Posted by: Woodfork Law | May 2, 2013

Important! Step up basis

The concept of “step up basis” is one of the most beneficial items when it comes to taxes in estate planning.  Although step up basis can be a complex issue, fundamentally, it’s fairly simple.  First, “basis” itself is essentially what you paid for an item.  For example, you buy a house for 200k that is your “basis” or “cost basis.”

Now, “step up basis” simply means the value of the item when you pass away, and your heirs inherit the item in your will or trust.  For example, you buy a house for 200k in 2013, then pass away in 2073 and the house is worth 900k. Your kids will inherit the house valued at 900k.  Now here’s the benefit, if your kids sell the house 1 year later for 902k, they would only pay tax on the 2k gain, not the $702,000 gain. The original cost of 200k was “stepped up” to 900k.

To see the real benefit in step up basis, look at what happens if no step up.  If you give an item to your kids as gift while you’re living, instead of leaving it in your will or trust, your kids get the item as valued at the time you bought it.  So in the above example, if not inherited, but gifted, your kids receive the gift of a house with a basis of 200k (even though market value is 900k).  Now, again, if the kids sell it a year later for 902k, they would pay tax on the entire $702,000 gain.  Big difference.

Posted by: Woodfork Law | April 30, 2013

Retirement Accounts

Throughout your working career you may have contributed to a retirement account such as a IRA, Roth IRA, 401k, Keogh, etc.  When you pass, these accounts will not go into probate as a part of your estate because they have beneficiary designations. When you opened your retirement account, you designated a beneficiary on the forms themselves.  You do not have to list your retirement accounts in a Will or Trust.

Normally, you should name your spouse as your beneficiary.  In fact, some states will allow a spouse to claim a part of the retirement account if they are left out.  The advantage of leaving the account to your spouse is that your account may be rolled over into your spouse’s retirement account without being taxed and/or penalized as a withdrawal.  The disadvantage is that the account will be included in your spouse’s estate when they pass.

However, note that it is important to have an alternative beneficiary in the event your spouse passes before you.  If you do not have an alternative beneficiary, the value of the retirement account will be included in your estate – with possible tax consequences.

Posted by: Woodfork Law | April 3, 2013

Living Trust v. Durable Power of Attorney

A Living Trust is a tool that provides for estate planning by allowing you to control your property while living, and have a trustee control it after you pass or become incapacitated.  A durable power of attorney appoints a person (called “attorney-in-fact”) who controls your finances if you become incapacitated.  So while it may seem that you could avoid the cost of a Living Trust by simply having a will and a durable power of attorney, this may not be prudent.

While the durable power of attorney allows the person you pick to control your finances in the event of any incapacity, as a practical matter, you will have a much easier time with a living trust.  Simply put, banks and financial institutions are very skeptical of powers of attorney that claim to give the attorney in fact authority over a person’s finances.  The banks are concerned with fraud.  Therefore, the banks will likely require that you produce the original power of attorney, and they may keep the original for many months.   On the other hand, if you have living trust, the trustee can step in and manage your finances immediately.


Posted by: Woodfork Law | March 25, 2013

A Living Trust for Simple Estates? maybe

Many families require only a simple will, a living will, and other advanced directives. Often, a Living Trust is not cost-effective for simple estates; however, there is a possible exception.  A simple estate may require a living trust when there is property located outside the state you are living.

The only thing worse than probate, is multiple probates, in multiple states.  When you pass with property located outside the state, the property must be probated in each respective state.

One common way to avoid multiple probates for out of state properties is to transfer those properties into your living trust. You can do this by simply having a lawyer in the state where your property is located draft a deed transferring the title into the trust name. You need a lawyer in that state to re-title the property because they know the technicalities of the local area.  You don’t want to find that you did everything by the book in Arizona, sent the deed to the land records in the state where the property was located, then later find something is wrong with the title.

Also, as with any transfer of property to a living trust, you should verify that any “due-on-sale” clause is not triggered.  Basically, a due on sale clause means that if you transfer title to your property that has a mortgage, the mortgage holder is permitted to call the entire mortgage due immediately.

Posted by: Woodfork Law | March 19, 2013

Immigration and Estate Planning

Most believe Congress may come to some agreement in the next few years on immigration reform.  One aspect of immigration that rarely gets much attention is how citizenship effects estate planning.

One of the most beneficial tax benefits in estate planning is the unlimited marital deduction.  Simply put, when one spouse passes, all assets may be transferred to the surviving spouse estate tax free.  But, if one spouse is not a U.S. citizen, the unlimited marital deduction is not available.  The most common explanation is that the IRS believes the non-citizen would leave the country and take the assets with them.

The way to solve this problem is to establish a “Qualified Domestic Trust” or QDOT for short.  QDOT trusts allow a US citizen to transfer assets to a non-citizen spouse tax free.  In order to establish a QDOT trust, first, one trustee must be a US citizen or a domestic corporation.  Second, there must be provisions in the trust that dictate withholdings on estate tax on principal distributed.  Third, there must be provisions in the trust that dictates that the trust complies with IRS regulations.  Fourth, when the US citizen spouse passes, the trustee must elect irrevocable QDOT treatment on federal estate tax forms.

With that said, the non-citizen spouse could become a naturalized citizen and take advantage of the unlimited marital deduction.

Posted by: Woodfork Law | March 12, 2013

Life Insurance in Estate Planning

Life insurance can be a very important tool in estate planning.  Often, when someone passes, the surviving spouse must pay expenses, debts, ongoing bills, and support children.  If the estate doesn’t have liquid assets, life insurance can provide cash.

But, there is a problem with life insurance in an estate plan.  While it is true that when life insurance proceeds are left to a spouse, there is no tax because of the marital deduction; however, insurance proceeds will be included in the surviving spouse’s estate for tax purposes.

To prevent taxes from taking a big chunk of your family’s estate when the surviving spouse passes, you may consider an Irrevocable Life Insurance Trust (ILIT).  An ILIT is an irrevocable trust that puts the proceeds of life insurance outside of both the husband and wife’s estate.

However, the most important aspect of the ILIT is that the trust is irrevocable.  This means once the life insurance policy is placed in trust it cannot be changed.  Another important aspect of the ILIT is that the decedent may not retain any incidents of ownership in the insurance policy, and ownership of the policy must have been transferred at least 3 years before death.  If these conditions are satisfied, life insurance proceeds may be placed outside of both spouses’ estates.

Posted by: Woodfork Law | March 4, 2013

Estate Planning Action and Inaction

Divorce can have a tremendous adverse impact on the best estate plans.  First the good, if a husband and a wife have a will or a trust, in the event of a divorce, all inheritance given to the former spouse is revoked. This means you does not have to do anything to make sure the former spouse doesn’t get anything in your will after a divorce.

Now the bad, much different from the will or trust, if a husband and wife have a POD, TOD, or life insurance policy, you must notify the bank or insurance company of the divorce.  Thus, if your marriage ends in divorce, you must affirmatively inform the institution in writing.

Most people have a POD or “payable on death” provision for their bank account.  This means that when a person passes, their bank account goes to the beneficiary (usually spouse) outside the probate process.  A TOD or “transfer on death” is essentially the same thing, but for securities accounts (stocks, bonds, etc).

The risk here is obvious. Example, when you opened your checking account, savings account, brokerage account, or purchased life insurance, you named your spouse as the beneficiary in the event you passed before your spouse.  Years later, you divorce.  If you do not notify the bank, brokerage firm, or insurance company of your divorce, and you pass before your former spouse, your former spouse will get those accounts. Unless you have an agreement with your ex-spouse, this is clearly not what you wanted.

Posted by: Woodfork Law | February 23, 2013

Is a Credit Shelter Trust necessary?

Under estate tax law, each person presently receives a $5,250,000.00 estate tax exemption. Basically, this means that if everything in your estate at the time of your passing is less than 5.25 million dollars, you will not have to pay estate taxes.  For married couples, both the husband and the wife each get the 5.25 million dollar exemption.  However, before 2010, when the first spouse passed, they would loose their exemption.

For years, estate planning attorneys got around this problem by creating what is called a “Credit Shelter Trust.” This Trust goes by a few different names such as a “Bypass Trust,” or an “A/B Trust,”  In a nutshell, the purpose of creating the Credit Shelter Trust was to preserve the spouse who passed first’s tax exemption.  As a result, when the second spouse passed, both spouses tax exemptions could be used to pass gifts to heirs tax free.

Presently, under the 2010 Tax Relief Act provisions for portability, the use of the Credit Shelter trust may not be necessary.  Now, after the first spouse passes, his or her tax exemption may be go directly to the surviving spouse.  Portability arrives at the same result as the Credit Shelter trust without the hassle.

Although “Portability” seems extremely beneficial, there are some issues. For example, if the survivor remarries, he or she loses the deceased’s exclusion amount.  Also, if you elect portability, the exclusion is locked in, and not indexed for inflation.  Additionally, portability will not provide the same protection against the surviving spouse’s creditors and future ex-spouses as would the credit shelter trust.  Thus, even with the benefits of portability, if estate taxes are a concern for you, you should sit down with a lawyer to decide if portability is best for you.

Posted by: Woodfork Law | February 15, 2013

Why a Will is needed even when you have a Living Trust

You probably are already aware of the many great benefits of a revokable living Trust when it comes to estate planning.  Just to mention a few of the benefits are avoiding a long, expensive, public probate, planning for incapacity, and even in some cases, minimizing estate taxes. With so many great benefits of a Trust, you may think, “do I really need a Will?”

The answer is yes.  Even if you have a multimillion dollar estate with the most complex A/B Bypass Trust, including a Charitable Remainder Trust, Life Insurance Trust, and a gifting strategy, you still need a Will.

The main reason is because as a practical matter you cannot transfer all your belonging into your Trust. Even if you transferred everything you can think of, when you pass, you will still have clothes, jewelery, cash, and other personal items that must be given to your heirs.

Although Arizona allows you to make reference to a personal property memorandum in your Will, you still will not be able to list everything.  The part of a Will that handles all your personal property and tangible things, is the “Residuary Clause.”  Basically, this clause in your Will states that whatever items in your estate that you didn’t include in the Trust, or the personal property memo, (the residue) goes to who you direct.  Therefore, if you do not have a Will, and have not transferred the items into your Trust, it is as if you never planned your estate at all.

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