice or hardship. Unfortunately, when something appears to be too good to be true, it often is. There are, however, steps which you can take in order to protect at least some of your assets for the benefit of your family.

 

First, try to stay healthy. This may seem obvious, but diet and exercise play an important role in maintaining mental health. Both physical and mental health may dictate your future health care needs.

 

Second, stay connected with friends and family. Isolation can put people at risk for injuries and cognitive decline. Unmarried individuals are more likely to need nursing home care, but the stress of taking care of a spouse or parent can strain even the best family relationships. Allow people to help you, your spouse or parent to stay independent while in your own home, living with other family members or in an assisted living facility.

 

Third, if you are relatively young and healthy, consider the purchase of a long-term care policy which could pay for at-home assistance, in addition to nursing home care if necessary. This insurance will also provide you with flexibility for the transfer of assets to family members if you do eventually need to enter a nursing home. Similar to the homeowners’ insurance which you hope that you will never need, it may make sense to purchase long term care insurance when you can afford to do so.

 

Fourth, plan ahead. With monthly nursing home costs now exceeding $8,000, and expected to rise at a rate greater than inflation in general, only very wealthy individuals can afford to pay for at-home care or nursing home care without significant reduction to their estates.

 

Under current law, individuals may be eligible for Medicaid assistance to pay for long term care in a nursing home. Since Medicaid is a welfare program, however, the rules for qualification are strict and will probably become even stricter in the future. Assets, income and gifts made within 5 years before an application for Medicaid assistance will all be counted in the determination of your qualification for this assistance.

 

Although a discussion of all of the applicable rules is too complicated for this article, some of the most important rules are currently as follows:

 

If the Medicaid applicant is married, all assets which belong to the applicant and to the applicant’s spouse are relevant.

 

Assets held in a revocable trust (including a home property) are countable.

 

Assets held in an irrevocable trust will be countable to the extent that they are available to pay for care.

 

The applicant’s countable assets are limited to $2,500. If the applicant is married, the spouse’s countable assets cannot exceed the lesser of $109,560 or ½ of the couple’s countable assets.

 

Personal property, such as household furniture, a vehicle and jewelry, is not counted.

 

The Medicaid applicant’s income is almost entirely used to pay for care, but the spouse’s income is not counted.

 

Equity in the home property, not held in a trust and not in excess of $500,000, will be not countable if the applicant’s spouse lives there.

 

No significant gifts have been made within 5 years of the application to anyone other than the applicant’s spouse.

 

A more detailed explanation of these rules can be found at www.nhla.org. These rules change often. We recommend that you schedule an appointment to discuss their application to you and your family if this is a concern.

 

Also under current law, veterans may be eligible for long term care in a VA facility. The rules for qualification in this facility are different from the rules for Medicaid qualification. Principally, gifts from the applicant to a spouse are counted, all gifts made within 1 year of the application for admission are counted, and the veteran’s assets must not exceed $275,000.

 

According to the United States Center for Disease Control, New Hampshire had 80 nursing homes with 7,742 beds and 6,941 residents in 2009. At the same time, the U.S. Census reported 1.325 million residents of New Hampshire. Accordingly, the percentage of the New Hampshire population which actually resides in a nursing home is relatively small. Nevertheless, the impact on you and your family may be great.

 

We wish all of you good health!

 

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Teaching Charity through Estate Planning

by Attorney Christine S. Anderson

September 2011

 

I am fortunate to derive great personal fulfillment from the work that I do. I love visiting with clients, listening to their concerns and goals, and helping them to create estate plans designed to address their concerns and achieve their goals. Among my favorite topics to address with clients is teaching charity through estate planning.

 

Charitable giving is not a priority for all of our clients. The variety that comes with a successful estate planning practice is what keeps the practice interesting. Some of our clients consider charitable giving to be an important part of their estate plans and want to pass that value on to their descendants. Crafting an estate plan that helps clients to achieve this goal is a part of my job that I love.

 

Years ago, if a family wanted to establish a common fund for charitable giving, they were advised to establish a family foundation. A family foundation can be either a non-profit corporation or a trust. It is a separate legal entity with terms that govern the administration of the legal entity. A family foundation has considerable state and federal filing requirements including the preparation of an application for tax-exempt status which must be filed with the IRS.

 

These days, an alternative to establishing a family foundation is to establish a donor-advised fund under the umbrella of a public charity. The New Hampshire Charitable Foundation accepts donor-advised funds. Many financial organizations have established public charities that are able to facilitate donor-advised funds such as Fidelity’s Charitable Gift Fund. One benefit of using a donor-advised fund is that there are virtually no start up expenses or lead time. The administrative tasks are handled by the umbrella organization. The primary disadvantage of using a donor-advised fund is that the individual has less control over the creation and administration of the entity.

 

As part of this process, clients need to consider whether they would like to establish and operate the charitable entity during life, or whether the charitable entity will come into existence only following death.

 

The creator of a charitable entity typically gets the family members involved by making them trustees, board members or advisors to the donor-advised fund. This will only be effective if the family members designated get involved in the process of deciding how and when the charitable funds should be distributed.

 

There is a trend toward getting family members involved in charitable giving at an early age. One example involves parents working with a group of college-age children. The parents indicate that they will be giving a certain amount to charity at the end of the year. They encourage their adult children to consider which charities they would like to see supported. Then, at a family meeting, all of the family members make presentations about why their favored charities should be supported by the family. The group votes following the presentations and the funds are distributed to the charities that the group selects. This can also be done on a smaller scale with very young children. A variation on this theme is to encourage children to pool funds that they otherwise would spend on holiday gifts for their parents or for each other and make a donation to one or more charitable organizations selected by the children.

 

What if the family members are just not interested? It is important to recognize that charitable giving is simply not everyone’s cup of tea. The estate planner and client need to have in mind what will happen to the charitable foundation or the donor-advised fund if family members are no longer involved. Do the funds simply get distributed in one lump sum to a pre-selected charity? Are the funds held and administered by professional third-party advisors, such as the client’s accountant, attorney or a trust company?

 

A thoughtfully structured estate plan can facilitate a process of involving family members in charitable giving. Transferring this value and a framework within which it can operate can be the most important bequest a person leaves to his or her family.

 

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In Case of Emergency

by Attorney Christine S. Anderson

August 2011

 

If you have a new cell phone, chances are that the first thing that you did when you set it up was to "ICE" it. When you "ICE" your phone, you insert personal information to be used in case of an emergency (hence the term "ICE".)

 

We recommend that you consider ICE - ing other aspects of your life as well. Do your loved ones know who would make health care decisions if you are in an accident, or if you are suddenly taken ill? Does your health care agent have a copy of your Advance Directive for Health Care? Have you had a conversation with your health care agent about the decisions that you would want that person to be comfortable making on your behalf? We recommend that you either give your health care agent a copy of your Advance Directive for Health Care or let your agent know where to find a copy. You should also share your thoughts on the decisions that you want your agent to make.

 

Do you have a current list of your medications available in a place where your loved ones can find it? Many of us have more than one physician who is prescribing medication to us. It is quite possible that only you are aware of all of the medications that you are taking. What about a list of all of your health care providers? In the event of a medical emergency, it is important that your agent have access to a list of all of your health care providers and medications.

 

What about your computer, online bank account pass words and answers to your security questions? If you are unexpectedly unable to take care of your own finances, can your family get into your computer and get access to your online bill paying? What about your post office box? Are your loved ones aware that they should contact your attorney to discuss the release of your Durable General Power of Attorney in the event of your incapacity?

 

Unfortunately, some people die suddenly and unexpectedly. If that were to happen to you, would your family know where to find your copies or who to contact to get copies of your estate planning documents? What about your final arrangements? Do your loved ones know where to find a list of your assets? We recommend that you instruct your executor to call us in the event of your death.

 

No one likes to think about his or her own illness or death. Planning to facilitate your loved ones’ response on your behalf in the event of an emergency is time well spent.

 

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Estate Planning for the Family Vacation Home

by Attorney Christine S. Anderson

July 2011

 

For many of our clients, their most treasured asset is the family vacation home. Some of the happiest memories of time spent with children and grandchildren relate to the family camp or lake house. Planning for the family vacation home poses unique opportunities for future generations to create fond memories of their own as well as unique challenges surrounding exactly how to facilitate the future enjoyment of the property.

 

When clients come in to discuss estate planning for the family vacation home, we pose several questions. Will all of the children and grandchildren be beneficiaries? How will the annual expenses be paid? How will time at the family vacation home be allocated? Who will be in charge? How long will the family vacation home be held in the family? What about a future sale of the property?

 

The answers to these questions will shape the way we craft an estate plan designed to achieve our clients’ goals. In most families, the parents would like the property to be enjoyed by all of their children and grandchildren. However, many clients anticipate that certain children may have more disposable income to be used for the payment of the upkeep of the property than others. In this circumstance, we recommend that the clients set aside funds to be used for the taxes, insurance, maintenance and repair of the property. Providing resources for the support of the family vacation home minimizes the likelihood that discord will result from one beneficiary not paying his share of the annual expenses of the property.

 

Depending on the size and lay out of the property, it may be possible for everyone to be present at the same time. More often, time spent at the family vacation home will need to be divided among the family members so that each child and his or her family will have exclusive use of the property for certain periods of time. We draft our clients’ trusts to address common or exclusive use and a procedure for scheduling the use of the family vacation home depending on the clients’ particular circumstances.

 

Although clients may not want to consider that there will ever be a time at which most of the family will no longer use the family vacation home, it is always a possibility. It is important to address how to handle a situation in which only one of the adult children and his family continues to use the property. Will the family vacation home be sold at that point, or will it continue to be held? Who will decide?

 

Some clients want to transfer the family vacation home to their children during their lifetimes. It is possible to convey the property into an entity, such as a limited liability company or family limited partnership, and transfer shares of that entity to children and adult grandchildren or trusts for grandchildren. This can be a useful estate tax planning technique as fractional interest discounts are available for this type of gift. Other clients prefer that the transfer of the family vacation home be structured to occur after their deaths.

 

We would be happy to meet with you to discuss how to plan for the distribution of your property either through lifetime gifts or through a transfer at the time of your death. Until then, we wish you many warm, lovely days spent with your family and loved ones enjoying your family vacation home.

 

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Gifts for College Education

by Attorney Christine S. Anderson

June 2011

 

It is that time of year again. High schools are graduating classes of bright, enthusiastic young adults. It is hard to miss the teenagers in prom dresses, tuxes and limos. Hallmark ads showing parents in dorm rooms having flash backs to the first day of kindergarten can bring a tear to the eye of even the most battle weary parent of an adolescent. It is against this back drop that we are often asked to advise grandparents and parents about the various techniques for making gifts to help with the skyrocketing cost of higher education.

 

Tax-favored 529 accounts are the most recent addition to the tool box and they have become increasingly popular. Named after Internal Revenue Code Section 529, no income tax is reportable on the appreciation within the account as long as no withdrawals are made. When withdrawals are used for qualified college education expenses, including vocational school expenses, the withdrawals are not subject to income tax. It is possible to front load these accounts by making a deposit of five times the annual exclusion (currently $13,000) and electing to treat the gift as made proportionately over five years. Each state has its own 529 account product. New Hampshire’s version of the 529 account is called the UNIQUE college investment plan, sold through Fidelity. You do not have to choose a 529 account established by an institution in your state of residence. The primary disadvantage to these accounts is that if the proceeds are not used for qualified college education expenses by the time the beneficiary is 30, when the funds must come out, then a 10% penalty applies in addition to the income tax on the appreciation of the assets. It is possible to change the beneficiary to someone under age 30, who will use the funds for college expenses. If you are uncertain whether a grandchild or child will go to college, these accounts are not ideal. Websites that compare the various 529 plans include: www.savingforcollege.com and www.collegesavings.org.

 

Custodial accounts are an old favorite and still offer a reasonable choice for college savings. These accounts may be set up at any financial institution and are in the child’s name and social security number with an adult custodian designated to be in control of the account until the child reaches the age of 21. The interest earned on the account is taxable currently. The purposes for which the funds can be used are not limited to college education. It is not advisable to put more into a custodial account than is likely to be used for college. Any balance in the account when the child reaches age 21 must be turned over to the child.

 

Irrevocable Trusts offer the most flexible option, because they can be drafted to provide that the funds can be used for educational expenses including private elementary and secondary school as well as for other purposes such as to help a beneficiary with a down payment on a house or to help a beneficiary with starting a business. Irrevocable Trusts can continue for an extended period of time, until the age at which the donor thinks the beneficiary would be ready to receive the remaining principal outright. One disadvantage to setting up and funding an Irrevocable Trust is that the Trustee will be required to file an income tax return each year in which the Trust has any taxable income or gross income greater than $600. There are also legal fees associated with the creation of Irrevocable Trusts.

 

Coverdell savings accounts, formerly known as education IRAs, must be funded with cash and can only be funded up until the date on which the beneficiary is 18 years old. There must be a written trust that governs the account and the balance in the account must be distributed when the child is 30. When funds come out of the account, there is no income tax as long as the beneficiary’s qualified education expenses are greater than the distribution. Distributions can be used for qualified elementary and secondary (K-12) education as well as for higher education expenses. These accounts are of limited usefulness as annual contributions cannot exceed $2,000 per year and the amount that can be contributed is phased out based on the donor’s adjusted gross income.

 

Perhaps the simplest approach is for a grandparent to make the tuition payment directly to the college or university. Gifts of tuition paid directly to the educational institution do not have any gift tax consequences to the donor. Such payments do not apply against the $13,000 annual exclusion for gifts. For a very generous grandparent, it is possible to pay a grandchild’s $40,000 college tuition bill and give the grandchild $13,000, without any gift tax consequences.

 

While the best planning is done closer to the first day of kindergarten than the night of the prom, it is never too late. Many alternatives are available if you would like to make a gift to help support a child’s college education. Call the office if you would like to schedule an appointment to discuss which of these options is best suited to your individual circumstances.

 

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Health Care Advance Directives for College Students

 

Whether your children are getting ready to go off to college for the first time, or coming home for the summer, we encourage you to have them sign Advance Directives for Health Care in order to appoint you, or others, as their agents to make health care decisions in the event of illness or accident.  To facilitate the signing of this document by our clients and their adult children, we have made it available as a pdf form to be printed and completed without charge, here. 

 

For more information, see Attorney Christine S. Anderson's article titled The Importance of Planning for Healthcare Decisions from June, 2010.

 

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Non-tax Reasons for a Couple to Establish Separate Trusts

by Attorney Christine S. Anderson

May 2011

 

Recently, our emphasis has been on updating estate plans to factor in the increased estate tax exemption. The amount that any individual can transfer estate tax-free upon death is currently $5,000,000. While the estate tax exemption will revert to $1,000,000 on January 1, 2013, most experts anticipate that the $5,000,000 exemption will be extended beyond 2013.

 

Our 2011 website articles have described reasons why a couple would consider updating their estate plan to either (1) terminate an irrevocable trust when the surviving spouse would not have a taxable estate (April 2011) or (2) include disclaimer planning so the surviving spouse can determine after the first death whether estate tax planning is needed (March 2011). We also advise some couples to update to a plan that includes one family trust for probate avoidance, when two trusts are no longer needed for estate tax planning.

 

This article will focus on why a couple would consider an estate plan that includes two separate trusts, one for each spouse, even if the combined net worth of the couple is below the estate tax exemption for one person.

 

Control is the primary reason why a couple typically decides to establish a trust for each spouse even when their combined net worth is not enough to mandate two trusts. Each spouse’s trust becomes irrevocable upon that spouse’s death. The surviving spouse must live by the trust terms as set by the deceased spouse. We sometimes have clients who want to maintain control in order to protect the client’s assets from possible diversion to a future spouse of the surviving spouse. It is not uncommon for a client to express that the client acquired certain assets from the client’s family and wants to ensure that those assets pass to the client’s children. In some cases, a spouse may simply just want to dictate how the funds are used during the surviving spouse’s lifetime and following the surviving spouse’s death.

 

There are a couple of ways to maintain control of a trust after the first death during the surviving spouse’s lifetime. First, the spouse may choose to have a third party (someone other than the surviving spouse) serve as trustee. A variation on this is to have the surviving spouse serve as co-trustee together with a third party. In addition, the terms of the trust that benefit the surviving spouse can be narrowly drawn. For example, the trust may provide that the surviving spouse is entitled to trust income only or a 5% annual distribution only. When a spouse is concerned about protecting trust assets for eventual distribution to children, the trust can provide that the children are entitled to receive the annual information reports prepared by the trustee, so that the children can monitor the trust.

 

Blended families are a second reason why a couple with less than $5,000,000 would consider two trusts. Each spouse can have his or her own trust that provides for the surviving spouse during his or her lifetime. Each spouse can be assured that the assets remaining upon the death of the surviving spouse will pass to the children from the first marriage.

 

Creditors of a surviving spouse are yet another reason to establish separate trusts. While a trust which provides that a third party trustee may make discretionary distributions to a surviving spouse will not be protected from nursing home costs, it is possible for a third party trustee to deny distributions to a surviving spouse in order to protect trust assets from the general creditors of the surviving spouse.

 

Unless a couple has signed a prenuptial agreement waiving the surviving spouse’s elective share, it is important to be mindful that despite a couple’s intentions, a surviving spouse has certain rights to inherit from a deceased spouse. The surviving spouse’s elective share must be addressed when this type of estate plan is created.

 

For some of our clients, two trusts remain an integral part of their estate plan, despite the increase in the estate tax exemption and the elimination of estate tax as a reason for two trusts.

 

 

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Terminating Unnecessary Irrevocable Trusts

By Attorney Ruth Tolf Ansell

April 2011

 

In our recent articles, we have focused on the estate planning opportunities available under the Unemployment Insurance Reauthorization and Job Creation Act of 2010.  This article will focus on planning opportunities available under this Act for existing, irrevocable trusts. 

 

Since 1997, the federal estate tax exemption has increased incrementally from $600,000 to $5,000,000.  Although it is presently uncertain whether the increased exemption will be applicable after 2012, the significantly increased exemption provides an opportunity for trustees and beneficiaries to re-evaluate the need to continue trusts created many years ago in order to minimize estate taxation.

 

Consider, for example, estate tax planning trusts created in 1997 by a couple who then had assets worth $1,200,000. With a maximum estate tax rate of 60% at that time, in order to avoid a potential estate tax upon the death of the surviving spouse, the husband and wife would have divided their assets between their trusts so that each trust would have assets worth approximately $600,000.

 

If the husband died in 1997, his trust would have become irrevocable, providing for the lifetime benefit of his wife in a manner designed to avoid taxation of this trust at the time of her death, when the balance of the trust will pass to the couple’s children. It is likely that at least some of the trust assets have appreciated since 1997, but the income earned by the trust and by the surviving spouse on her own assets from year to year has declined. Accordingly, in order to maintain her lifestyle and to pay increased medical costs as she has aged, trust principal has been invaded for the spouse’s benefit and as a result, the combined value of the husband’s trust and the wife’s assets is now less than $1,000,000. Since estate tax planning is no longer needed, the beneficiaries of the trust would like to simplify their finances and avoid the filing of annual trust income tax returns.

 

If all of the trustees and beneficiaries of the trust agree, New Hampshire law will permit the trust to be terminated by agreement at this time. Probate Court approval for a termination could be sought, if any beneficiary is unable or unwilling to agree to a termination. In either case, however, the husband’s trust assets could be transferred to the wife’s trust, thereby terminating the husband’s trust.

 

There are several advantages in terminating a trust which no longer serves its intended purpose. First, the investment of these assets can be consolidated with the investment of the wife’s assets, in lieu of maintaining separate accounts for each trust. Second, income tax returns will no longer need to be filed to report the income earned by the husband’s trust. Third, if the property owned by the husband’s trust includes the wife’s primary home, she will be able to exclude $250,000 of gain on the sale of this property, if she (or her trust) owns this property for at least 2 years before a sale. Fourth, the trust assets will be re-valued on the wife’s death, securing a step-up in tax basis in order to avoid taxation on any gain which may have occurred since the husband’s death in 1997.

 

Of course, there may also be disadvantages. Primarily, a distribution to the wife or to her trust may cause the property to be subject to diversion to a second husband or creditor. (The first husband’s trust would not necessarily have been protected from the wife’s nursing home costs, but it would have been more protected from other creditors.) Also, if the wife moves to a state which has estate taxes, the assets in her trust or estate may be subject to this tax.

 

Other consequences may be either advantageous and disadvantageous to the trust beneficiaries. By example, children or other beneficiaries who may have been entitled to an annual report of trust investments and distributions of the husband’s trust will not be entitled to this information with respect to the wife’s trust during her lifetime. The wife will have more freedom to manage and invest the trust assets, while the other beneficiaries may have been more comfortable with a periodic review of their anticipated inheritance.

 

There is no right answer. In light of the increased estate tax exemption, however, if you are the trustee or beneficiary of a relatively small trust initially created for estate tax planning, we encourage you to consider a termination of the trust by agreement.

 

 

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Estate Tax Planning in Trusts: It’s Time to Review

by Attorney Christine S. Anderson

March 2011

 

On December 17, 2010, when the President signed the Unemployment Insurance Reauthorization and Job Creation Act of 2010, the amount sheltered from gift, estate and generation skipping transfer tax increased to $5,000,000 per person for gifts made, and for the estates of individuals who die, in 2011 and 2012. This is great news. While it is impossible to accurately predict the future, many experts believe that this $5,000,000 exemption will be extended beyond 2012.

 

As a result of this change in the law, we recommend that our married clients who have estate tax planning trusts take this opportunity to consider how their trusts will be administered in light of the increased estate tax exemption. Not that many years ago, in 1998, the estate tax exemption was $625,000. The exemption increased over the years to $1,000,000, $2,000,000 and eventually to $3,500,000 in 2009. If you have a trust that was drafted at a time when the estate tax exemption was substantially lower than $5,000,000, you should re-examine the trust to ensure that your estate plan is still consistent with your overall intent. Here is why.

 

Estate tax planning for a married couple relies on two basic concepts designed to defer all estate taxes until the death of the second spouse. Those concepts are the estate tax exemption and the unlimited marital deduction, which allows an unlimited amount of assets passing to a surviving spouse to be exempt from estate tax. The typical estate tax planning trust includes a formula for the division of assets between a trust designed to shelter the maximum amount of assets that qualify for the estate tax exemption and a gift (or a trust) for the benefit of the surviving spouse that qualifies for the unlimited marital deduction.

 

Estate tax planning trusts established for a couple are typically mirror image documents. When the first spouse passes away, assets equal in value to the estate tax exemption are allocated to a trust which will provide only limited access or benefits to the surviving spouse in order to keep these assets from being taxable as part of the surviving spouse’s estate. If the deceased spouse’s estate exceeds the amount which may then pass free of federal estate taxes, the excess assets are either distributed to the spouse or held in a marital trust for the benefit of the surviving spouse. This plan is designed to defer all estate taxes until the death of the second spouse.  No estate tax will be due at the first death.

 

Consider a couple who established trusts with estate tax planning in 2003, when the estate tax shelter amount was $1,000,000. If each spouse had $2,000,000 in his or her name, it was understood that at the time of the first death, $1,000,000 would have been held in the estate tax sheltered trust, with the balance passing outright to the spouse. Under the current tax law, however, if the couple’s net worth has remained the same, when the first spouse dies, the entire $2,000,000 of the deceased spouse’s estate will be held in trust for the benefit of the surviving spouse. No assets will be distributed from the deceased spouse’s trust to the surviving spouse outright, as intended in 2003 when the trust was created.

 

In a typical estate tax planning trust, the surviving spouse will receive the income and have the right to withdraw the greater of $5,000 or 5% of the trust principal once a year. In order for the surviving spouse to receive more than the income and 5% of the principal, a co-trustee would need to be appointed by the surviving spouse and that co-trustee must be the one to authorize a discretionary distribution of principal to the surviving spouse. The surviving spouse may be unhappy with restricted access to a greater share or all of the deceased spouse’s trust.

 

If the estate tax exemption remains at $5,000,000, it may be unnecessary for the surviving spouse in this example to have limited access to the deceased spouse’s trust. All assets could have been distributed to the surviving spouse, free of estate tax because of the unlimited marital deduction. As long as the surviving spouse’s net worth is less than the estate tax exemption in the year of his death, no estate tax would be due on the second death.

 

Many of our clients have trusts that limit the surviving spouse’s access to the deceased spouse’s estate for tax planning and with a $5,000,000 exemption, it is no longer necessary to minimize estate tax after the second death.* For individuals who established estate tax planning trusts purely for estate tax avoidance, it is important to review those documents in light of the increased estate tax exemption. There are some flexible planning techniques (see last month’s article on disclaimer planning) that can be incorporated into existing trusts in order to preserve the option to incorporate estate tax planning if necessary, which will not limit a surviving spouse’s access to a deceased spouse’s assets, if that would not be necessary in order to avoid estate tax.

 

*Certainly there are non-tax reasons why a spouse may want to control the assets held in trust for the surviving spouse’s lifetime. An upcoming article will address non-tax reasons why a married couple may prefer two trusts.

 

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Estate Planning with Disclaimers:

The Most Flexible Solution for these Uncertain Times

by Attorney Christine S. Anderson

February 2011

 

When Congress passed the Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17, 2011, the amount that each person can shelter from estate tax was increased to $5,000,000. This is great news. Unfortunately, this increase in the estate tax exemption only applies to individuals who die in 2011 and 2012. If Congress does not extend the estate tax exemption before the end of 2012, it will revert to $1,000,000 for individuals who die on or after January 1, 2013. This uncertainty about the size of the estate tax exemption that will apply to a client’s estate at the time of the client’s death can make predictable estate planning feel like a Herculean task.

 

There is one planning technique that is particularly useful against the changing backdrop of the estate tax law. Disclaimer planning, sometimes referred to as post-mortem planning, can provide a married couple with ultimate flexibility following the first spouse’s death. With disclaimer planning, we draft the Wills and Trusts so that each spouse leaves his or her entire estate to the other. If, at the time of the first spouse’s death, it is appropriate to implement estate tax planning, the surviving spouse can disclaim his or her interest in all or a portion of the deceased spouse’s estate. Assets disclaimed by the surviving spouse would pass into a credit shelter trust, which would then be held for the lifetime benefit of the surviving spouse. Upon the second death, the assets remaining in the first spouse’s credit shelter trust would not be included in the second’s spouse’s taxable estate.

 

Disclaimer planning will give the surviving spouse the flexibility to navigate the maze of the estate tax law in the year of the first spouse’s death and make a well-reasoned decision about whether estate tax planning is necessary, given the family’s asset profile at that time. A disclaimer is an irrevocable, written statement, signed under oath indicating that the person signing the disclaimer refuses to accept certain assets that would otherwise pass to him or her as a result of the death of a loved one. The disclaimer must be executed within nine months of the first spouse’s death, in order to be effective to keep the assets out of the surviving spouse’s estate.

 

Many of our clients who established and funded two revocable trusts for estate tax planning when the estate tax exemption was $1,000,000 or less have already amended their trusts and wills to incorporate disclaimer planning. Disclaimer planning is not for every family, however. Blended families may prefer to have a more structured, less flexible, plan to ensure that assets ultimately pass to the children of the deceased spouse. There may be other reasons why it may be preferable to have the Revocable Trust of the first spouse to die become truly irrevocable on the first death. This concept will be discussed in greater detail in a future article.

 

 Married clients with significantly less than $5,000,000 may be well served by disclaimer planning. For example, consider a couple in a long-term first marriage, with mutual children, $1,000,000 of real estate and investments in the husband’s name and $2,000,000 of marketable securities in the wife’s name. We may advise the couple to consider disclaimer planning. If at the time of the wife’s death, the husband looks at their combined net worth and the estate tax exemption and if the estate tax exemption has been permanently extended to $5,000,000, he may be comfortable having all assets pass to him. If, on the other hand, the estate tax exemption is $1,000,000 at the time of the wife’s death, he would likely disclaim $1,000,000 of the wife’s assets and have those assets held in trust for his lifetime benefit, in a manner that would keep the assets out of his estate, for estate tax purposes, at the time of his death, thereby maximizing the amount that may pass to the children estate tax-free.

 

While not for everyone, many of our clients choose estate planning with disclaimers to keep their options open and to provide as much flexibility as possible. Call the office to schedule a conference, if you would like to discuss how disclaimer planning may fit into your estate plan.

 

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Good news for our clients who are charitably inclined! 

 

The new tax law extends tax-free qualified charitable distributions for up to $100,000 of 2011 distributions  made directly to certain charitable organizations from an IRA when the IRA owner is over the age of 70 ½.  In addition, the new tax law provides that an IRA owner may elect that up to $100,000 of qualified charitable distributions made in January 2011 be treated as made on December 31, 2010, retroactively extending this benefit to 2010 for fast-acting charitably inclined individuals.

 

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Ansell & Anderson is now on Facebook!

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2010 Estate Tax Legislation: Certainty for a Little While

December 20, 2010

By Attorneys Christine S. Anderson and Ruth Tolf Ansell

 

At long last, we have a new tax law. Although estate planners, who want to know precisely what we can do, when, would have appreciated a longer horizon for planning, at least we have a little more certainty.

 

The estate tax is reinstated for decedents dying in 2011 and 2012. The estate tax shelter amount is $5,000,000 indexed for inflation with a 35% tax rate for assets in excess of the shelter. As was the case prior to 2010, assets owned by a decedent will receive a step-up in tax basis equal to the fair market value of the assets as of the decedent’s date of death. This is more generous than most of us would have predicted, so we should be happy. However, as was the case for the past several years, this tax rate and exclusion amount is only good for the next two years. After that, we are back to the pre-Bush era shelter amount of $1,000,000, with a maximum tax rate of 55%. The fact is, unless you have a crystal ball and can tell us your date of death with certainty, we will still be planning much as we have been, keeping our documents as flexible as possible to minimize tax and maximize control for surviving family members, whether death occurs when the tax shelter is $5,000,000 or $1,000,000.

 

Interestingly, this new legislation allows fiduciaries of estates of decedents dying in 2010 to opt in to the new $5,000,000 estate tax shelter amount and pay the 35% tax on assets in excess of the shelter. In exchange for opting in, the assets will receive the step up in tax basis.

 

The gift tax rate for 2011 and 2012 is 35% with a $5,000,000 exemption. This reflects a return to the unification of the gift and estate tax exemptions. You can either choose to give $5,000,000 tax free during life or at death. Any taxable gifts in excess of the $13,000 annual exclusion will reduce how much you can give estate tax free at death.

 

The concept of the portabililty of the estate tax shelter, although discussed among estate planning professionals for years, has never been part of the estate tax regime until now. The concept is that if one spouse dies in 2011, using only $3,000,000 of her estate tax shelter, her husband can use her remaining $2,000,000 for a combined shelter amount of $7,000,000 at the time of his death in 2012.

 

For those of you interested in generation skipping transfer tax, we are delighted to tell you that all generation skipping gifts made in 2010 are subject to a tax rate of zero percent. Gifts which might generation skip in the future will be subject to a $5,000,000 exemption. In effect, generation skipping gifts made in 2010 are off the radar. Going forward, in 2011 and 2012, the generation skipping transfer tax rate is 35%.

 

All in all, this is not a bad package for our clients. This status of these tax laws will be hotly debated before the 2012 election as will all the tax legislation that was part of Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

 

We wish you a happy and peaceful 2011.

 

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Making Your Own Final Arrangements

By Attorney Christine S. Anderson

December 2010

 

If you know me, you may have wondered "Is this woman an overly organized, detail-obsessed control freak?" You may have thought to yourself "She cannot really expect me to follow up on her suggestions for funding my revocable trust to the degree she recommends, can she?" After reading the title to this article, you may now be convinced. Surely, I cannot expect you to spend an hour or two of your time planning your own cremation or burial, can I?

 

The choices that will need to be made very soon after your death are many.  Decisions about how the body of a deceased person is to be handled must be made within a day or so of death. Most family members are physically and emotionally spent when a loved one dies. One of the first tasks they are faced with is visiting the funeral home and making a multitude of decisions. Your loved ones will be faced with a barrage of questions, such as the following. Would you like her to be embalmed? Would you like her to be waked? If she is to be waked, do you want an open casket? Would you like her to be cremated? If she is cremated, who gets to keep her remains? If she is cremated, do you want her remains to be buried? If so, where? Then there is the choice of the casket. There are a wide range of options. You may prefer a casket made of a particular type of wood. If you make your own arrangements, you can choose it for yourself. I bet you didn’t know that if you are going to be cremated, your family can rent a perfectly lovely casket for the wake. They don’t have to purchase a casket to be destroyed during the cremation process. Think about the money that you can save if you do this planning for yourself. Your family may feel that they are being cheap if they don’t go all out. If you make your arrangements for yourself, you can be a bargain hunter!

 

When you visit your favorite funeral home, you can choose whether or not to pre-pay for your final arrangements. If you don’t want to prepay, the funeral director will still be happy to record your choices and keep a file on you, for future reference.

 

What if your family cannot agree on how to process your body after your death? New Hampshire law provides that unless the decedent has put his or her wishes in writing regarding who is to have custody and control, then the "next of kin" gets to decide whether to have you waked, cremated and/or buried. You can control who is to be in charge of your body following your death and what your final arrangements will be, but you must take action.

 

Some people say that the funeral is for the living and that it is important for the survivors to be involved in the planning of the celebration of a loved one’s life. Have no doubt that even if you visit your favorite funeral home and make your own final arrangements, there are many, many details and plans that still need to be made for the funeral or memorial service and for the gathering or reception that is typically hosted after a service. Many families create memory boards with photos of the deceased to display. There will still be plenty for your loved ones to plan, even if you take care of the final arrangements in advance.

 

You might not consider it the most pleasant way to spend an afternoon, but imagine how relieved your family members would be if they knew that you had made your own final arrangements. It is an incredibly thoughtful gift to have made these arrangements and spared your spouse, son, daughter or other loved one from this task.

 

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Prenuptial Agreements - Too Much Like Getting Divorced Before the Wedding?

by Attorney Christine S. Anderson

October 2010

 

We read about them in People magazine or the newspapers, but prenuptial agreements are not just for the rich and famous. More and more, they are part of a typical estate plan for moderately wealthy individuals who want to avoid a potential dispute with a prospective spouse. A Prenuptial Agreement (sometimes referred to as an antenuptial agreement or a premarital agreement) is a written contract which specifies prospective spouses’ rights to, and obligations regarding, property division and support in the event of a divorce or the death of one of the parties during the marriage. Prenuptial Agreements are most often used in the context of a second marriage. Prospective spouses may wish to preserve their assets for their children from a first marriage, in the event of their death, or for themselves, in the event of divorce. It has been said that a Prenuptial Agreement is like getting divorced before the wedding. While a Prenuptial Agreement by necessity involves some negotiation between prospective spouses, it need not be a negative experience. If the parties are matter-of-fact in their approach to such an agreement, it is possible that the process can be less emotionally charged.

 

To be considered a valid, binding contract, a Prenuptial Agreement must be fair when it is entered into and fair when it is enforced. It must be procedurally fair and substantively fair. In order to be procedurally fair, certain formalities are required in the way the parties enter into the Agreement. Specifically, each party must have the opportunity to be represented by an attorney. In our office, we strongly recommend that each party have their own attorney. In addition, all assets of both parties must be disclosed to the prospective spouse. The Agreement cannot be signed under duress. To ensure that there is no pressure on a party to sign the Prenuptial Agreement, it is recommended that the Agreement be signed at least 30 days before the wedding and before the invitations are mailed out. The wedding must occur within one year after the date on which the Agreement is signed. Substantive fairness is also required. It is not necessarily going to be considered fair for a spouse to give up all his rights to the other spouse’s property in the event of divorce or death, if that spouse would be impoverished as a result. If one party gives up all his rights to property and support from the other spouse and if circumstances change between the time when the Agreement is entered into and the time when the Agreement is to be enforced such that the Agreement would be unfair, a Court may not enforce the Agreement. For example, if both spouses are employed with high incomes when the Agreement is entered into, and the Agreement states that no alimony is to be paid by either party, but at the time of a divorce, one party is disabled and will go on welfare if the other party does not contribute to his support, then the Court may order that the wealthier spouse pay alimony or property settlement to the disabled spouse. To ensure that an Agreement is later enforced, a property settlement paid by the more wealthy spouse to the less wealthy spouse should be considered.

 

The second most common circumstance under which Prenuptial Agreements occur are when parents encourage their adult children to have a Prenuptial Agreement to protect the future inheritance of their children and to protect the assets that have already been given to their adult children. While it is true that parents can modify the provisions of their estate planning documents to limit an adult child’s access to his inheritance, many want the added protection of a Prenuptial Agreement. In this situation, it is not unusual for the Prenuptial Agreement to address only the separate assets that the parties own when the marriage is begun and assets given or inherited in the future. This type of Prenuptial Agreement may specifically indicate that property earned and acquired by the parties during the marriage will be considered marital property to pass to the surviving spouse on death or to be divided equally in the event of a divorce. In this context, alimony may even be left open for a court to decide, in the event of a divorce.

 

While Prenuptial Agreements are specifically authorized under New Hampshire law, the law is silent regarding a Postnuptial Agreement, which would be signed after the parties are married. One legal issue regarding the validity of a Postnuptial Agreement is whether there is "consideration" or a bargained-for exchange for such an agreement once the parties are married. In the context of a Prenuptial Agreement, part of the bargained-for exchange necessary for a valid contract is the marriage itself. (If you sign this Prenuptial Agreement, I will marry you. Or, if you do not sign this Prenuptial Agreement, I will not marry you.)

 

After the parties are married, it is critical that they follow up with respect to retirement account beneficiary designations and spousal waivers, consistent with the terms of the Prenuptial Agreement. Furthermore, estate plans should be reviewed and possibly modified to ensure that such estate plans are consistent with the deal struck by the parties.

 

If you are considering a Prenuptial Agreement for yourself or your adult child, we would be happy to work with you to help plan for an event that you do not look forward to happening (death or divorce) so that you can turn your energy and attention to planning for the event that you do look forward to happening (the wedding day).

 

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Control beyond the Grave: No Contest Clauses

by Attorney Christine S. Anderson

September 2010

 

Rarely does a New Hampshire Probate Court decision make front page news. On August 25, 2010, the headline of the Union Leader exclaimed: "Judge strips NH real estate heiress of fortune." While this somewhat gossipy newspaper story may provide many of its readers with a certain amount of schadenfreude (German for pleasure felt at someone else’s misfortune), it is truly remarkable from an estate planner’s standpoint.

 

The fifty-four page Probate Court decision, Shelton, Tamposi v. Tamposi, Jr. & Tamposi, is remarkable in part because it is a clear indication that a New Hampshire Court is willing to uphold a no contest clause in a trust. In 1952, the New Hampshire Supreme Court in Burtman v. Butman, 97 N.H. 254, enforced a provision in a will directing that a bequest would be void if the beneficiary challenged the will. Indeed, most, if not all, New Hampshire estate planners advise interested clients that a New Hampshire Court would uphold a no contest clause, also referred to as an in terrorem clause, in either a will or a trust.

 

The Tamposi decision involves real estate mogul, Sam Tamposi, who wanted his real estate empire to remain intact, and held for the benefit of his family, after his death. Sam wanted his dynasty to be managed for his family by his oldest son and his youngest son, who were designated as the investment directors in the Trust, separate from the Trustees. The investment directors were to manage the family real estate business, which was held in the Trust. The Trust was divided into shares for Sam’s six children.

 

The dispute in this case surrounds primarily one beneficiary’s persistent attempts to wrest her share of her father’s Trust from the control of her brothers, the investment directors. The unhappy beneficiary framed her challenge to the investment directors’ control of her share of the Trust by alleging that the investment directors breached their fiduciary duty. The Probate Court viewed the disgruntled beneficiary’s challenge as a challenge to the over-arching intent of her father’s estate plan. The Court praised the investment directors’ management of the Trust assets, valued at $20.5 million in 1995 when Sam died. As noted in the decision, on December 31, 2008, the value of the Tamposi Companies, including the Trust assets, was $146 million. The Court found that the investment directors did an exemplary job, growing the family business for the benefit of the Trust beneficiaries. The Court characterized the frustrated beneficiary’s challenge as not a genuine challenge to the investment directors’ actions in their fiduciary capacity, but rather as a challenge to the very essence of the Trust as Sam had envisioned it. The Court enforced the no contest provision in the Trust and held that the share of the beneficiary challenging the actions of the investment directors was actually a challenge to the Trust itself, and therefore resulted in her forfeiting her share of the Trust, as directed by the no contest clause.

 

The Court’s ruling in the Tamposi decision makes it clear that a New Hampshire Probate Court will go out of its way to uphold the over-arching intent of the creator of a Trust, by enforcing a no contest clause, so that the long-term plan intended by the Trust creator will be honored after his death.

 

The Tamposi case is also remarkable because the Court enforced the no contest clause in 2010, approximately fifteen years after the creator of the Trust died.

 

If you are interested in ensuring that provisions of your estate plan are upheld, regardless of whether the beneficiaries like it or not, then you can breathe easier. The New Hampshire Probate Courts are on your side.

 

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Estate Planning for Pet Lovers

by Attorney Christine S. Anderson

August 2010

 

Pets enrich our lives. For many, they are members of the family. Unlike children, pets never grow up and become self-sufficient. They are always dependent on us for food and shelter. It is natural for a person who considers his pets to be members of his family to be concerned about the care of his pets after his death.

 

In 2004, New Hampshire enacted the Uniform Trust Code which, among other things, authorizes a person to create a trust for the care of one or more animals. The trust can provide for animals living during the trust creator’s lifetime, but the pet trust must terminate upon the death of the last pet that was living at the time of the trust creator’s death.

 

You don’t have to be as wealthy as Leona Helmsly to create a trust for your pet. Nevertheless, it is important that the trust not be funded with more than is necessary to provide for the care of the designated animal beneficiaries. The statute that authorizes pet trusts also authorizes a court to order the distribution of assets in excess of the amount that the court determines to be necessary for the care of the animals. Under a similar law in New York, the Court ordered the trust created for Leona Helmsly’s dog to be reduced to $2 million. Any excess amount ordered to be distributed out of a pet trust in New Hampshire would be distributed to the trust creator or to the residuary beneficiaries of his trust.

 

If you are considering establishing a pet trust, consider who would be the trustee. Having someone other than the caretaker serve as the trustee provides a check and balance. The trust may provide that the assets can be used to purchase food for the pets, the cost of a caretaker, and veterinarian bills. In order to avoid potential conflicts of interest, it may be best to provide that any assets remaining in the trust at the time of the last surviving pet’s death will pass to a charity, rather than to the caretaker. If you want the caretaker to be the beneficiary after the pet’s death, you may want to have someone other than the caretaker be the person authorized to make the decision to euthanize a pet, at the end of the pet’s healthy lifetime.

 

Horse lovers abound in New Hampshire. Pet trusts are particularly well suited to individuals who own horses, which are long lived and expensive to maintain.

 

A simpler alternative for a pet lover is to provide a conditional bequest in a will or trust. For example, "I give $10,000 to my sister, Jane, provided that my sister is willing to provide a home for my pets that are living at the time of my death." The disadvantage to this type of gift is that Jane may take the pets in, collect the bequest, and then euthanize the animals or take them to a shelter. A similar alternative is for a person to leave a conditional bequest to an animal protection organization, provided that the organization makes certain that his pets are adopted into homes.

 

Supporting animal protection organizations such as the humane society or animal rescue league is also a goal of many pet lovers. Gifts of income tax deferred retirement accounts are especially good choices. When an IRS approved income tax exempt charitable organization receives an income tax deferred retirement account, it will not pay income tax on the funds. This is in contrast to an individual who would pay income tax if the individual received the same funds. Outright gifts of cash or property are also a means to support animal protection organizations, as is naming such an organization as the beneficiary of a life insurance policy.

 

Using a charitable remainder trust, it is possible to provide an income stream to an individual for life and to have the funds remaining distributed to the animal protection organization. A charitable remainder trust provides estate tax and income tax deductions for the value of the remainder interest passing to the charity, but only if the beneficiary to receive income for life is human. A charitable deduction is not authorized if the income beneficiary of the charitable remainder trust is a pet.

 

If you are a responsible pet lover, there are many alternatives to ensure that your pets are cared for after your death. Various ways to benefit your favorite animal protection organization are available as well. You should consult with your estate planning attorney to determine the options which are best suited to your circumstances.

 

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A Big Price to Pay for Estate Tax Avoidance

By Attorney Ruth Tolf Ansell

July 2010

 

Although we can't talk about our own clients, we can't resist the temptation to talk about the estate of Dan L. Duncan, a Texas billionaire who died in March with an estate estimated to be worth $9 billion passing largely to his children and grandchildren.  Unless the estate tax is retroactively reinstated, however, no federal estate taxes will be payable by his estate since Mr. Duncan had the good fortune (for his descendants) to die in 2010.

 

Notwithstanding many attempts to revive the federal estate tax this year, no taxes are currently payable.  If Mr. Duncan had died in 2009, his estate could have paid more than $4 billion in federal taxes.  The tax cost could have been nearly $5 billion in 2011, under the new law currently scheduled to be effective next year with an exemption of only $1 million.  (Predictions for reinstatement of the estate tax next year range from an exemption of $1 - 5 million.)

 

Retroactive application of the federal estate tax for all 2010 decedents was also discussed as great length earlier in 2010.  As the months pass, however, retroactive application appears less likely. 

 

Accordingly, the biggest tax issue for the descendants of Mr. Duncan appears to be the capital gains tax which will be payable when they sell the assets which they have inherited.  Fortunately for them, the maximum capital gains tax is significantly less than the estate taxes which would have been payable and they are only payable after the inherited assets have been sold.

 

Unfortunately for Mr. Duncan, death in 2010 was the ultimate cost for the anticipated estate tax savings.  We do not recommend this course of action for even our wealthiest clients.

 

For more articles on this matter, check out the links below.

http://www.nytimes.com/2010/06/09/business/09estate.html?dbk

http://thetrustadvisor.com/news/billionaire

http://wills.about.com/b/2010/06/16/estate-tax-repeal-update-billionaires-children-and-grandchildren-reap-the-benefits-of-estate-tax-repeal.htm

 

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The Importance of Planning for Healthcare Decisions

by Attorney Christine S. Anderson

June 2010

 

The New Hampshire Advance Directive is one of the most basic yet essential parts of an estate plan. Without it, a family could be in turmoil when a loved one is incapacitated or unconscious following an automobile accident or sudden illness. If there is no official designation of an agent by the incapacitated person under an Advance Directive, the family may be unable to make decisions until a legal guardian can be appointed by the Probate Court.

 

A moving article on the importance of Advance Directives was recently published in The New York Times in connection with a national campaign to increase awareness, April 16, 2010, Health Care Decisions Day.

 

Don’t find yourself or a loved one unprepared in this situation. The New Hampshire Advance Directive contains two parts: a Durable Power of Attorney for Health Care and a Living Will. We recommend to all clients that they (and all of their children over the age of 18) sign a Durable Power of Attorney for Health Care, and a Living Will, if consistent with their beliefs.

 

If you have not yet signed the New Hampshire Advance Directive and would like to, you may print off a form with instructions here.

 

We encourage you to suggest that your children over the age of 18 complete and sign these forms as well. Keep in mind that the New Hampshire Advance Directive is only activated if the person signing it becomes incapacitated. A parent will likely not be able to schedule physician’s appointments or receive any other medical information for a competent adult child simply because the parent is named as the child’s agent under the New Hampshire Advance Directive. A separate medical record release form may be needed, if you want to be able to communicate with your adult child’s physician.

 

We are always happy to meet with you to complete and sign these documents. However, by making them available to be signed outside of the office, we intend to increase the number of individuals who have the Advance Directive in place. If you are a client and sign a New Hampshire Advance Directive outside of our office, please send us a copy for your file.

 

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Take Time to Review the Beneficiaries of Your Retirement Accounts

by Attorney Christine S. Anderson

May 2010

 

Periodically, we recommend that you review the designated beneficiary of your retirement accounts, to confirm that the designated beneficiary is consistent with your current estate planning intentions. Keep in mind that these accounts will be payable directly to the designated beneficiary, and not be subject to the distribution outlined in your will or trust, unless your estate or trust is the designated beneficiary.

 

Unlike most other assets, retirement benefits are generally subject to income tax when received by the beneficiary. (A different rule applies for Roth or after-tax retirement accounts.) Because the decedent deferred payment of income tax on the assets in the retirement account, the beneficiary will have to pay income tax at the beneficiary’s tax rate when the beneficiary receives a distribution from this account. Complex rules govern the distribution options and income taxation of retirement benefits.

 

The most common choices for beneficiaries are (1) a spouse, (2) adult children or other individual adult beneficiaries, (3) charitable organizations and (4) a revocable trust. There are benefits and drawbacks to be considered with each of these choices.

 

For married individuals, a spouse is a tax-favored beneficiary. Only your spouse can elect to roll over a retirement account and defer withdrawals from the retirement account until age 70 ½.

 

Both a spouse and other individuals can elect to stretch the withdrawal of funds from the inherited retirement account over their life expectancies, but these withdrawals must begin after the account holder’s death. Minimum distributions rules apply each year, but the beneficiary may elect to take more than the minimum amount at any time. Penalties for early withdrawal do not apply. The beneficiary can also designate who will receive the balance of the account at the time of the beneficiary’s death.

 

If the primary beneficiary is an individual, make sure that you have designated a contingent beneficiary in case the primary beneficiary predeceases you. If you fail to do this, the retirement account will be payable to your estate. In this case, the retirement account must be distributed, and all income taxes paid, within 5 years after your death.

 

If you plan on including one or more charitable, tax-exempt organizations in your estate plan, designating a tax-exempt organization as the beneficiary of your retirement account is a smart planning technique. While other beneficiaries must pay the deferred income tax when they take distributions from the account, a tax-exempt, charitable beneficiary does not pay income tax, and, therefore, is the only beneficiary that can receive these funds tax-free.

 

Designating a trust as the beneficiary of a retirement account gives the account holder more control over the distributions which can be made during the individual beneficiary’s lifetime and after the beneficiary’s death. If income tax deferral is also desired, it is important that the trust include certain provisions so that the trust will be ignored and the individual trust beneficiary will be considered as the beneficiary of the retirement account. If you do not include these provisions, the income tax deferral will be limited to 5 years after your death.

 

Retirement accounts are often a large share of an individual’s wealth. It is easy to lose track of how one’s retirement account is to be distributed upon death. Take time now to follow up with the administrator of your retirement accounts. Determine who the currently named beneficiaries are and consider whether these designations should be updated to be consistent with your current estate planning objectives.

 

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The Value of Our Services

by Attorneys Christine S. Anderson and Ruth Tolf Ansell

April 2010

 

We are fortunate to have so many clients who truly value and appreciate our services. The clients who best understand the value of our services are those who have had negative experiences with the legal system before they came to see us.

 

If you have been through a long, difficult probate of a loved-one’s estate, you understand why we recommend that you take steps to avoid probate. If you have paid the IRS estate or gift tax that could have been saved, you understand why we counsel our clients to structure ownership of their assets to minimize or completely avoid estate and gift tax. If you have been involved in acrimonious litigation with your siblings or the children of your second spouse, you understand how thoughtful estate planning could have prevented the costly court battles.

 

It is more challenging for clients who have never had negative experiences with the legal system to understand why we charge for the initial conference or how we can charge the fees that we do for a set of estate planning documents. We charge for the initial conference for two reasons. One is that we want to discourage those who are not truly serious about their estate planning from wasting their time and ours. The other is that we often convey valuable information in the initial conference. Many times clients will come to us for advice when a family member is about to enter a nursing home. The advice we give in those meetings can save the family significant wealth and the initial meeting, in some situations, is the only meeting. We charge what we do for estate planning because our documents not only help clients designate who they want to be in charge of their affairs and how their assets are to be distributed, but our documents also minimize the costs that would be incurred if the documents did not exist. For example, all of our estate plans include powers of attorney. If the powers of attorney are needed because the client becomes incapacitated, a costly guardianship is avoided. The cost savings from avoiding a guardianship alone exceed the cost of the entire estate plan. That is not to mention the cost savings achieved by avoiding the probate process. The estate tax saved when clients structure their holdings to minimize estate tax is typically hundreds of thousands of dollars. Many clients have told us that the peace of mind that is achieved when the client sets up the estate plan to minimize taxes, avoid probate and neutralize family conflict is well worth the expense.

 

Although those who have had an unpleasant experience which they would like to avoid in the future are often our most grateful clients, the beneficiaries of clients who have witnessed how smoothly the estate plans we set up can operate are also some of our best supporters.

 

If you are considering whether it is worth the cost to carefully structure and implement your estate plan, consider the potential tax, litigation and emotional expense to your family if you do not.

              

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The Effect of Divorce on Your Estate Plan

By Attorney Ruth Tolf Ansell

March 2010

 

Ansell & Anderson does not represent clients on marital matters or divorce. Unfortunately, however, not all of our estate planning clients remain happily married after they have signed their documents. Accordingly, we are often asked to advise our estate planning clients of the steps which should be taken if they have filed for divorce.

 

Before we counsel our clients, we will need to determine whether we had previously represented the client individually, or the client and the client’s spouse jointly.

 

If we have individually represented the client, we recommend that the client prepare new estate planning documents, removing the spouse as a beneficiary, executor, trustee and agent. Under New Hampshire law, however, we cannot counsel our client to transfer any assets or property belonging to either or both of the parties after the filing of a divorce action, until the property rights of each of the parties has been determined or agreed upon.

 

It should be noted that assets owned by both parties in a divorce are subject to equitable division between them. In the absence of a binding prenuptial agreement, ownership of property by either spouse does not assure the owner that this property will be awarded solely to this spouse in the divorce action.

 

Also, if a client should die before the divorce has been finalized, the client’s spouse will have the right to elect against the client’s will to receive a statutory share of the deceased client’s estate, unless the parties have been living apart and the surviving spouse has been guilty of conduct which would constitute grounds for divorce. Fault grounds are extremely difficult to prove under these circumstances.

 

If we have represented the clients jointly, we cannot take any action which would be contrary to the interests of either client until the divorce has been finalized. In this case, the estate planning file will be open to both of the clients and their attorneys, without exception.

 

This does not mean that changes cannot be made to the estate plan, however. Under our standard durable general powers of attorney, the designation of a client’s spouse as an agent will be revoked if either spouse files a libel for divorce. A similar result will occur under New Hampshire law with respect to advance directives for health care. New advance directives for finance and health care can be signed for these clients, whether we have previously represented them individually or jointly, since the prior documents are no longer fully effective.

 

Wills and trusts will generally remain applicable until a divorce has been finalized. For jointly represented clients, we cannot represent either spouse to change a will or trust in order to remove the designated gifts to a spouse without his or her consent until the divorce has been finalized.

 

Further, under New Hampshire law, when the marriage has been terminated by divorce, all gifts to a spouse under a will or revocable trust and the designation of a spouse as the executor under a will or as the trustee of a revocable trust will automatically be revoked. At that time, our joint representation will also be terminated and we may thereafter individually represent each of the clients. Nevertheless, we will not be able to represent either client in relation to any action against a former spouse or the estate of a former spouse who was also our client.

 

After the divorce has been finalized, we remind our clients to change the beneficiaries on their retirement accounts, life insurance and payable on death accounts. Contingent beneficiaries under the will and trust should also be reviewed.

 

 

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Dealing with the Distribution of Personal Property in Your Estate Plan

by Attorney Christine S. Anderson

February 2010

 

When meeting with estate planning clients, the discussion occasionally turns to the disposition of furniture, jewelry, china, silver, collectibles and other personal property. When clients ask for advice, I tell them that there are three common approaches. The first and most simple approach is to indicate the group to receive the personal property and generally state that the recipients can divide the personal property equally among themselves, as they agree. If they do not agree, the fiduciary (executor under a will, or trustee under a trust) would make the final decision. An example would be leaving personal property to surviving children in approximately equal shares, or perhaps, to surviving nieces and nephews. The second and most involved approach is to provide a detailed list of virtually all personal property and assign each specific item to a specific beneficiary. Clients who follow the second approach go through their home, room by room, making a list of who is to get what. The third approach is a combination of the first two: a few items are specifically given, with the remainder to be divided approximately equally among a group of beneficiaries. A less common option is to direct that all personal property is to be sold with the proceeds to be distributed to a particular individual or group of beneficiaries.

 

While there is no correct formula for success, there a few helpful guidelines to consider:

 

1. We often advise clients who are making a gift of personal property to a group of beneficiaries to consider creating a tangible personal property memorandum. Many of our revocable trusts refer to a tangible personal property memorandum and provide that a trustee make division based on the client’s wishes as expressed in such a memorandum. The personal property memorandum is not binding on the trustee. If you create one of these documents, you must have faith that the trustee will follow your wishes, but recognize that the trustee is not bound to follow your wishes, as would be the case if you included a specific bequest of particular items. So why bother with a personal property memorandum? A personal property memorandum is prepared by the client and can be modified at any time by the client without coming back into the attorney’s office for a trust amendment. Also, it is possible for such a document to include not only a listing of who is to receive certain items, but also the history of the item given along with the reason behind its importance to the giver. For example, a personal property memorandum could indicate something like "my silver tea set, which I received from my grandmother Jane Smith, to my granddaughter Jane Doe, who was named after her"; or, "my 36" strand of pearls, which were given to me by my parents when I graduated from law school, to my friend, Attorney Lucille Brown." Providing an explanation of the importance of the item to the giver can greatly enhance the gift.

 

2. Some clients will make a detailed list of all items in their home and try to get their adult children to agree on the items which each child wants while the parent is still alive. Most adult children are reluctant to go through this process for a multitude of reasons. (It makes them focus on an unpleasant topic: the death of the parent; it is often a tedious process; and most adult children are extremely busy and consider this matter less than urgent, especially while the parent is alive.) However, if you are able to force your adult children through this process, perhaps it will minimize later disputes over who gets the antique cookie jar.

 

3. A professional appraisal of personal property following death is a good idea. The cost is typically less than five hundred dollars. The appraisal will not only provide the values of the particular assets which will help with an "approximately equal" division, but it will also provide a list of assets from which the beneficiaries can make selections. It is important to get the appraiser to the house right away, before the contents of the house begin to migrate to other homes. Once the personal property has been scattered, it is virtually impossible to collect it again, in order to get a complete appraisal prepared.

 

4. In the planning context, I will often tell clients about how siblings may wage war with each other over personal property items worth much less than the amount spent for attorneys to fight about those items. Given this back drop, my advice to fiduciaries is that it is important to treat the disposition of the contents of the house with great respect and formality. The appraisal is an example of what may seem to be an extreme procedure for a typical family willing to "agree" to the division of the items in the house. Once the appraisal is prepared, provided that the document states that the beneficiaries are to divide the personal property equally, I will recommend that the beneficiaries draw straws to decide the order in which the beneficiaries will choose from the list of personal property. Once each person has made a choice, the first beneficiary can make his or her second choice and the selection process should go around again and again until there are no items left that any one wants. Some clients may choose to include this selection process in their estate planning documents.

 

5. Think about the people who will have access to the home after your death. If you are leaving the home to one person and the contents to a different person, this could present a problem. If you are concerned about access to the home after your death, instruct the fiduciary to have the locks changed promptly after your death.

 

Many times, clients do not give much thought to the disposition of personal property within an estate plan. Given the legal battles that can be waged over who gets Dad’s roll top desk or Grandma’s antique rocking chair, however, it makes sense to be thoughtful about the disposition of tangible personal property within your estate plan.

 

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New Year's Resolutions

by Attorney Christine S. Anderson

January 4, 2010

 

January.  It is that time of year again. Time to make promises about getting more exercise or losing weight. Why not make a promise to yourself to get your estate plan in order? Lots of us have in mind that we need to fine tune or overhaul our estate plans, but it is not a pressing matter until a health scare or travel plans motivate us to get it done. Before tax season is upon us and while the nights are long and dark, make a list of the estate planning revisions that you have been thinking about and then get in touch with Ruth or me. You would not believe how many times clients say to me "It is such a relief to have that accomplished. It was easy. I wish I had come in sooner."

 

Christine, what about your New Year’s resolutions, you say? Okay, okay, I promise that I will negotiate with my husband about the change in guardians that I have been considering. I will then prepare and we will sign new wills. In addition, I will finally get around to preparing that tangible personal property memorandum that I have been ruminating about for years. Will you?

 

Best wishes for a happy and healthy 2010.

 

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           For the third consecutive year, Attorneys Ruth Tolf Ansell and Christine S. Anderson have been named to the New England Super Lawyers list.  Each year, only 5% of the lawyers in New Hampshire receive this honor.

    

       Super Lawyers recognizes outstanding attorneys in more than 70 areas of practice using a rigorous, multiphase selection process that includes peer nominations, evaluation of attorneys based on 12 separate indicators of professional achievement and peer recognition, evaluation by other lawyers with one's practice area and a final discipline check to verify that the attorney meets the highest ethical standards.  Attorney Ansell and Attorney Anderson were honored for their accomplishments in the areas of Estate Planning and Probate Administration.

     

       Every year, the national polling firm of Woodward-White performs an exhaustive search for the country's best attorneys and publishes their names in "The Best Lawyers in America."   New Hampshire Magazine reprints the New Hampshire Attorneys in its October issue.  Once again, Attorney Ansell was named as a top attorney in trust and estate law.  Attorney Anderson was again named as a top attorney in elder law and trust and estate law.

 

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Should you name your Attorney as the Executor of your Estate?

By Attorney Ruth Tolf Ansell

December 2009

 

Many clients ask if they should name their attorney as the Executor of their Estates. Although this practice has been commonly accepted in New Hampshire for many years, it is not required or even recommended for most clients.

 

In recognition of the potential conflicts of interest which can arise when an attorney drafts a Will for a client which designates the drafting attorney (or another member of the same law firm) as an Executor, a new ethics opinion has recently clarified the issues which need to be considered in this designation. (The same concepts apply to the designation of Trustees, Guardians, Agents and other fiduciaries.)

 

First, the attorney must have the requisite competence, including specific knowledge about this field of law. If you are considering the designation of your attorney as the Executor, you should confirm his or her experience in this practice area.

 

Second, designation of your attorney as the Executor should only be made after you have considered all available options. You should discuss whether or not your goals will be better served with the attorney as the Executor, in lieu of your family members, friends or professional fiduciaries, such as a bank or trust company. Consider the relative experience each person may have to perform the anticipated duties. Also consider if the actions of the attorney will be covered by professional liability insurance, or if the action of a professional fiduciary will be bonded. The relative costs of each choice should also be considered. Although professional fiduciaries generally publish a fee schedule for their services, New Hampshire does not have a standard commission for Executors. You should ask how your attorney will charge for services as the Executor.

 

Under New Hampshire law, Executor compensation is subject to Court approval. If an Estate is closed informally through a motion for summary administration, however, these fees will be subject only to the approval of the beneficiaries of the Estate. (Similarly, if the attorney is designated as a Trustee or agent, compensation is not automatically subject to Court approval, but may be reviewed by a Court if a beneficiary or other interested person objects to a proposed fee.)

 

The same considerations arise when the attorney is designated as a successor Executor or as a Co-Executor with a family member, friend or professional fiduciary.

 

Whether or not the attorney is designated as the Executor or as a Co-Executor, another attorney may be retained to represent the Estate. Most clients anticipate that the designated attorney will serve as both the Executor and counsel to the Estate, unless another attorney is needed for any reason, such as counsel to handle the ancillary administration of the Estate in another state, or when a conflict may arise between the Executor and the Estate.

 

In addition to potential conflicts over Executor compensation and/or attorney fees, other conflicts may arise from the designation of the attorney as the Executor, including potential conflicts with other family members who may also be clients of the attorney.

 

It is recommended that the attorney send you a written confirmation of your informed consent to the designation of the attorney as the Executor. In order to avoid the appearance of impropriety, the attorney may elect not to be a witness to the Will. In some cases, another attorney may be asked to handle the execution of the Will, or another notary public may be asked to acknowledge your signature.

 

Stricter disclosure rules will apply if an attorney solicits a designation as the Executor of your Estate. Attorneys cannot ethically include themselves as an Executor or successor Executor without your informed consent. Similarly, an attorney cannot require you to designate him or her as the Executor.

 

Of course, you may always execute a new Will at any time, whether or not you have previously designated your attorney as the Executor. As with all aspects of your estate plan, changes should be considered periodically as your circumstances change.

 

 

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Common Myths About Probate

By Attorney Christine S. Anderson

November 2009

 

In the course of advising clients about estate planning and probate, I have discovered that many clients have misconceptions about probate. Some of the most common misconceptions that I have come across include:

 

If I have a will, my estate will not go through probate, right?

 

Wrong. Probate is the court process that a decedent’s property goes through following death, if the property was owned by the decedent in his or her name individually. The probate process is designed to provide a system of taking inventory of the assets, allowing creditors to make their claims against the assets and once the creditors are paid, to provide for the distribution of the assets to the beneficiaries or heirs. If the decedent had a will, the assets pass to the beneficiaries named in the will, after probate is complete. If the decedent did not have a will, the assets pass to the heirs according to the state law that governs how a person’s property is to be distributed if the person does not have a will: the intestacy statute.

 

Even if you have a valid will, that fact alone does not mean that your estate will not go through probate. Additional steps must be taken to avoid probate. In order to avoid probate, assets need to be either (1) titled in a living trust (either revocable or irrevocable), (2) held in an account that is designated to "Transfer on Death" automatically to a designated individual, (3) jointly owned, or (4) bear a beneficiary designation, like a life insurance policy or a retirement account.

 

I will save estate taxes if I avoid probate, won’t I?

 

Estate taxes have nothing to do with probate. New Hampshire has no estate tax currently and the Federal Estate Tax applies to a decedent’s assets regardless of whether the assets go through probate. In order to minimize estate taxes, you may be advised to transfer assets into a revocable trust, which includes certain provisions designed to shelter the assets from estate tax at the time of the second spouse’s death, and which would serve the added purpose of avoiding probate. However, avoiding probate does not in and of itself minimize estate taxes.

 

Probate fees are a percentage of probate assets.

 

In other states, probate fees can be a percentage of probate assets. Years ago in New Hampshire, there were probate fee guidelines designed to limit the fees attorneys charged for probating an estate and which were based on a percentage of assets in probate. In 1992, the probate fee guidelines were abolished. A New Hampshire Supreme Court case stated that fees need to be reasonable based on all the facts and circumstances. Estate of Rolfe, 136 N.H. 294, 299, 615 A.2d 625, 628-29 (1992). While it is not essential that an executor retain an attorney to help get through the probate process, given the volume of paperwork involved and the various deadlines, many executors do hire attorneys. Fees are almost always based on hourly rates and while not insubstantial, they are not a percentage of assets in probate.

 

The cost of probate also includes the filing fees which get paid to the Probate Court and which are typically less than $200 plus the cost of the corporate surety bond set by the Probate Court. Regardless of whether a will states that the decedent wanted the executor to be able to serve without obtaining a corporate surety bond, most New Hampshire Probate Courts order executors to obtain corporate surety bonds on the full value of the probate assets. Bonds are costly. For example, a $500,000 bond costs approximately $1100 per year for every year that the estate is open; a $1,000,000 bond costs approximately $1800 per year.

 

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How Often Should I Update My Estate Planning Documents?

By Attorney Ruth Tolf Ansell

October 2009

 

Whether you created your estate planning documents with Ansell & Anderson or other attorneys in the past, you may be wondering whether you should update your estate plan at this time. The answer to this question depends on several factors.

 

Has your family situation changed dramatically since you signed your estate planning documents?

 

This past summer, a great deal of attention was focused on the designation and appointment of Executors and Guardians in the last Will of Michael Jackson. Although none of my clients are likely to face the same media attention in life or in death, the same issue may be applicable if their Wills are not periodically updated.

 

Marriage, divorce, disability, the birth of children, or the death of your spouse or another intended beneficiary may change your intentions. Your documents may have been drafted to anticipate some of these changes. For example, a Will or Trust generally indicates who will receive an intended gift if the designated recipient does not survive you. Similarly, you may have already designated alternate Executors and Trustees in your documents. Each of your documents should be reviewed periodically to be certain that the appropriate people are named. This review should include the beneficiaries designated on your life insurance policies, retirement accounts, annuities and other Apayable-on-death@ accounts. I recommend that you review your documents at least once a year to address changes in your family situation.

 

Has your financial situation or asset profile changed dramatically since your estate planning documents were signed?

 

Significant changes in your wealth may affect your current intentions. Specific gifts may need to be adjusted or deleted if the value of your estate has declined significantly. Alternatively, if your estate has increased appreciably, a continuing Trust may be considered in lieu of an outright gift to individual beneficiaries. The purchase of real estate in another state may also prompt a review of your estate plan in light of the application of the other state=s laws. The purchase of a sizeable life insurance policy might prompt a review of your estate plan, to determine appropriate ownership and beneficiary designations. Similarly, changes in your estate plan may be needed when you retire and lose a significant group term life insurance policy. I recommend that you review your estate plan whenever your financial situation changes dramatically.

 

Do your documents need to be revised as a result of changes in the applicable law?

 

Although we routinely advise our clients of changes in federal and state law which affect estate planning in general, we do not review a client=s documents unless we are expressly asked to do so. Often, the application of new laws needs to be considered in conjunction with changes in the personal and financial situation of our clients. Accordingly, I recommend that you meet with your attorney for this review every few years.

 

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Getting Organized: an Estate Planning Attorney’s Perspective

By Attorney Christine S. Anderson

September 2009

 

            If you have ever had to handle the affairs of a friend or family member who was not well organized, you will most likely promise yourself that you will not leave your own friends or family in a similar mess.  Getting your affairs organized to make it easier for someone to pick up the pieces in the event that you are in an accident, become sick or pass away, is a real labor of love. 

 

            Think about what would happen if you were in a terrible accident on the way home today.  How would your spouse, child, sibling or friend figure out where your checkbook is?  Would they be able to get access to your bank account if you pay your bills online?  What if you die?  Would your family know what you want for final arrangements?  Would they know if you have estate planning documents or life insurance? 

 

            OK. So you want to get organized, but don’t know where to begin.  One way to tackle this task is to assemble a loose leaf binder.  The binder will include a wealth of information about you, and should be kept in a secure location.  It could be kept in a locked drawer of your desk or in a safe or safe deposit box, but make sure that your family or friends know where to find it and where the key or combination is to be found.  Certainly keeping this information stored in your computer is not a bad idea, but access to the computer and location of the file within the computer will need to be given to your loved ones.  If you choose to keep the information in your computer, printing a hard copy from time to time is a good idea.

 

            We are all trained to not write down the passwords to our computer.  However, in this context, it is appropriate to include the password to your computer, on-line banking, and various on-line accounts and keep this information in a secure location that can be accessed by your designated family member or friend.  

 

            Many people keep a net worth statement that lists their assets and liabilities.  If you expand on this, listing account numbers, your net worth statement can be an excellent resource.  If you have long-term care insurance, disability insurance and/or life insurance, let your loved ones know.  Be sure to include your liabilities: your mortgage(s), line of credit, automobile loan(s) and credit cards.  Include the account number, creditor’s telephone number and payment address.                     

 

            You should include with this information the name of the person who you have designated to act as your attorney-in-fact for financial matters to pay your bills, cash checks and handle your finances in the event of your incapacity.  Leave instructions about who is designated as your agent and how the power of attorney is to be released.  Indicate if your bills are paid on-line, or by check or by automatic debit.  Include a list of bills that are paid monthly. 

 

            Provide a list of your team of advisors.  List your financial planner and/or stock broker, your accountant and your estate planning attorney.  Consider including a copy of your most recent tax return.  

 

            You might also want to include the names of your various medical specialists and a list of your prescriptions.  If you do not buy all of your prescriptions at one pharmacy, this information could be quite useful to your health care agent, in the event of your incapacity.    

        

 

           Some people feel that funerals are for the living and should be actively planned by them to help them begin the grieving process.  This may be good advice in general, but it would be hugely helpful for your family to know if you have a cemetery lot or if you have a preference for cremation.  It is possible to visit a funeral home and select the services and products you would like at the time of your death.  The funeral home will keep a file on you.  You do not need to prepay for the arrangements, although you can.  If you do engage in planning your final arrangements, let your loved ones know which funeral home to contact. 

 

            It is important to review and update this information at least once a year.  After your personal income tax return is filed is a good time to do it.  You will have just reviewed the income reports from your various accounts, so this information will be fresh in your mind. 

 

            It is never easy for a loved-one to have to take over for you either because of illness or death.  Concern for your well-being or grief over your passing will likely sap the mental energy of the person handling your affairs.  You can make it easier on them by getting organized. 

 

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Click on the link below to read an article about estate planning that was featured on Good Morning America recently

 

http://abcnews.go.com/GMA/Story?id=8396359&page=1

 

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Creating your own Documents 

A Recipe for Disappointment? 

By Attorney Ruth Tolf Ansell

July 2009

With the proliferation of on-line document production systems and do-it-yourself estate planning books, you may be wondering whether you should create your own documents, instead of paying an attorney to prepare your Will, Trust and/or Power of Attorney. The on-line systems appear to be easy to complete. The estate planning books claim to be valid in all states. You may be tempted to try your hand at the paperwork to save some of your children's inheritance.

 

We understand the temptation. Unfortunately, our experience has shown that self-prepared estate planning documents are all too often either ill conceived or poorly drafted.

 

By analogy, when you decide to cook something, you find a recipe, buy the ingredients and follow the directions. Upon completion, your success can easily be measured. Some recipes will be enjoyed many times. Others will never be tried again. Still others will be altered to meet your tastes.

 

With estate planning, you create documents which are designed to be used when you are either incompetent or deceased. At this point, since you will be unable to make any changes, mistakes can be very difficult and costly to correct. Estate or income taxes may be paid unnecessarily. Even if everyone in the family agrees on the intended distribution of estate assets, court action is often needed to implement the intended plan. If the estate recipients do not agree on a proposed correction, however, the resulting litigation can last for many years, significantly reducing the value of the estate ultimately passing to the beneficiaries, and often irreparably damaging family relationships. Only the lawyers seem to benefit from the botched plan. In this case, the poorly drafted estate planning documents are the legal equivalent of food poisoning.

 

Most importantly, estate planning documents need to be tailored for your personal circumstances and financial situation. The documents which may perfectly suit your neighbor may be inappropriate for you and your family. As in cooking, the foods which your friends enjoy may not be to your taste or in your diet. Although the estate planning books and systems may offer many choices at minimal cost, there is limited direction to select the most appropriate provisions to meet your needs or intentions. The advice of a professional is needed to select the appropriate choice for your estate plan, to explain the legal and practical implications of the various options.

 

Admittedly, the New Hampshire Advance Directive for Health Care is a statutory form, available to download and sign without cost at http://www.gencourt.state.nh.us/rsa/html/X/137-J/137-J-20.htm

This form includes both a Durable Power of Attorney for Health Care and a Living Will. Originally adopted in 1991, this form was expressly redesigned in 2007 to be easier for individuals to complete and properly execute without professional advice. Nevertheless, for many of our clients, the choices in this document require further explanation.

 

Continuing with the food analogy, the New Hampshire Advance Directive for Health Care can be compared to a peanut butter and jelly sandwich, being both simple to create and offering limited options. By comparison, a Will would be a simple meal or a small dinner party, and a Trust would be a holiday banquet. The complexity and content of these documents will vary significantly from one person to another. For these reasons, it is critical that you seek competent legal advice before implementing an estate plan.

 

Most attorneys advertise that their services include estate planning. Some of these attorneys also counsel clients on a range of other issues, including divorce, real estate, corporate issues and criminal matters. These attorneys generally practice in all areas of the law and do not choose to concentrate on estate and trust law. With only a general understanding of estate planning, their documents may be similar to the self-prepared documents and not appropriately tailored to your unique family and financial circumstances.

 

The attorneys at Ansell & Anderson are not general practitioners. Each of us elected to focus our practice in trust and estate law, and related matters, many years ago. We will refer our clients to other attorneys for other complex legal issues. Most importantly, we will help you to create an estate plan which is appropriate for your family and property.

 

The documents which implement your estate plan are only a part of the process. We will help you to understand the choices which are available to you and the consequences of your decisions. At the end of the day, like the porridge selected by the fabled Goldilocks, your estate plan will be "just right."

 

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Asset Protection Trusts in New Hampshire

By Attorney Leila E. Dal Pos

May 2009

Asset protection strategies are most often used by affluent individuals and those in high-risk professions to shelter property from creditor claims and lawsuits. Historically, these strategies were limited and often involved transferring property to a spouse and/or irrevocable trust and giving up both control over and access to the property.

 

In this difficult economic environment, many more individuals and business owners are searching for methods to protect their assets from potential creditors. Fortunately, it is now possible under New Hampshire law to transfer assets to a trust, retain most of the benefit of the transferred property and still protect the property from certain creditors.

 

The New Hampshire Legislature recently enacted the Qualified Disposition in Trust Act, RSA 564-D (the "Act"), which applies to trusts created after January 1, 2009. New Hampshire joins at least nine other states (Alaska, Delaware, Missouri, Nevada, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming) which have enacted similar legislation.

 

The Act allows an individual ("grantor") to transfer property to an irrevocable trust for the grantor’s benefit (and for the benefit of the grantor’s family) while sheltering the assets from certain creditors of the grantor. This type of trust is called a "Self-Settled Spendthrift Trust" or "Asset Protection Trust" ("APT").

 

Under prior law, creditors could reach the maximum amount of trust property that a trustee could distribute to a grantor. For example, if a trustee had a discretionary power to distribute all of the trust property to or for the benefit of a grantor, then the grantor’s creditors could reach all of the trust property even though the grantor could not demand distributions from the trustee. Under the new Act, the same creditors could not reach the assets of the APT as long as the requirements of the Act were met.

 

Note that the following types of creditors may reach the property held in an APT:

(1) a prior creditor whose claim arose before or on the date assets were transferred to the APT and who files suit against the grantor within four (4) years of the transfer or, if the creditor files suit later, within one (1) year after the transfer was, or could reasonably have been, discovered by the creditor;

(2) a future creditor whose claim arises after assets are transferred to the APT and who files suit against the grantor within four (4) years of the transfer;

(3) a spouse who was married to the grantor before or on the date assets were transferred to the APT and who is entitled to alimony or property division;

(4) a child who is entitled to support; and

(5) a claim that arises as a result of death, personal injury or property damage caused by the grantor and occurring before or on the date assets are transferred to the trust.

 

If there is evidence that a grantor intended to defraud a creditor whose claim existed at the time property was transferred to an APT, the creditor may reach the assets under the New Hampshire Uniform Fraudulent Transfer Act.

 

Certain requirements must be met for the trust to qualify as an APT. The grantor may, but is not required to be, a New Hampshire resident. The trust must be irrevocable, contain a provision that the trust assets cannot be transferred, assigned, pledged, or mortgaged (whether voluntarily or involuntarily) by the grantor, and state that it is governed by New Hampshire law. The Trustee also must be located in New Hampshire and have custody of some or all of the trust assets. If an institution serves as trustee, it must have trust management powers in New Hampshire. Note that the grantor cannot serve as the sole trustee of an APT, but can be a Trust Advisor.

 

The Act permits a grantor to retain certain rights to income and principal of the trust while sheltering the property from creditors, including, but not limited to, the right to receive trust income or a 5% annuity or unitrust amount annually. The Trustee also may be given the power to make distributions for the health, support, maintenance and education of the grantor and to make distributions to the grantor in the Trustee’s sole discretion. Please note, however, that the rights retained by the grantor may disqualify the grantor and his or her spouse from receipt of Medicaid assistance. The grantor’s spouse and children may also be beneficiaries of the APT.

 

The Act allows the grantor to retain some control over the APT. For instance, the Act allows the grantor to retain the right to remove and replace the Trustee so long as the replacement trustee is not related or subordinate to the grantor. The grantor may also appoint trust advisors to make distribution and investment decisions. Finally, the grantor may retain the right to veto distributions to other beneficiaries, consent to investment decisions and direct, in his or her will, how the trust property will be distributed at the grantor’s death.

 

For individuals and business owners who are not in financial distress, an APT may be appropriate to shelter property from potential creditors while allowing the grantor to continue to benefit from such property. It should not be considered in isolation, but as part of a comprehensive asset protection plan. Careful consideration should also be given to the income and transfer tax consequences of establishing an APT.

 

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