Author Archives: arai

Traditionally, the federal estate tax was extremely burdensome to wealthier individuals, and the bulk of estate planning involved finding ways to minimize this federal tax.

In the last few years, though, the federal estate tax rates and exemption amounts have changed and become much less of a problem. On the other hand, federal income taxes, capital gains taxes and other investment taxes have gone way up. And many states have increased their income, estate and inheritance taxes.

As a result, these days smart estate planning involves looking at all the different possible taxes that heirs might be facing, and figuring out how best to reduce the overall tax burden.

Here’s one example: Let’s say Linda owns some stock that she bought years ago for $30,000, and it’s now worth $100,000. She thinks it will continue to increase in value, and at some point she wants it to go to Adam.

In the past, it might have made sense for Linda to give the stock to Adam immediately. That’s because any further increase in the stock’s value would belong to Adam, not Linda, and when Linda passed away, her heirs wouldn’t have to pay federal estate tax on it (which could have been as high as 55%).

Today, however, it might make more sense for Linda to leave the stock to Adam in her will. Since federal estate tax rates are lower and the exemption amount is higher, Linda’s estate might not have to pay much (if any) estate tax as a result of keeping the stock.

Plus, if Adam received the stock as a gift and sold it, he’d have to pay capital gains tax on the $70,000 increase in value while it belonged to Linda – at today’s higher capital gains rates. But if he inherited the stock and sold it, his capital gains tax basis would be increased to the stock’s value as of the date Linda died, and he would avoid the tax.

As a further wrinkle, though, depending on the states where Linda and Adam live, there might be state estate taxes and/or state inheritance taxes, which now often kick in at much lower thresholds, and there might also be state income and capital gains taxes to consider. The state tax issues could further complicate the decision.

As you can see, it’s still necessary to do careful tax planning in order to leave as much as possible to your heirs – it’s just that the nature of that tax planning has changed. If you wrote your will years ago when the tax laws were quite different, you might want to review your estate plan now to see if it still makes sense under current conditions.

The idea of retiring on a beach in Central America or in a quaint village in Europe might seem idyllic. But before you think seriously about retiring in another country, be sure you know all the tax and estate planning rules.

A lot of people have been tripped up by these rules in the past. For instance:

• If you keep more than $10,000 in a foreign bank account, you’ll have to file annual reports with the U.S. government. And be sure you can even open a local account – a law passed by Congress in 2010 requires foreign banks to file detailed disclosures on accounts held by Americans, and many smaller foreign banks won’t even accept Americans as account holders anymore because they don’t want to deal with the paperwork.
• Some foreign countries don’t allow non-citizens to directly own real estate. As a result, you’ll have to own the real estate through a trust or a corporation, or have a local agent hold title while you contract with the agent to control the property. Owning real estate through a foreign trust or corporation can result in onerous tax and reporting requirements here in the U.S.
• Some people have the opposite problem: They want to own real estate through a trust or corporation for asset-protection purposes, but this isn’t allowed by the foreign country.
• You might be subject to gift and estate taxes in both the U.S. and the foreign country. While you can sometimes get a credit on your U.S. federal taxes for any taxes you pay to a foreign country, this isn’t always the case. And it can be even harder to get a credit if state estate taxes are owed.
• Inheritance rules are very different in some countries, and sometimes foreign law will dictate what happens to your property in spite of what you put in your will. For instance, even if your will says that your real estate will go to your spouse, it could end up going to your children instead – or even to a distant relative.
• If you make gifts to foreign charities, you generally can’t deduct them on your U.S. taxes.
• Finally, Medicare typically won’t cover your health expenses in a foreign country, so you’ll have to make other arrangements. And if you eventually return to the U.S. and you didn’t pay Medicare Part B premiums while you were away, you might be subject to a penalty if you sign up for Part B coverage.

A federal estate tax return doesn’t have to be filed every time someone dies. In fact, a return typically doesn’t have to be filed unless the estate is worth more than the federal estate tax exemption amount (which is currently $5,340,000). As a result, most estates never have to file one. However, a change in the law back in 2011 makes it advantageous to file a return if the deceased person is survived by a spouse – even if the estate is below the exemption amount and thus a return isn’t legally required.

If you know someone whose spouse passed away and who didn’t take advantage of this opportunity, the IRS is now giving them a second chance to file a return – but they must act by the end of this year in order to do so.

Here’s the background: Generally, when a person dies, his or her estate can give an unlimited amount to a surviving spouse tax-free. After that, if the person’s bequests (plus large lifetime gifts) total more than the exemption amount, then an estate tax is due.

Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use his exemption amount, and when his wife died later, she would get her own exemption amount. But if the husband left everything to his wife and no tax was due when he died, the husband’s exemption amount would be “wasted.”

Under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her exemption amount, the difference can be passed along to the other spouse.

So suppose a husband dies and doesn’t use any of his $5,340,000 amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5,340,000 plus the $5,340,000 that the husband didn’t use. So instead of being able to leave $5,340,000 tax-free to her heirs, she can leave $10,680,000 tax-free – a potential savings of millions of dollars.

However, this only works if the husband’s estate filed a federal estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.

This means that it’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.

Even if it seems highly unlikely that a surviving spouse will be worth more than $5,340,000 when he or she dies, it’s still a good idea to file a return, because Congress could always change the exemption amount. In fact, not that long ago the exemption amount was less than $1 million.

Recently, the IRS announced that for anyone who died between the beginning of 2011 and the end of 2013 and whose estate didn’t file a federal return, the estate can go back now and file one. Even though the return will technically be late, this will be allowed and there will be no penalty.

However, this window is open only until December 31, 2014. So if you know someone who is in this situation, be sure to encourage them to file a return.

Also, don’t wait until December! Act as soon as possible, because it can take some time to file a return properly, and you don’t want to be caught up in an end-of-the-year rush.

(Finally, you should be aware that there are further complexities involving the exemption amount if the surviving spouse decides to remarry. It’s important to discuss this with an estate planner if this is a concern.)

As more and more people live their lives online, the question of what happens to online assets and records after someone dies is becoming more important – and confusing.

Consider all the things that you might “own” on the Internet – thousands of photos and e-mails, Facebook and other social media accounts, music libraries, blogs, genealogy records, domain names, and much more.

Then consider how many financial accounts you have or manage online – including PayPal and other accounts with credit balances, as well as online accounts with detailed financial records, automatic bill-paying processes, etc.

If you haven’t given any thought to what will become of these things – and who will manage them after you’re gone – it’s probably a good time to do so.

Increasingly, executors are being faced with very difficult questions about what to do with these online assets. How can they access them? To whom do they belong? What would the deceased loved one have wanted?

The whole issue is so new that there aren’t many easy answers. In fact, only a handful of states – including Connecticut, Idaho, Indiana, Oklahoma and Rhode Island – have any laws at all governing executors’ ability to handle online property.

So what should you do to make things easier for your heirs?

A good start is to put together a list of everything online that has value, sentimental or otherwise. Then decide what you want to happen to it.

Write the list down, so that if you were to pass away, your executor would know what assets exist. You might want to include passwords, and keep the list with your will. Be sure to update it from time to time. (However, it’s never a good idea to put your passwords in the will itself – that’s because wills can become public records, giving the whole world access to your passwords.)

Tell your executor what you want him or her to do regarding the assets. Do you want your social media accounts deleted, or preserved as a memorial? Do you want your old e-mails destroyed, or copied for someone? Who should get photos, songs, and other materials?

If your executor isn’t particularly tech-savvy, you might want to appoint a separate “digital executor” to handle your online assets.

Keep in mind that you might not have unlimited say over what happens. That’s because, while you may think you “own” material that’s online, your ability to control it is often limited by the “Terms of Service” agreement you clicked on when you first signed up with a service provider.

So while you might want to leave a library of thousands of songs on iTunes to someone, this might or might not be permitted by the iTunes service agreement.

If an account is important to you, you might want to contact the service provider and ask about its rules. For instance, Google now lets you choose what you want to happen to your e-mail if you pass away. But if you haven’t made a choice within Google itself, and you just write something in your will, it’s not clear that Google will abide by it.

In some cases, it might be possible to put a license agreement with a service provider into a trust, so that the “account” can continue after your death.

Another issue is what happens if an executor uses a password to access a financial account after someone dies. The executormight have a legal right to access and use the account. But he or she might also be considered to have wrongfully accessed the account by using someone else’s password in order to impersonate them – even if the executor is doing something as innocent as paying ongoing bills.

It gets even more complicated if someone other than an executor – such as a family member – uses a deceased person’s password. In general, it’s better to contact the institution about the situation first, rather than simply logging in as someone else.

Many people have very specific preferences for how their funeral should take place. These can include where they want the funeral to be held, who should be invited, what the person will wear, who should speak, what music should be played, and who should act as pallbearers.

If these things are important to you, it’s a good idea to take steps to make sure your wishes are carried out properly. You can write detailed instructions, and let your family know where they can find the information.

It may be tempting to include this information in your will, but you should remember that wills are often not opened until long after the funeral is over. It’s usually better to write a separate document. You might want to attach a copy of it to your health care directive.

If you don’t make your wishes known, the responsibility for making funeral and burial decisions will rest with your loved ones. If you’re married, your spouse will usually be in charge of making the decisions. If you’re not married, the responsibility will likely go to your children or other family members.

Often, a person’s loved ones are in a state of grief shortly after a death; they might find it hard to make these decisions, or they might find that having to make them increases their emotional suffering. Worse, in some cases family members might disagree about the decisions, leading to unnecessary conflict. That’s why it can be a great comfort to family members to know that they are carrying out someone’s last wishes.

Another option is to make arrangements in advance directly with a funeral home. However, you should be very careful if a funeral home offers you a “prepaid” funeral plan. While these may be okay with a reputable funeral home that you know and trust, there have been many cases where a funeral home has gone out of business and has taken many people’s “prepaid” funds with it, or has otherwise failed to live up to its commitments once the person who signed the agreement has died and can no longer complain.

Did you know that if you start receiving Social Security early, but change your mind within 12 months and pay all the money back, you can still wait until your full retirement age and collect much larger monthly benefits?

In effect, after you reach age 62, you can use Social Security as a short-term interest-free loan.

Although this option doesn’t make sense for most people, there are situations where it’s a good idea. For instance, a senior who is laid off from a job after age 62, but expects to find a new job soon, could use Social Security benefits to “tide them over” and then repay the benefits from the new job’s salary. This might be smarter than tapping long-term investments or retirement accounts, both of which could result in higher taxes.

Before 2011, it was possible to collect benefits and then declare a “do-over” at any time before full retirement age. The law has since changed so that beneficiaries are limited to a 12-month payback period in order to qualify for full benefits later. Also, beneficiaries are allowed only one “do-over.”

However, even if you aren’t able to pay back all the money within 12 months, if you pay it back at some point before your full retirement age, you can still earn some delayed retirement credits and somewhat increase your ultimate monthly payments.

Reverse mortgages can be a big help to seniors who need extra cash, but they can become a big headache for the person’s family members after they pass away or move to a nursing facility. Family members need to be aware of their rights and obligations, because they usually have to make decisions quickly after a person dies or moves.

Reverse mortgages allow homeowners who are at least 62 years old to borrow money on their house. The homeowner receives a sum of money from the lender, based largely on the value of the home, the age of the borrower, and current interest rates. The loan doesn’t have to be paid back until the house is sold or the homeowner moves out or passes away.

If a couple takes out a reverse mortgage together and one spouse dies, but the other spouse continues living in the house, then nothing happens. But when the last homeowner dies or moves, the entire loan suddenly becomes due.

What happens next usually depends on whether there’s significant equity in the home. If there is, then most commonly the person’s executor will sell the home, pay off the loan, and distribute the remaining equity to the heirs.

If the family wants to keep the home, then they can do so by paying off the loan from other assets.

What if the home is “underwater” and the loan amount is greater than the home’s value? In such a case, it’s important to know that the owner’s estate is not responsible for the difference. The lender can foreclose on the home, but the lender can’t force the heirs to make up the difference between the loan amount and the value of the house.

Generally, the family can stay in the house while the lender forecloses, or simply turn the keys over to the lender and walk away.

Another option is that the family can keep the house by paying the lender 95% of the appraised value of the home. Although this amount will be less than the amount of the loan, the lender is required to write off the difference, and the family will get to keep the property.

In general, the heirs have 30 days to decide what they want to do with the house, and up to six months to arrange financing. (They may be able to get an extension for up to a year if they can show that they’re actively seeking financing or a sale.)

Unfortunately, many family members have no idea what their rights are in the immediate aftermath of a family member’s death. And many lenders these days aren’t notifying heirs about their rights, and are immediately beginning foreclosure proceedings.

If you have a reverse mortgage, it’s very important to discuss these issues with your family so they will be prepared if something should happen to you.

Some people try to save money by writing their own will using a pre-printed form or an online program, without consulting a qualified attorney. We often advise people that this is a mistake, and that the potential unfortunate consequences of using a homemade will can be far worse than the cost of doing it the right way in the first place.

A recent case from Florida provides yet another example of why this is true.

A woman named Ann Aldrich wrote her will on something called an “E-Z Legal Form.” She listed her assets – including a house, a car, and a bank account – and said that they should go to her sister. She also said that if her sister died first, they should go to her brother.

Her sister did die first. As it turned out, her sister bequeathed Ann more than $120,000 and some real estate. But Ann’s “E-Z” will didn’t say what should happen to this additional property that she inherited after the will was written.

When Ann died, her brother went to court and argued that he should get all of Ann’s property, including the sister’s inheritance. But Ann’s nieces complained that this wasn’t fair, and that they should inherit part of the sister’s assets too.

The case went all the way to the Florida Supreme Court – which sided with the nieces. The court said that since Ann never said what should happen to the additional property, it should be divvied up among the various family members exactly as if she hadn’t written a will at all.

Of course, the cost to the family of a protracted lawsuit was far greater than what Ann would have spent to consult an elder law attorney, who would have advised her about the importance of having a clause in her will about assets acquired at a later date.

In fact, one of the Florida Supreme Court justices described the case as “a cautionary tale of the potential dangers of utilizing pre-printed forms and drafting a will without legal assistance.”

Many people today keep working beyond age 65 – the age when most people become eligible for Medicare. If you’re still working and your employer offers health coverage, do you need to enroll in Medicare? Should you do so?

The answers can be complicated – and there may be different answers for the different “parts” of Medicare. Here’s a closer look:

Medicare Part A. Part A of Medicare covers hospital visits and nursing home stays, as well as certain types of care provided by home health agencies. It’s usually smart to go ahead and enroll in Part A even if you’re still working, since it’s free for most people and it may supplement your employer’s insurance.

However, you need to be careful, because sometimes enrolling in Part A can affect your employer-provided insurance. You’ll want to ask your employer (or your spouse’s employer, if that’s where you get your coverage) whether your current insurance will change if you enroll in Part A.

This is especially true if you have a high-deductible health plan with a health savings account, since enrolling in Medicare can make it difficult or impossible to make further contributions to such an account.

Medicare Part B. Medicare Part B covers doctor visits, lab tests, and other outpatient and preventive care. It has a monthly premium that changes each year; the monthly premium is $104.90 for most people in 2014.

If you work for a company that has fewer than 20 employees, it’s generally wise to go ahead and sign up for Part B. If you don’t, then your employer’s insurance plan may be able to refuse to cover you for any services that Medicare would have covered. That means that you may have to pay for those services out of your own pocket.

If you work for company with 20 or more employees, though, you can generally wait to sign up for Part B, because your employer’s insurance plan must continue to cover you as before.

As a general rule, if you don’t sign up for Part B when you’re first eligible, and you decide to sign up later, you’ll pay a penalty – an extra 10% premium for each year that you delayed signing up after you became eligible. However, if you delayed signing up because you were working and covered by your employer’s insurance, there’s an exception. As long as you sign up within eight months after you retire, there’s no penalty.

(If the size of your company is anything close to 20, be sure to ask how many employees it has for Medicare purposes. The government has its own methods for counting “employees” that can be very different from just looking at how many people are sitting in an office.)

Medicare Part D. Part D covers prescription drugs. Even if you choose not to enroll in Part B, you can still enroll in Part D. However, if your employer offers a prescription drug plan, there are several issues to consider before you switch.

One is whether your employer’s current plan or a Medicare Part D plan is better for you. Different plans cover different drugs, and pay different portions of the cost for various types of drugs. You’ll want to make a list of the drugs you currently take (or might be likely to take in the near future), and see which plan makes the most sense for your needs.

Another issue is whether you’ll have to pay a penalty if you don’t sign up for Part D now, but do so at some point in the future. Your employer’s plan should send you a letter telling you whether or not your current coverage is “creditable” – meaning that it’s considered equal to or better than what Medicare is offering. If your current coverage is “creditable,” then you can keep it and not have to worry about a penalty. But if your current coverage is not creditable and you don’t sign up for Part D right away, then you’ll have to pay a penalty if you sign up later, similar to the penalty for delaying in signing up for Part B.

If you’re thinking of signing up for Part D, a final consideration is whether you can drop your current drug coverage without losing your other employer-provided insurance. Be sure to ask your employer about this.

Social Security. If you’re currently receiving Social Security benefits, you don’t need to do anything to enroll in Medicare. You’ll be automatically enrolled in Parts A and B effective the month you turn 65.

If you’re not receiving Social Security benefits and you want to sign up for Medicare, you can call the Social Security Administration at 800-772-1213 or enroll online at www.socialsecurity.gov/medicareonly.

If you’re receiving Social Security benefits and you don’t want to sign up for Part B, fill in the box on the back of your Medicare card declining Part B coverage and mail it back to the address listed. You’ll be mailed a new card.

As you can see, Medicare decisions are complicated. If you have any questions, we’d be happy to help you.

Some people have been reluctant to review their wills is recent years because the estate tax laws have been so uncertain. They’ve taken the attitude that they want to wait until the dust has settled.

Well, with the “fiscal cliff” law on the books, the dust has now settled – or at least things are far more settled now than they have been in a very long time.

That fact in itself is a good reason to have your estate plan reviewed. But you should also know that some of the provisions in the new law could wreak havoc with older wills that haven’t been looked at in a while.

Here’s just one example: A lot of older wills contain a “bypass trust.” For a long time, you could leave only a relatively small amount tax-free at death to anyone other than a spouse, so it was important to maximize this amount (called an “exemption”) for each spouse. Typically, when the first spouse died, an amount of assets equal to the exemption would go into a trust to benefit the surviving spouse and/or the couple’s children or other heirs, rather than directly to the other spouse. This way, the couple could use the exemption twice – once when the first spouse died, and once when the second spouse died.

As recently as 2001, the exemption amount was only $675,000, and the estate tax rate for amounts over that was 55%. So for larger estates, it was critical to maximize the exemption by having as much as possible go into a trust when the first spouse died, in order to “bypass” estate taxes.

Today, however, the exemption is $5.25 million, and that amount will increase each year for inflation. So if you have an older will that says the full exemption amount will go into a trust for your children, and the rest will go to your spouse, it’s possible that your entire estate will go into the trust, and your spouse will be left with nothing.

Therefore, it’s a good idea to review your will and reconsider the amount that should go into such a trust.

In fact, it’s possible that a trust is no longer necessary at all. Under the new law, if the first spouse to die leaves everything to the other spouse, the other spouse also inherits the first spouse’s exemption. Thus, when the second spouse dies, his or her exemption is doubled – for 2013, that would mean an exemption of $10.5 million instead of $5.25 million.

Leaving everything to a surviving spouse without a trust is simple, and it has a number of other benefits. For instance, when the second spouse dies, the couple’s heirs will receive a 100% step-up in basis for capital gains purposes on the entire estate.

On the other hand, there are many advantages to leaving assets in a trust. The assets will be more protected from creditors, for example. And if you have property that might greatly increase in value by the time the second spouse dies, you can avoid the possibility that it will exceed the exemption amount by leaving it in a trust.

If you’re concerned that your spouse might remarry after you pass away, or if you want to protect children from a prior marriage, a trust can be an excellent way to do so.

And a trust could also protect a surviving spouse from state estate taxes, which sometimes kick in at amounts that are far less than the federal exemption.

But a trust intended to serve one of these purposes might need to be different in structure from a traditional bypass trust, which is another reason that it’s important to have your will reviewed in light of the new law.