Estate Planning Bits

Katrina caused a brief but powerful charitable giving incentive

The Katrina Emergency Tax Relief Act of 2005 (KETRA) provides that cash distributions made from August 28 through December 31, 2005, will be fully deductible up to 100% of a donor’s adjusted gross income. The donor has the opportunity to elect this option, whereas under previous law, charitable deductions were limited to 50% of a taxpayer’s adjusted gross income with a five year carryover for excess deductions not used in one year. Please note, however, that these gifts must be in cash and may not be capital gain-type property, real estate, or other non-cash gifts.

It is important also to remember that this increased deductible is not only for hurricane relief. Recipients must be publicly supported charities, such as the American Cancer Society, the American Heart Association, Shriner’s Hospitals, etc. And, while corporations were also previously limited, to 10% of the taxable gift, they are now subject to no limitation if made during this specified time period. Unfortunately, however, private foundations do not qualify for 100% charitable deductions.

This provides a planning opportunity for many individuals who are over the age of 59½, who may now access their IRA funds to make charitable contributions through the end of 2005. Any amount withdrawn will be included in the adjusted gross income, and thus, increase thresholds for other itemized deductions, and possibly cause Social Security income to be taxed at higher rates than otherwise. However, the charitable deduction may be taken as a 100% deduction if the donor itemizes his or her deductions. Perhaps with this increase in the charitable deduction, donors who otherwise would not be able to itemize may fully or partially take deductions in 2005. Therefore, in the event that any donor wishes to make his or her charitable donations in 2005, he or she should also consider making payments of cash donations in 2005 for the 2006 gift.

This legislation may also benefit a donor who has a significant capital gain in 2005 and wishes to make a substantial charitable gift in order to reduce his or her taxable income. Since the highest rate for income taxes on capital gains is 15% (not considering alternative minimum tax issues), a donor may wish to sell stock in 2005 and make the gift in 2005. This will have the effect of having the donor pay income tax at 15% on the gain while at the same time writing off a charitable deduction at a higher rate if the donor is, in fact, in the higher rate of taxation. However, if the donor wishes to use this technique, the stock or other security must be sold fairly soon so that the funds will be available to be deposited to the donor’s account and then have the check written to the charity before December 31, 2005.

By: Hyman G. Darling, Esquire

Irrevocable Trust basics

Irrevocable trusts can be useful if you wish to reduce the value of your own taxable estate. By placing assets in an irrevocable trust, you depart with the ownership of your property.

A disadvantage is when assets are placed in an irrevocable trust, you are often subjected to a Federal gift tax. An advantage, however, is that probate costs and fees can be avoided through an irrevocable trust, although they cannot be changed.

The most common type of irrevocable trust is a life insurance trust. This allows you to reduce the size of your taxable estate.

By: Gina M. Barry, Esquire

Who will care for your pets when you can’t?

"Many have forgotten this truth, but you must not forget it. You become responsible forever for what you have tamed.” Antoine de Saint-Exupery stated this in The Little Prince. Most people consider their pets to be members of their family, while others go to more extremes, yet the fact is there is a strong bond between pets and their owners. It has been said that 80% of pet owners brag about their pets to others, 79% allow their pets to sleep in bed with them, and 37% carry photos of their pets in their wallets. It is evident that there is an indescribable love between pets and their owners. A common issue that arises is, what happens to pets if the owner passes away or becomes sick and can no longer care for his or her pets?

If you passed away and did not have an estate plan for your pet, often they are euthanized, neglected or abandoned. To prevent these outcomes from happening, an estate plan is created, which provides for the proper care and love for your pet. Legally, an animal is considered tangible personal property, like your car, furniture, jewelry, and would pass down to heirs or beneficiaries of your estate who are entitled to your personal property. Your pet can be cared for through an estate or a trust.

The first step in planning for the estate of your pet is to select a caretaker. A caretaker is usually a person or organization that can provide for your pet when you no longer can. The process of selecting a caretaker can be challenging. When selecting one, you want to communicate your expectations and needs of the pet, you should allow the potential caretaker to spend time with your pet, and you should discuss any type of reimbursement or compensation. You should compile information about your pet such as identification, detailed instructions for care needs, veterinary information, and legal documents. Based on the circumstances, you may want to set aside caretaking funds necessary to cover expenses for your pet. An organization may also be a caretaker for your pet.

A “pet trust” is an arrangement whereby the caretaker’s right to receive any caretaking funds is limited. The term “pet trust” can include three different types of arrangements: honorary trusts, statutory pet trusts, and traditional legal trusts.

1. An honorary trust is a trust for the benefit of the pet. The caretaker may either honor the terms of the trust by using the funds or relinquish the funds to the beneficiary. An issue that arises is the remainder beneficiary is the only party that can enforce the honorary trust.
2. A statutory pet trust allows virtually any third party to compel the caretaker-trustee to use designated caretaking funds solely for the benefit of your pet. While a pet trust offers a level of protection, there are limitations as well. The court is allowed to reduce the amount of caretaking funds to what it sees reasonable.
3. A traditional legal trust can be established for your pet, which allows more flexibility than the other alternatives.
   

Pet trusts tend to be costly due to the fact that there is an attorney fee, annual administrative costs, and costs to cover care for the animal. There are a dozen or so states that allow pets to be named as beneficiaries of trusts, and enforce the trust with someone acting on the pet’s behalf. Besides estate documents, animal cards should be made. An animal card is a document that contains information about the animal and contact information for the party who has custody of the animal. Animal instruction documents contain the same information as the animal card, as well as the animal’s medical history and contact information for the veterinarian.

Start planning your pet estate so your furry, fluffy companions will be in good hands.

By: Gina M. Barry, Esquire

Advantages of the Family Limited Partnership

In a Family Limited Partnership, family members, typically parents, put assets into a partnership, and then give minority interests to other family members, typically children, while the general partners retain control of these assets. This gives the parents an opportunity to shift assets to their children. The Family Limited Partnership also allows for children to manage their parents’ assets, and then after their parents’ death, those assets do not need to go through probate.

A Family Limited Partnership provides a good option for parties seeking to protect their family assets. It removes the assets from their estate while still retaining control over them. The partnership becomes its own entity, with its own tax identification number, which can then conduct the same activities as an individual or a corporation.

There are significant advantages to using a Family Limited Partnership as a part of your estate plan.

1. One is the control the general partners retain over the assets. They can decide whether to distribute or reinvest any income or profits from the partnership.
2. Another advantage is the restrictions that can be placed on the limited partners. They can be restricted from transferring or selling their interest, ensuring that wealth stays within the family.
3. A Family Limited Partnership can also protect assets should a limited partner get a divorce or have trouble with creditors.
   
4. Family Limited Partnerships also provide more flexibility than other estate planning devices, like the irrevocable trust. For example, the partnership may be amended or terminated upon agreement of the members, and the partnership can provide that all disputes be resolved through arbitration, rather than in court.
5. Perhaps one of the largest advantages to a Family Limited Partnership is the valuation discount. This valuation discount is due to a limited partner's lack of control and marketability in their interest. A gift of, for example, a 10% interest in a $1,000,000 limited partnership has a substantially lower value than a gift of $100,000 for gift tax purposes. With careful drafting, a gift of a partnership interest can fall under the annual gift tax exclusion. By using the Family Limited Partnership, families with significant assets can significantly lower both their gift and estate tax payments.
   

By: Brett A. Kaufman, Esquire

Joint tenancy with right of survivorship vs. tenancy by the entirety – What’s the difference?

A joint tenancy with a right of survivorship (JTWROS) is a form of ownership where two or more people own equal and undivided interests in property, (an asset). The most common type of joint tenancy today is seen with married couples; however, single/unrelated individuals may also use this form of ownership. Since each joint tenant owns an undivided interest in the whole asset, consent from all joint tenants is required in order to sell, give away, or dispose of the asset.

Tenancy by the entirety (TBE) is a term used by some states when referring to a joint tenancy with right of survivorship for joint owners who are married. Like a JTWROS, on the death of one spouse, the surviving spouse is vested with sole ownership of the property through operation of law.

With both forms of ownership, JTWROS and TBE, when one of the joint tenants dies, his or her interest passes to the surviving joint tenant(s) automatically, without the need for any probate court proceeding/process. This can be very advantageous in that there are no probate court costs, no attorney fees and no information being opened to the public.

However, with joint ownership, the first to pass away loses control as to how the interest will pass. When the first joint owner dies, his or her interest automatically passes to the surviving owner, who will then own the property solely and have the final say as to who will receive an interest in that property upon their passing. It is a gamble as to who will die first, so if one wants to make sure a part of the interest passes to a certain loved one, then this type of joint ownership may not be the proper avenue.

Care agreements - when you must care for your elderly parent

Often when parents age or become ill they need assistance to continue living at home. With increasing frequency, children choose to take on the responsibility caring for their parents. Care agreements are contracts between a parent and child, in which the parent agrees to pay the child a monetary sum in exchange for the child taking care of him or her. The child agrees to this responsibility until the parent passes away or is no longer able to perform two of the activities of daily living, including bathing, eating, dressing, transferring and toileting.

Since a child is providing his or her parent with care, it is appropriate to place a value on the services. Care agreements are established when a parent needs assistance to continue to live in their own home or begins residing with the child in the child’s home. The child’s services may be valued as a package, equal to the average monthly cost of board in a care facility. In Massachusetts this value is approximately $4,000 per month. Services may also be valued individually when only some caretaking duties are performed by the child.

When drafting a caretaker agreement, the purpose should be clearly stated, as well as the services that the caretaker will provide and the location where the care will occur. If the parent has begun to reside with the child or vice versa, the lodging arrangements should be described in detail. The agreement should also detail who is responsible for utility payments, such as gas, water and electricity, as well as yearly expenses, such as property taxes and homeowner’s insurance.

One important issue to consider in a caretaker agreement is a parent’s wish to die at home, while being attended by the child. The child has to be willing to commit to this type of agreement. Since there is a potential for a catastrophic illness, an agreement to keep the parent at home until death carries a great responsibility.

By: Gina M. Barry, Esquire