Should Your Graduate’s To-do List Include Powers of Attorney?

It’s that time of year when many high school graduates are preparing to leave home, whether it be to attend college or join the workforce.  While families prepare for this change in their child’s lives, many parents forget that they will no longer be able to make health care and financial decisions on behalf of their child once he or she turns 18.  Without the proper advanced planning documents in place, parents would need to obtain a court order to exercise this authority on behalf of their adult child, even if the child becomes incapacitated.  For this reason, we recommend that all parents encourage their children to implement a Durable Power of Attorney, Power of Attorney for Health Care, and HIPAA Authorization for Release of Protected Health Information upon attaining age 18.  In doing so, it may be helpful to more fully understand what these documents do.

Durable Powers of Attorney: Authorizes the designated attorney-in-fact to act on behalf of the adult child with respect to most financial matters.  This could include managing bank accounts, paying bills, signing tax returns, applying for government benefits, applying for a lease, etc.  Durable Powers of Attorney can be either immediate or “springing”.  To activate a springing Durable Power of Attorney, the adult child must be deemed incapacitated by two different physicians (or pursuant to recent legislation, one physician and one psychologist, physician’s assistant, or nurse practitioner).

Power of Attorney for Health Care: Authorizes the designated health care agent to make medical decisions on behalf of the adult child if he or she is incapacitated.  Like a springing (as opposed to immediate) Durable Power of Attorney, a Power of Attorney for Health Care must be activated upon the adult child’s incapacitation.

HIPAA Authorization for Release of Protected Health Information: Authorizes an adult child’s health care providers to release information to and discuss the child’s medical care with the designated individuals.  Without this authorization, health care providers are legally prohibited from discussing the adult child’s care with third-parties, even if those third-parties are the child’s parents.  The HIPAA Authorizations is also effective even if the adult child’s Power of Attorney for Health Care has not yet been activated.

Most of the time, a parent will never need to utilize these documents (at least they hope not to) on behalf of their child.  However, it is better to hope for the best and plan for the worst.

If you should have questions regarding these issues, please contact Lin Law LLC at (920) 393-1190.

U.S. Congressional Bills Introduced Regarding Estate, Gift and Generation-skipping Taxes

A bill was introduced in the Senate to reduce estate, gift, and generation-skipping transfer tax exemption amounts and increase tax rates.  The bill would also eliminate or reduce the tax benefits received from certain estate planning techniques.

Senator Bernie Sanders (I-VT) introduced Senate bill 994, also known as the “For the 99.5 Percent Act”, which would amend the Internal Revenue Code to increase the rates regarding taxes on the transfer of the taxable estate of decedents who are US citizens or residents.

For estates over the basic exclusion amount, the rate would be 39%.  For estates over the basic exclusion amount and not over $10 million, the rate would be 45%.  For estates over $10 million and not over $50 million, the rate would be 50%.  For estates over $50 million and not over $1 billion, the rate would be 55%; and for estates over $1 billion, the rate would be 65%.

The bill would also reduce the basic exclusion amount, which for 2021 is $10,000,000, adjusted for inflation, to $3,500,000 for estates of decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021.  (The text of the bill does not include an annual inflation adjustment for the basic exclusion amount).

The bill would also eliminate a step-up in basis for certain grantor trusts, the assets of which are not includible in the grantor’s estate.  This foregoing change would make clear that assets in an intentionally defective grantor trust (IDGT) would not receive a step-up in basis at the death of the grantor unless the assets were includible in the grantor’s estate.

Additionally, the bill would apply an inclusion ratio of one to any generation-skipping transfer trust that is longer than 50 years, and would impose a limit of two donees for annual exclusion gifts.

A bill was also introduced in the U.S. House (H.R. 2576) to amend the Internal Revenue Code “to reinstate estate and generation-skipping taxes, and for other purposes”, although text has not been received for this bill as of this date.

THE BOTTOM LINE

Under the proposed legislation, estate tax exemption levels would fall and rates would rise.  It is important to remember that each bill has only been introduced and may have only a small chance of passage into law.  However, the proposed legislation represents another indicator that revisions to the tax code will likely remain a Congressional priority.

If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.

Biden Administration Likely to Propose Increasing Capital Gains Tax and Other Estate and Income Taxes

President Biden will likely propose almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help with social spending that addresses inequality.

Although the plan is not yet public, people familiar with the proposal have indicated that for those earning $1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could reach 43.4%.  A new marginal 39.6% rate would be an increase from the current base rate of 20%.  The existing 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income.

This proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor.  President Biden campaigned in part on equalizing the capital gains and income tax rates for wealthy individuals, stating that it’s unfair that many of them pay lower rates than middle-class workers.

The Biden administration has also recently indicated its desire to enhance the estate tax for the wealthy.  The current estate tax exemption of $11.7 million per individual (and $23.4 million per couple) could be reduced by approximately 50%.  The step-up in basis at death, which increases the tax basis for inherited assets to their full fair market value upon death, could also be repealed.

These proposals are likely to be released soon in the administration’s forthcoming “American Families Plan”, which is expected to include a new wave of spending on children and education, including a temporary extension of the expanded child tax credit.

According to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform, the capital gains increase would raise $370 billion over a decade.

OTHER POSSIBLE PLAN DETAILS

  • The top individual federal income tax rate could rise from 37% to 39.6%.
  • The corporate tax rate could increase from 21% to 28%, and a 15% alternative minimum tax could apply to corporate book income of $100 million and higher.
  • Individuals earning $400,000 or more could pay additional payroll taxes.
  • The maximum Child and Dependent Tax Credit could rise from $3,000 to $8,000 ($16,000 for more than one dependent).
  • Tax relief could be offered for student debt forgiveness and the first-time homebuyers tax credit could be restored.
  • The social security tax could be extended to higher income levels.

The outline of the previously-referenced “American Families Plan” is expected to include measures aimed at helping Americans gain skills and have more flexibility in the work force.  The details of the plan remain a work in progress and could also change before the announcement.

THE BOTTOM LINE

Under the expected plan, federal taxes imposed on corporations and wealthy and higher income taxpayers would increase.  Lower-income individuals’ rates generally would not change and families would be entitled to expanded credits and deductions.

If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.

What is an estate plan, and why do I need one?

At its most basic, an estate plan dictates how your assets will be managed and distributed upon your death. An estate plan can, and should, however, encompass more than just the disposition of your assets. It can include planning for future incapacity, estate tax mitigation, and burial and funeral arrangements, among other things.

The following are some of the fundamental benefits of implementing an estate plan:

  • You decide who inherits your assets upon your death. Without an estate plan, state law determines who inherits your assets.
  • You decide how and when your beneficiaries receive their inheritance (e.g., outright vs. in trust, distributions immediately or over time). Without an estate plan, the terms and timing of distributions are set by law, which can result in your beneficiaries receiving a sizable inheritance outright, with no restrictions.
  • You choose who will manage your assets upon your death. Without an estate plan, a court will appoint individuals to fulfill these duties.
  • You designate a guardian for your minor children. Without an estate plan, a court will appoint their guardian, and may not choose the person you would have picked.
  • You can minimize or avoid the probate process, if desired. Without an estate plan, some or all of your assets will likely be subject to probate.
  • You can minimize taxes payable by your estate and your beneficiaries upon your death. Without an estate plan, Uncle Sam may be the ultimate beneficiary.
  • You decide who will make financial and health care decisions for you if you become incapacitated. Without an estate plan, a court will appoint a guardian to make financial and health care decisions for you.

In other words, estate planning gives you control over the management and distribution of your assets and your health care decision-making, both during your lifetime and upon your death. Without one, you may be leaving certain important details to chance.

If you have questions on this topic, please contact Lin Law LLC at (920) 393-1190.

In the wake of COVID-19, many are considering their estate plans

This article by Lin Law LLC’s Attorney Emily E. Ames was featured in the June 22, 2020 issue of The Business News.

In the midst of a global pandemic, people are spending more time at home and have more time on their hands. As a result, many are considering their estate plans, or lack thereof.

When people think of an estate plan, they often think of a last will and testament, which is the foundation of any estate plan. For those concerned with avoiding probate of their assets upon death, they may also consider a revocable trust (sometimes referred to as a “living trust”). Probate, which is the court-supervised process of winding up a decedent’s affairs, is often vilified in light of its public and sometimes tedious nature. But, whether or not probate avoidance is desired or necessary in a given situation will depend, in large part, upon the nature of the assets that comprise a person’s “estate.” In either case, it’s important to have a good understanding of the mechanics of your estate plan in order to avoid inadvertently circumventing it. For example, failure to title assets and prepare beneficiary designations appropriately are two good ways to upend an otherwise airtight estate plan.

It’s also important to keep in mind that the will or revocable trust, which serve as an estate plan’s primary vehicle, are not the whole picture. A complete, well-rounded estate plan should also include a marital property agreement for married couples, powers of attorney for finances and health care, authorizations for the release of protected health information and electronically stored information to designated individuals, and documentation of the person’s wishes regarding funeral and burial arrangements.

For those who already have an existing estate plan in place, it’s important to periodically review and update the documents as time passes, considering not only changes in financial and personal circumstances, but also changes in applicable federal or state law. Just how often to review an estate plan depends, of course, both on the estate plan itself and the nature of the circumstances that have changed.

For example, an estate plan established upon the birth of a married couple’s first child may no longer be appropriate twenty or thirty years later, when the couple is approaching retirement. The focus of their existing estate plan was likely to name guardians and establish testamentary trusts for the benefit of the couple’s then-minor children, who are now grown adults, possibly with children of their own. The couple’s named fiduciaries, such as personal representative, trustee, and power of attorney, may have been parents, siblings, or other family members who are no longer the most appropriate choices for those roles, whether due to age, incapacity, or geographical location.

In updating their estate plan, this couple’s focus will likely have shifted from providing for their children to planning for the potential of future incapacity and long-term care needs. They may now wish to name one or more of their children as personal representative, trustee, and power of attorney. Depending on the couple’s net worth, they may need to consider implementing tax planning strategies within their estate plan, in order to mitigate potential estate tax consequences. In other words, their personal and financial circumstances have changed, and so too should their estate plan.

Should your high school grad’s college-readiness checklist include powers of attorney?

Despite recent events, many high school graduates are now preparing to leave home, whether it be to attend college or join the workforce. While preparing for this enormous change in their child’s lives, many parents forget that they will no longer be able to make health care and financial decisions on their child’s behalf once he or she turns 18. Without the proper documents in place, parents must obtain a court order to exercise this authority on their adult child’s behalf, even if the child becomes incapacitated. For this reason, we recommend that all parents encourage their children to implement a Durable Power of Attorney, Power of Attorney for Health Care, and HIPAA Authorization for Release of Protected Health Information upon attaining age 18. In doing so, it may be helpful to have a better understanding of what these documents do.

Durable Power of Attorney: Authorizes the designated attorney-in-fact to act on the adult child’s behalf with respect to most financial matters. This could include managing bank accounts, paying bills, signing tax returns, applying for government benefits, applying for a lease, etc. Durable Powers of Attorney can be either immediate or “springing.” In order to activate a springing Durable Power of Attorney, the adult child must be deemed incapacitated by two different physicians (or, under recent legislation, one physician and one psychologist, physician’s assistant, or nurse practitioner).

Power of Attorney for Health Care: Authorizes the designated health care agent to make medical decisions on the adult child’s behalf if he or she is incapacitated. Like a springing (as opposed to immediate) Durable Power of Attorney, a Power of Attorney for Health Care must be activated upon the adult child’s incapacitation.

HIPAA Authorization for Release of Protected Health Information: Authorizes an adult child’s health care providers to release information to and discuss the child’s medical care with the designated individuals. Without this authorization, health care providers are legally prohibited from discussing the adult child’s care with third-parties, even if those third-parties are the child’s parents. Importantly, the HIPAA Authorization is effective even if the adult child’s Power of Attorney for Health Care has not yet been activated.

Nine times out of ten, a parent will never need to utilize these documents on their child’s behalf, but it’s always better to hope for the best and plan for the worst.

If you have questions on this topic, please contact Lin Law LLC at (920) 393-1190.

Hindsight is 20/20, even for Kobe Bryant

In a previous post, The Estate of Kobe Bryant, we discussed some of the potential challenges facing Kobe’s wife, Vanessa Bryant, as the likely heir of Kobe’s sizable estate. Recent court filings have revealed some of the details of Kobe’s estate plan, including one major flaw.

In March, the co-trustees of Kobe’s trust (his wife, Vanessa, and his former agent, Robert Pelinka, Jr.) petitioned a California court to amend the terms of Kobe’s trust to add Kobe and Vanessa’s youngest daughter, Capri Bryant, as a beneficiary. The trust, which was originally created by Kobe in 2003, was amended in 2011 and 2017 to add his and Vanessa’s first three daughters, Gianna (now deceased), Natalia, and Bianka Bryant, as beneficiaries.

Kobe and Vanessa failed, however, to update the trust subsequent to Capri’s birth in 2019, and the trust did not include an “afterborn children” provision (stating that any additional children born to Kobe and Vanessa would be included as beneficiaries of the trust). As a result, the trust provides for distributions of income and principal to provide for Vanessa, Natalia, and Bianka’s support, maintenance, and care during Vanessa’s lifetime. Upon Vanessa’s death, the remaining balance of the trust will be divided into equal separate shares for Natalia and Bianka only.

The petition filed by Vanessa and Mr. Pelinka therefore requests that the Court add Capri as an equal beneficiary of the trust. Under California law, a court may amend the terms of a trust if the requested modification is consistent with a material purpose of the trust. In this case, the court is likely to find that Kobe intended to provide equally for all of his children and amend the trust as requested. From Vanessa’s standpoint, however, the fact that the petition was necessary in the first place is an unwanted complication in the midst of an undoubtedly difficult time.

Ultimately, this story demonstrates that even celebrities fail to update their estate plans after significant life events, such as marriage, divorce, or the birth of a child. It is important to periodically review any existing estate plan, considering changes not only in financial and personal circumstances, but also in applicable federal or state law. Just how often to review an estate plan depends, of course, on both the estate plan itself and the nature of the circumstances that have changed.

If you have any questions on this topic, please contact Lin Law LLC at (920) 393-1190.

Happy International Women’s Day!

Sunday, March 8, 2020 is International Women’s Day! This day, celebrated annually since 1911, honors working women worldwide. Most working women have a lot on their plate, and between their careers, their families, and all the other day-to-day goings-on, their estate plan is probably not at the top of their priority list. So, let’s take some time, in honor of International Women’s Day, to consider the unique challenges women face with regard to their estate plans.

Women in the United States live an average of 5 years longer than men. As a result, they are statistically likely to outlive their male spouses. Depending on each spouse’s level of involvement in the estate planning process, a new widow may or may not have a good understanding of how her estate plan works, and should consider having it reviewed to determine whether any updates are necessary.

Women are often caregivers not only for their children, but also for ageing parents (this has become so common that there’s a term for it: the “sandwich generation”). Women in this position should take the time to consider who will take over their responsibilities if they themselves become incapacitated. This may require ensuring that successor trustees, attorneys-in-fact for finances, health care agents, and/or guardians are named to take over those responsibilities.

Finally, women are often the peacekeepers in their families, and may wish to plan for and, hopefully, help soften the impact their passing will have on their spouse, children, and other family members. This could include leaving specific instructions regarding the disposition of tangible personal property (particularly items like family heirlooms), putting written procedures in place for managing the family cottage, and/or pre-planning their funeral and burial arrangements.

Planning for the future isn’t always easy, but doing so will help to ensure that your loved ones are provided for after you’re gone.

If you have any questions on this topic, please contact Lin Law LLC at (920) 393-1190.

The Estate of Kobe Bryant

On January 26, 2020, beloved basketball star Kobe Bryant died in a helicopter crash at the age of 41. Given Kobe’s estimated net worth (he earned an estimated $680 million over his 20-year career with the Lakers alone), his estate plan (or potential lack thereof) has been a hot news topic ever since. However, Kobe’s lifetime earnings are only a small part of his financial and estate planning picture. In 2013, Kobe co-founded the venture-capital firm Bryant Stibel, and in 2016 began investing in sports drink brand BodyArmor. As the result of a recent investment in BodyArmor by Coca-Cola, Kobe’s initial $6 million investment in the company is now worth an estimated $200 million.

Kobe was, of course, survived by his wife, Vanessa, and rumor has it they married without a prenuptial agreement. Depending on how Kobe’s estate plan, if any, was structured, Vanessa is likely to inherit a large portion, if not all, of Kobe’s estate. Due to the unlimited marital estate tax deduction, she will inherit those assets free of estate tax. However, Vanessa will now have the task of managing her late husband’s estate, including his various business endeavors, and planning the eventual disposition of that estate. The work and difficulty involved in doing so will depend, in large part, upon the planning, or lack thereof, that Kobe completed during his lifetime.

If you have any questions on this topic, please contact Lin Law LLC at (920) 393-1190.

IRS Confirms: No “Claw-Back”

Ever since the 2017 Tax Cuts and Jobs Act (“TCJA”) doubled the federal estate tax exemption amounts (adjusted for inflation to $11.58 million for 2020), estate taxes have been a thing of the past for most individuals. Some high net-worth individuals, however, have kept in mind that the TCJA is set to “sunset” on December 31, 2025, at which point the estate tax exemption amount will revert back to amount in effect in 2017 ($5 million, as adjusted for inflation). Those individuals have therefore questioned whether it is possible to utilize a portion of the presently available exemption amount by making taxable lifetime gifts, or whether the IRS would later “claw back” the temporarily increased exemption amount by reducing a taxpayer’s available estate tax exemption by the cumulative total of the gifts made by the taxpayer while the TCJA was in effect.

On November 22, 2019, the Internal Revenue Service issued final “anti-claw-back” regulations in the form of Treasury Decision 9884. This decision provides that an estate may compute the applicable estate tax credit using either the exemption amount applicable during the decedent’s lifetime or the exemption amount applicable on the date of the decedent’s death, whichever is greater.

26 CFR § 20.2010-1 provides the following example (edited for simplicity):

Individual A (never married) made cumulative taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $11.4 million in basic exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s gifts (based on the $9 million of basic exclusion amount used to determine those credits) exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, the credit for purposes of computing A’s estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A’s gifts.

If you have any questions on this topic, please contact Lin Law LLC at (920) 393-1190.