Month: January 2013

How the Fiscal Cliff Budget Deal Affects Your Estate Planning

The fiscal cliff budget deal reached by Congress at the beginning of 2013 was complex and confusing to many Wisconsin residents but its effects are important to know, as portions of the bill can directly impact your long-term estate planning.

In December 2010, Congress and President Obama reached an agreement on a piece of tax legislation called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRUIRJCA”). This law set the estate tax exemption at $5 million, with that amount indexed for inflation in 2012. The law expired at the end of 2012. As that expiration approached, the estate tax exemption was poised to decline sharply (to $1 million,) and potentially trigger a huge impact on estate planning.

To avert this, Congress passed the American Taxpayer Relief Act of 2012 (“ATRA”), which President Obama signed on January 2, 2013. The compromise permanently set the estate tax exemption at $5 million per individual and tied it to inflation. (The 2012 exemption is $5.12 million, with the 2013 exemption set at $5.25 million.) For those estate that exceed the exemption amount, the new law raises the top estate tax rate from 35% to 40%. Without the ATRA, the estate tax exemption would have tumbled to $1 million, and the maximum tax rate would have climbed to 55%.

The ATRA also made permanent a provision of the 2010 law that allows widows or widowers to apply the unused portion of their deceased spouses’ estate tax exemption to their own, meaning that the couple may be able transfer double the applicable exemption amount tax-free. This “portability” of the estate tax exemption is not automatic and requires proper planning to accomplish.

Although many may feel that a figure of $5 million or $10 million is too large a number to apply to them, consider that it can include savings, pensions, investments, art, jewelry, IRA accounts, 401(k) accounts, property and other items often passed down from one generation to another.

The federal statute averting the fiscal cliff also had a ripple effect on Wisconsin tax law, as well. Wisconsin has a state estate tax, but it is a “pick-up” tax, meaning that it is equivalent to the federal credit for state death taxes allowed under the federal estate tax. The fiscal cliff legislation made permanent the elimination of that federal credit, meaning that it essentially eliminated the Wisconsin estate tax permanently, unless the state legislature changes the protocol for calculating state estate taxes.

Here are a few other implications of the fiscal cliff budget deal:

  • Income tax rates will remain lower for those individuals making under $400,000 and couples making under $450,000. For those earning over those amounts, the income tax rate will increase from 35% to 39.6%. Those dollar amount thresholds will be indexed for inflation beginning in 2014.
  • Capital gains and dividends taxes will increase from 15% in 2012 to 20% for those individuals making over $400,000 or $450,000 for couples.
  • The IRA charitable rollover was extended through 2013 by the fiscal cliff deal. This means that those individuals over the age of 70 1/2 can transfer up to $100,000 to charity of their choice, directly from their IRA assets.

Elderly Are Targets Of Financial Exploitation

We hear of scam artists taking advantage of the elderly far too often. These incidents tend to involve caregivers, persons with powers of attorney, perfect strangers and even family members. These are all forms of elder abuse by financially manipulating the elderly.

Some traits that we see far too often are loved ones that suffer from severe memory loss and dramatic mood swings. Often they sleep through the day and stay awake at night. Their state of being continually disoriented makes them an easy target for those who wish to manipulate them into making poor financial decisions.

A study completed by MetLife Mature Market Institute in 2010 revealed that elder financial abuse rose 12% from 2008 and is continuing to rise by double digits. The study also confirmed that those most trusted by the elderly person accounted for 34% of the financial abuse, such as paid caregivers, friends, neighbors and family members. Unfortunately these statistics are far from being accurate, since the vast majority of cases are never reported. For example, Sandra Timmermann, an executive director for the institute, related that for every case actually reported, there were four or five that went unreported.

These egregious actions take many forms. Paid caregivers will sometimes take advantage of the declining mind of their patient by taking too much money for their services when it is offered or ask for additional money when they have already been paid. The family member who offers to take care of paying the bills for their elderly parent can become too tempted, when they have check signing authority and credit or debit cards. All of a sudden, charges for restaurants, hotels and airline tickets appear on the monthly statements, among other things, which go undetected by the elderly mother or father.

Other people in position to take advantage of the elderly are investment advisors or financial planners who cause an elderly person to make poor investment decisions or estate planning decisions. In these instances, the investment choice is usually one that benefits the person giving the advice, rather than the client.

Finally, there are even alerts from the FBI about people who call on the elderly, identifying themselves as someone trying to help a grandson or granddaughter in need and asking for money to be wired to an account or particular place. The caller also asks that the grandparent not tell their mom or dad. This “grandparent scam” preys on the elderly by relying on their love and concern for grandchildren.

Here are a few suggestions to keep elder financial abuse from happening:

• Organize your affairs and have a successor trustee or durable power of attorney so that someone other than you has control over your finances, regardless of your age and mental state. If you have substantial assets ($500,000 in investments), consider naming an institutional trustee or power of attorney instead of relatives who might be tempted to help themselves.

• Have some form of checks and balances when there is more than one person who has total control of your finances. This is important for a couple of reasons. It can not only prevent fraud but it can be of benefit if one of the people with the power of attorney is unavailable or otherwise incapacitated from serving.

• Have duplicate financial statements sent to more than one person. This is easily accomplished by authorizing any financial institution to send copies to designated individuals, including your attorney.

Senate Passes Estate Tax Reform

According to many news sources, including CNN Money, the proposal the Senate passed and is sending to the House on January 1st includes an estate tax rate increase to 40% from 35%, but keeps the exemption at about $5 million and indexed to rise with inflation. This change would be permanent, so we would not need to look for changes every year.

It is anyone’s guess what the House will do, but this is good news for many of my clients.

Make Estate Planning Your First Resolution For 2013

As we begin the new year, we resolve to do things to make our lives better in 2013. Usually, resolutions include joining a health club to remove the extra pounds that were gained during the holiday season, among other things. Why not make estate planning one of your resolutions so that you can have peace of mind.

Some people procrastinate about estate planning until they receive a wake-up call, such as a health issue that is not fatal. They then take advantage of being given a second chance to address their estate planning needs. Unfortunately, many people are not granted a second chance. A heart attack, stroke or a fatal accident, may foreclose any planning opportunities.

Now is the right time to contact an estate planning attorney to begin the process. Having a Living Trust, a will, advance health care directives and a durable power of attorney is a good start. While creating these documents and considering the legacy you want to leave behind, additional estate planning tools can be entertained. It is important to establish an estate plan no matter what your age is, to make sure your wishes are carried out as you want and in a timely fashion.

During the holiday season, take time to reflect on 2012 and establish goals for 2013. Consider what you really want to do with your assets and how you want them to be distributed to your family. You might even want to consider a charitable bequest. Most importantly, begin the process and write down your ideas. Then set a deadline for meeting with an attorney to accomplish your wishes.

Here are some other things to consider doing in 2013 to preserve your financial health:

• Order a credit report to check for errors and take steps to have them corrected, if any are found.

• Take a look at your year-end statements from your various investment accounts and make sure you are properly diversified and the investments are still consistent with your tolerance for risk and investment objectives.

• With interest rates at all-time lows, consider refinancing your mortgage and paying off credit card debts that carry high interest rates.

Establishing an estate plan enables individuals to transfer wealth from one generation to another, to charities or to some other individuals. It provides for your care in the event that you become unable to care for yourself and it designates someone to care for any minor children. Probate can be avoided and considerable estate taxes can be avoided.

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