IRS Issues Fact Sheets Describing How to Avoid Identity Theft

With the recent news that TurboTax will no longer allow electronic filing of state tax returns because of the high incidence of fraud stemming from identity fraud, you may find the 2 fact sheets released by the IRS on January 26, 2015 interesting.  Click on the following links to read the fact sheets:

FS #1 and FS #2 -Identity-Theft-Information-for-Taxpayers-and-Victims

or go to IRS.gov site for identity theft.

Heeding the warnings and taking the precautions described by the service may help you avoid the tragedy and inconvenience of a stolen identity

If you want further information, please contact us for help.

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End of the Year Notes – Gifting

Much has been written about strategies for taking advantage of the historically unprecedented $5,120,000 exclusion from gift taxes that is available for gifts during 2012.  Time is running out on the ability to make and document such gifts before the end of the year.

Of course the furor is all about what happens if the Bush era tax cuts expire and the estate tax exclusion amount goes back to $1M and the opportunity to get an additional $4.12M out of the estate and gift tax system is lost.

There are several strategies available that address the concerns, but factors to consider include

  1. Do you have sufficient wealth that you can afford to give away assets of that magnitude?
  2.  After making the gift, will you have enough cash flow to be comfortable?
  3. Do you have assets to give away that are not highly appreciated; and if so, is there an alternate strategy that will work for you?

Giving away $1M does nothing to improve your tax situation.  Because of the uncertainty about what the tax laws will be, it is not clear that giving away even $3.5M will help.  This is a strategy that works best at the maximum level and at best is only neutral at the $3.5M level.  It is also a strategy that must be careful designed and carried out.

Most plans will require a formal valuation of the gift property, mindful analysis, and careful implementation.  If you need help working through the analysis, call me now.

Next week, I will explain the mechanics of the coming changes to capital gains tax and the medicare surcharge and why it is tax efficient to harvest capital gains before the end of the year.

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Should I Use A Beneficiary Deed?

Arizona was the first state to recognize beneficiary deeds as a method of transferring property at death.  At the time this article is written, Arizona has been joined by 16 other jurisdictions and the list is growing larger.  Why is it so popular?

A beneficiary deed allows you to retain ownership of your property and to change your mind at any time during your lifetime.  You may sell, rent, or mortgage the property without any complications.  It is becoming a favored strategy in conjunction with living trusts because it avoids having to re-title the property, notify lenders and insurance companies, and to remove the property from trust if the property is refinanced.

The beneficiary deed must be recorded before the grantor’s death.

A beneficiary deed passes title at the moment of death to those persons named as grantees in the deed.  All that is required is to record the death certificate and notify the lender, insurance company, county assessor, and homeowner’s association if there is one.

When creating a beneficiary deed, care must be taken to consider alternate or unexpected succession issues.  You may name one or more beneficiaries who may take as tenants in common or with rights of survivor-ship.  Grants to predeceased grantees may lapse or pass to the named grantee’s descendants depending on the language chosen.  Each grantee will have an undivided interest in the property and an equal right to possession unless otherwise stated.  You may create life estates or any other form of ownership recognized in Arizona.

Beneficiary deeds work well when the title will pass to a single individual or to a few individuals all of whom share a common vision of what to do with the property.  If there are multiple grantees who will not work well together, then a beneficiary deed may create problems and a probate will probably be a better choice for the grantor.

When using a beneficiary deed, you must be watchful for changes in your family dynamics or structure that would make this simple method inappropriate.  The deed may be revoked at any time.

If you think a beneficiary deed may work for you, contact me to discuss beneficiary deeds and your estate plan.  I look forward to hearing from you.

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What Is Probate?

Probate  is the court process by which a Last Will and Testament is proved valid or invalid. Its name is derived from a Latin root word that means “the truth.”  It is also the legal process whereby assets of a decedent are administered.  “Administration” means finding, collecting, and distributing assets in kind or after liquidation and payment of the decedent’s debts and the administrative expenses incurred performing those acts.  A probate case is also the process whereby the distribute-es of the decedent’s assets are determined and the creditor claims are examined.

Probate is not required in every case and the kind of assets owned by a decedent and how those assets are titled will determine if a court proceeding is necessary or not.  I am best known for creating estate plans using trusts that help families avoid estate taxes and probate, but my staff and I are also experienced at helping families determine if a probate case is necessary and to help families transition assets with as little anxiety and expense as possible.

Contrary to popular belief, the value of the assets is not the primary factor in determining if a probate case is necessary.  Some very small estates must be probated and many high value estates avoid probate.  Probate is a different issue than whether an estate tax return is required.  We will help you make an initial determination as to both issues.

The key factor for probate is whether or not the decedent would have had to sign a legal document to transfer the asset.  Common assets falling into this category are houses, bank accounts, vehicles, and business interests for which no alternate method of transfer has been pre-arranged.  We can assist you in pre-arranging your affairs to avoid probate and also efficiently transfer the assets regardless of whether pre-arrangements were made or not.

Life insurance proceeds or retirement plan benefits left to minors, survivor-ship interests in joint tenancy property that have not been documented, oil and gas interests, interests in partnerships or businesses are just a few of the problems you may need help resolving.  Arizona property owned by a decedent in another state is another common problem.

Some issues can be resolved by recording or filing a death certificate in the proper place, small estate affidavits can be used to good effects under some circumstances, and in some cases a probate case in one or more jurisdictions may be required.  This much is true, choosing the wrong process will delay the resolution and increase the eventual cost.

Even if all the decedent’s assets were properly owned by the living trust, there is still work to be completed before the beneficiary can enjoy the use of the asset.

To reduce the anxiety and expense of transferring assets after the death of a loved one, it is best to begin with the end in mind, which means understanding what needs to be done, having a good process in place for doing it, and having competent advisors assisting you.

I want to be that advisor for you.  Contact us to find out how we can work together.

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Trouble Ahead For Single Members LLCS (SMLLCS)?

A primary reason for forming an LLC is to protect a client’s other assets from liabilities arising from the business of the LLC.  That protection may now be at risk.

For some time, practitioners have been alert to the limitations in some states of the protection afforded to assets held in a SMLLC even when the statute, as in Arizona, provided a charging order as the sole and exclusive remedy, but now there is a new concern – that even clients that meet state law may be at risk under alter ego liability theories.

I’m taking a break this week from the explanations of basic estate planning to discuss an important recent case which imposes troublesome limitations on the protection afforded by a single member LLC.

The Colorado appellate court recently used an alter ego analysis to erode the protection an LLC provides to its members.  In Martin v. Freeman, the court employed a 3 prong analysis and found that a single member of an LLC was liable for the debts of his LLC because (1) the LLC was the alter ego of its member, (2) that the entity was used to defeat a rightful claim, and (3) an equitable result was obtained by ignoring the entity.  The court considered a variety of fact specific elements, including insider control, thin capitalization, the entity was a mere shell, legal formalities were disregarded, and commingling of funds, all relatively common occurrences in the operation of Arizona LLCs.  The court’s analysis twisted relative innocent facts to reach the conclusion that the validly formed and operated LLC provided no protection for its single member.  There was a spirited dissent which drew a bright line on the lengths to which the majority was willing to go to express its dislike for the notion that clients can avoid potential liability by merely forming an LLC in compliance with existing statutes.

The case makes clear that clients must supply something much more than a shell of an LLC.  Observation of certain elements derived from sometimes obtuse rulings from other jurisdictions may be important in cementing the client’s protection.  Merely observing the letter of the statute may not be enough.

Call me for a copy of my newly revised LLC operations manual which describes additional steps which may be important if you are to avoid personal liability when your LLC is sued, to obtain a more robust operating agreement, or form a new LLC.  Be careful out there, it is a dangerous world.

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Planning For After The First Death

A comprehensive estate plan includes understanding what steps will be required when you or your spouse dies.  Tax planning advantages and the intended distribution of wealth to your loved ones takes place in stages and certain opportunities will be lost unless the proper plan is in effect when the first spouse passes away.  This posting describes what steps are necessary after the first death.  Next week’s posting will describe how a comprehensive plan works through the life of a couple, the death of a spouse, and finally the death of the surviving spouse.

The estates of the first spouse to die often avoid probate.  Unless properly planned, the ease of the first transition may lull loved ones into a false sense of comfort that may surprise them upon the second death.  This may be especially true since 1/1/2011 when the new concept of “portability” was introduced allowing properly administered estates less than 10 million dollars to avoid estate taxes altogether.

Even with lack of proper planning many spouses may avoid an estate administration if the value of their estate is less than 10 million dollars.  Real property and accounts may be in joint tenancy or community property with rights of survivorship and life insurance, annuities, and retirement accounts may designate the surviving spouse as the death beneficiary and the surviving spouse may do nothing because there just doesn’t seem to be a need for it – the surviving spouse has complete access to everything and may not appreciate the need to administer those assets.

The recording of a death certificate and notification of the custodians of any policies, contracts, or accounts may be sufficient for the surviving spouse to gain control over all those assets.  Yet a gaping hole has been created unless the surviving spouse takes care to name new beneficiaries of retirement accounts that are retitled in the surviving spouse’s name (a “spousal rollover”) and have a Will or Trust which designates who inherits upon the death of the surviving spouse.  If the decedent has begun taking minimum required distributions, a minimum required distribution must be taken in the year the decedent dies, if none has already been taken.  There are substantial penalties for failing to take that minimum required distribution.  Taxes must be paid on the distributions taken either by the decedent or the beneficiary.

Failing to record a death certificate may cause delay later when trying to sell or transfer the property after a second death.

Accessing accounts after the second death when the first decedent’s name has not been removed may also cause delay and unnecessary expense.

In order to claim the benefits of “portability,” a timely estate tax return must be filed even if no tax is due.  This will be particularly important if the estate tax exemption amount returns to $1,000,000 on 1/1/2013 as is presently projected.

Failing to establish the credit shelter trust provided for in most good estate plans may be an expensive mistake.  It is a mistake of good faith if only estate taxation is considered, but other considerations such as how the children of blended families are treated or how the assets are protected from creditors are non-tax reasons to be concerned about the AB division in addition to the lawful avoidance of estate tax.

I recommend a legal checkup after any death just to be sure loved ones have good advice and guidance about how to proceed.  I like to create a customized checklist for the family of every decedent so they know when the administration of the estate is complete.

If you or a friend wants help understanding the legal process either before or after death, please call me.

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The 6 Potentially Fatal Flaws Of Joint Tenancy

Last week I mentioned joint tenancy bank accounts as being a simple, but potentially dangerous way to provide for a transition of bank accounts.  It is a commonly used technique because it is simple and is the favored way for bankers and investment advisors to administrative your accounts with the least amount of effort for them.

It is another example of my “broken clock” philosophy.  It is right twice a day.  When it works it is very simple and economical, but when it fails, it falls with a loud “thud” and can be very expensive, especially when you are aware of the other almost as simple and cost effective methods you could use.

About 12 years ago, I wrote a brief explanation of these problems from the perspective of the wealth transfer system.  Those 6 reasons remain valuable today, but I have rearranged the order of importance to take into consideration the different considerations which I believe almost everyone will face based on today’s different challenges.

In summary, using joint tenancy, may expose your assets to the liabilities of your joint tenant, accounts may be at risk because the joint tenant has control over the account without a corresponding fiduciary duty, you may unwittingly incur the costs of an unwanted probate proceeding, you may suffer an adverse income tax result, you may suffer an adverse estate tax result, your property may not pass to your descendants as you intended, and you may have created an avoidable risk from accidental creditors.

Here are the 6 tragic adverse, but avoidable, consequences you and your family may suffer if you rely on joint tenancy:

1. Joint tenancy accounts with adult child or caretaker subjects you to expensive and potentially devastating results and the loss of the asset.  Joint tenancy property is fair game for creditors of your joint tenant.  Although you may have an opportunity to prove the property was placed into joint tenancy for convenience and that the property really does not belong to the debtor, you are exposed to litigation and the expense and uncertainty that are litigation’s natural results.  You are also susceptible to the joint tenant misusing the property or not sharing the property with his or her siblings as you intended.

2. Joint tenancy will avoid probate for the first spouse, but not the second.  In fact it assures that there will be a public probate proceeding when the surviving spouse dies.

3. If the asset is real property or an investment account, joint tenancy will also cause the estate to lose the double step-up in basis afforded to community property assets.  This is a significant loss resulting in additional capital gains taxes if the asset is sold by the surviving spouse

4. A joint tenant has no control over what happens to the property after death.  A surviving joint tenant can sell or transfer the property, or can pass it to the survivor’s choice of heirs, including subsequent spouses.  Joint tenancy deprives you from assuring that your property stays in your bloodline.  Without any further planning, property owned by a surviving joint tenant will pass automatically to the heirs of the survivor.  If the survivor’s heirs are not the same as the decedent’s this could lead to an unintended result

5. No creditor protection is available when property passes by joint tenancy.  Creditors come in many shapes and sizes these days.  Jury verdicts in even the most common accidents easily exceed insurance limits.  Aging survivors are more susceptible to lapses of concentration while driving or otherwise.  Why unnecessarily expose all of the survivor’s assets to creditors when a trust can provide creditor protection to your spouse or your descendants?  This is valuable protection that can not be purchased at any price if you miss the planning opportunity of placing your accounts into a trust that will be irrevocable when the first spouse dies.

6. No estate tax protection for post-death appreciation is available if joint tenancy is used.  Although the asset will pass to your spouse estate tax free; upon the death of the survivor, the entire estate is exposed to estate taxes and the estate tax exemption available to the first decedent is lost unless you have planned for a credit shelter trust or file an estate tax return and claim the “portability” carryover exemption.  If your combined estate, including life insurance is likely to exceed $5,000,000 (or $1,000,000 if the law is not changed before the end of 2012), then you have unnecessarily benefitted the government at the expense of your descendants.  This could be a mistake that could cost you 55% of the value of your estate in excess of $1,000,000.

     I encourage you to take the time to consider whether joint tenancy is a viable strategy for you.  You may be the broken clock that is right twice a day, by why take that risk relying on a do-it-yourself approach to a complicated issue.  Call me to help you sort through what plan is best for you.

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Planning For Incapacity

Planning for incapacity involves understanding how incapacity might occur and a commitment to having a current plan.

Often considered crucial only for end of life planning or for diminished capacity, dementia, or Alzheimer’s Disease, planning is most important if you become incapacitated due to an accident, injury, disease, or other medical condition.  As with all modern planning, the plan must be flexible enough so that if implemented tomorrow, it will be effective for many years.  A common mistake is assuming that the plan will not be implemented for years to come.

The key for all planning is give adequate thought to how you and your family will react in a variety of situations.

A discussion with your spouse and loved ones about how you want to be cared for is better than any document you can sign for assuring dignified treatment consistent with your values and intentions, but the document is what expresses those values and intentions.

Your health care power of attorney (HCPOA) should name at least a primary person, usually your spouse, and one or more secondary people who are aware of your personal opinions about how and when you want health care and medical procedures delivered to you.  My preference is that the document be open ended and give the broadest possible authority to the agent you name.  The Arizona statutory form may be sufficient for some people and can be viewed and downloaded by clicking on this link, Arizona standard form, which will take you to the Arizona Attorney General’s website.

In addition to the HCPOA, should decide what are your end of life instructions and incorporate them into a living will.  The statutory form can also be downloaded at the Attorney General’s website, but it is somewhat less useful and more confusing because of the many options allowed.  I recommend that you discuss your end of life intentions with your loved ones to be sure everyone likely to be involved knows how you feel about life and dying.  I use a very simple form that plainly and unambiguously declares your end of life intentions.

In addition to these important decisions, you should consider who you want to make decisions for you if you are unable to make them for yourself because of a mental defect which might be dementia, Alzheimer’s, alcoholism, or other form of diminished capacity.  It will be no surprise that I believe it is more important who you select to make the decision and the authority given them than trying to make specific declarations for someone to follow.  The greatest flexibility translates to the best possible decision making, but your values and intentions must be known to the person you name.  Although you might accomplish that within the document, it is best if you have discussions extending over a period of time to make your values and intentions clearly known.

After assuring that all your health and medical needs are addressed, you must consider who will act for you to pay your bills and make your financial decisions.  Often, those acts will be performed by your co-trustee if you have a spouse or by an adult child who is already named as a co-trustee, but if you don’t have a co-trustee, you need a good mechanism for determining when a successor trustee under a trust or an agent under a general durable power of attorney will be able to act.  If the persons named by you to act are absolutely trusted, the appointment may be immediately effective.  If you want the appointment to be effective only if you are incapacitated, then the document must provide that the power “springs” into being only if you are incapacitated and you must provide a method for determining when that event occurs.  A common mistake is naming another person, usually a son or daughter, as a co-owner of your accounts so they can write checks in an emergency.  Despite the convenience, that is often a mistake because of the potential for problems I will explain next time.

If you would like a more in depth discussion of your planning needs, please call me.

Mark Bregman

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The Continuing Series On The Complete Guide To Estate Planning – Part 4 – Wealth Transition

Warning – The following are general comments for educational purposes and not intended as legal advice.  No client attorney relationship is intended and you should consult an attorney about your specific circumstances before taking any action in reliance on the general information presented in this posting.

This is the third part of the life time planning posting.  It describes the types of documents and the role players you will need to be “well planned.”  Next time, I will focus on why planning for wealth transition is important – for large taxable estates and especially for small non-taxable estates where the costs of not planning can have a bigger impact on your loved ones.

You must decide who will act for you in 6 different situations.   Four of those roles will be acted out during your lifetime.

Agent(s) under your Health Care Power of Attorney.  You must decide if you are unable to make informed medical decisions who will make those decisions for you. You should choose at least one contingent choice if your primary choice is not available. I do not recommend choosing multiple agents to act at the same time because there should be a clear chain of authority to whom medical providers can look for a decision. Your decision maker may consult others, but that authority is not usually written into the grant of authority.

You may specify that certain actions be taken or withheld, but the most useful process is to appoint someone who knows you and your intentions. Too many rules may be confusing rather than helpful.

Agent(s) under your Mental Health Power of Attorney.  In addition to a general health care power of attorney, Arizonans use a mental health power of attorney that may be incorporated into your health care power of attorney or be set forth in a separate document. The mental health power of attorney authorizes your agent to admit you to a “level one behavioral health facility” which is a facility where the doors are locked and you may be restrained if necessary. These facilities are for persons with advanced dementia or Alzheimer’s disease and for younger persons with drug, alcohol, or behavioral conditions. The mental health power of attorney is only effective if the person is unable to make an informed decision about an admission. Without the mental health power of attorney, you may still be admitted to such a facility, but the facility must release you unless the responsible person has obtained a temporary or permanent guardianship within 48 hours. The legal process for obtaining such emergency relief is expensive and most client opt to grant mental health authority to their agents.

A Living Will does not require an actor or role player because it is a declaration of your intention. You must decide how you perceive your own end of life. Do you want to let go when the doctors say there is no possibility of continuing meaningful life. The relevant medical legal terms are “persistent vegetative state,” “irreversible coma,” or “terminal illness” and the decision of whether you’ve reached one of those stages will be made by the physicians who are attending you or anyone you specify. The living will is a declaration of your intent that when it is time, you are content to let nature take its course without the application of heroic measures to continue your life in a diminished state because medical science can. Compare the difference between a declaration of your intent, with the directives in the powers of attorneys that appoint someone to make decisions for you.

A Living Will should not be confused with a “DNR” or “do not resuscitate” direction which in Arizona must be printed on an orange background, use specific words, and be countersigned by a consulting physician. If you have the orange form, you may also wear jewelry with the notification. This will give notice to all who read it that you do not desire to be revived if you stop breathing. The DNR is seldom used except in the most dire end of life circumstances.

We can provide living wills that are specific to particular religious beliefs and allow your religious leader to participate in the decision if you desire such participation.

Agent(s) for your Financial Powers of Attorney.  Financial Powers of Attorney can be useless or indispensable depending on your need at a particular time.  A power of attorney will often be a frustratingly useless document because in Arizona there is no law requiring a third party to honor it and as a consequence, most banks will not honor it unless it meets very stringent requirements including being of relatively recent (less than a year, sometimes six months) vintage and often a bank will require that it be on their own approved form.

The problems with banks are usually overcome because your account can be held in joint ownership with your spouse and you can assure access to your accounts if you are unable to write your own checks by having your account card at the bank indicate an agent or POA.  This is different than a co-owner or a POD and often the bank employee must be educated about their own form, but every account card allows such a designation.

However, a power of attorney will be indispensable for appointing an agent to deal with the Internal Revenue Service, to deal with the Social Security Administration, to deal with insurance companies, including health and long term care insurers and issuers of annuity contract, the Post Office, custodians of retirement accounts, and numerous other third parties.

Typically your spouse is your first named agent, but you must give consideration to alternates if your spouse is not able to act.  Without a valid and acceptable power of attorney, your care givers may have to seek a judicial appointment as your conservator in order to act on you behalf.  You should give careful consideration to whom you select to act on your behalf because the agent must be able to exercise good judgment for your benefit without any thought to there own benefit.

If you have a trust, you may have a Disability Panel which are the people you trust to make the decision whether you are incapacitated to the point of needing your successor trustee to assume control of your trust assets.  Our disability panels can act either by majority or unanimous vote depending on the make up of your panel and the panel is usually encouraged to seek the advice of your treating physician.

Often, the same people will act in several roles, but each role is unique.  If you give some thought to who you want to act for you in different situations, the planning of your estate will be easier and more complete.

Next time, I will explain basic estate financial and wealth transition planning while you are alive and well.  Thanks for reading and please call me if you would like a personal consultation about your emergency planning or wealth transition concerns.

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Introduction To Arizona Estate Planning

Welcome to a new multi-part serial presentation of what effective estate planning looks like.

Because many common estate planning issues are best handled using a trust based estate plan whose centerpiece is a revocable living trust, trust planning has become common place.  Nevertheless, many people new to estate planning begin with commonly held misconceptions.  Chief among those misconceptions are the beliefs that:

  • The decision to use a revocable living trust is based upon how much money you have;
  • Most estates will be subject to death taxes; and
  • Probate is an expensive process to be avoided above all else.

Under the constant bombardment of marketing pitches from seemingly impeccable sources, these fears are fed by myths which I will dispel in the following series of blogs.  I will explain important issues in estate planning in a logical rather than fear based environment.  I hope you find this information helpful.

A useful definition of estate planning is I want to control my assets while I am alive and well, and pass what I own, to whom I want, when I want, how I want, all at the lowest possible overall cost.  Every part of this definition is incorporated into each plan I create, but the first step is learning what you are up against.  The following topics will be covered in the order in which they will occur in the course of your life and death:

  1. Planning While Alive and Well;
  2. Planning for Incapacity;
  3. Planning for After the First Death; and
  4. Planning for Wealth Transfer to Descendants.
  5. Values Legacy
  6. Why Do-It-Yourself Planning using Forms Can Be Expensive

I will describe the questions you need to answer; I won’t answer the questions for you.  I intend to provide you a useful framework for your discussion with me or your own estate planner.

If there are additional topics you would like to see in more depth, post a comment and we’ll get to it.

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