Additional Charitable Remainder Trust Considerations

We previously provided an overview of Charitable Remainder Trusts (“CRTs”) and suggested that now might be a good time to employ this strategy to avoid immediate capital gains taxes on appreciated or concentrated marketable securities positions. That overview has sparked a number of inquiries about this strategy. We followed the introduction with an article specifying who can and should be involved in the creation of a CRT. In this article, we look at specific questions about flexibility in choosing ultimate charitable beneficiaries, limits on how much of the charitable income tax deduction can be taken in a given tax year, what types of trust assets should be considered for contribution to a CRT, and what types should be avoided.

Choice of Charitable Beneficiaries

Using a CRT appeals to those who truly care about philanthropy, and who wish in some measure to give back to society a portion of their success. It is important that they have the utmost flexibility in choosing those charities that will eventually benefit from the assets held in the CRT.

One of the methods used for flexibility in choosing charities is to draft the CRT so that the trustmaker may change the charitable beneficiaries at any time. This right can be exercised during life or can be exercised in a trustmaker’s will or trust. In fact, this right to change charitable beneficiaries can be given to other income beneficiaries such as the trustmaker’s spouse or children. With this type of drafting, if a trustmaker’s charitable objectives change or if the charity is no longer able to meet the trustmaker’s needs, then a new charity or charities can be named.

There are certain requirements that must be met by a charity before it can be a “qualified” charity for purposes of a CRT. A charity must be qualified in order to ensure that the CRT’s benefits will be realized and that the assets will not be included in the trustmaker’s estate. Charitable beneficiaries can include public charities and operating and non-operating private foundations (often referred to as non-public charities). The only repercussion of naming non-public charities as the charitable beneficiary of a CRT is that the amount of the current charitable income tax deduction drops substantially regardless of the kind of property that is being contributed to the CRT. All charities that are named in a CRT must be qualified charities as defined in the Internal Revenue Code.

CRT trustmakers can name as many or as few charitable beneficiaries as they choose. There are a number of different methods that are used to name charitable beneficiaries. For example, a trustmaker could allocate a fixed percentage to a number of charities, such as: 40 percent to the Red Cross, 25 percent to the Boy Scouts, 25 percent to the Girl Scouts, and 10 percent to the American Legion. In another example, a trustmaker could name all or a portion to the trustmaker’s own charitable foundation or a donor advised fund, such as: 100 percent to the John and Sarah Doe Charitable Foundation, or 50 percent to the Sam and Betty Smith Foundation and 50 percent to the Fidelity Charitable Fund with advice given by the trustmaker’s children. Finally, trustmakers may leave all or part of the CRT assets to their local Community Foundation or to a National Foundation, such as: 100 percent to the National Foundation for Philanthropy, or 50 percent to the Community Foundation for Anne Arundel County and 50 percent to the National Heart Foundation.

Annual Limits on CRT Charitable Income Tax Deductions

A federal judge once said, “Trying to understand the various exempt organization provisions of the Internal Revenue Code is as difficult as capturing a drop of mercury under your thumb.” Because of the inordinate complexity of the Internal Revenue Code, it is impossible to succinctly give you an overview of this area of the law in this article. However, you should know these basics:

  • Gifts of long term capital gain property are deductible up to 30 percent of the trustmaker’s contribution base (i.e., his or her adjusted gross income computed without regard to the charitable deduction and any net operating loss carryback) if given to public charities, but only up to 20 percent if given to certain private foundations.
  • While cash gifts can normally be deducted up to 50 percent of the trustmaker’s contribution base if given directly to public charities, this increase limitation is not available for contributions to CRTs. For a gift of cash to a CRT, the most that can be deducted in any one year is 30% of the contributor’s contribution base.
  • If these limitations prevent a taxpayer from deducting the predicted value that will ultimately pass to charity from his CRT in the year of contribution, any deduction generated by making gifts to a CRT can be carried forward for an additional 5 years.
  • A Charitable Remainder Annuity Trust will not qualify for an income tax deduction if the probability exceeds 5 percent that the trust assets will be exhausted prior to passing to charity. (This restriction does not apply to Charitable Remainder Unitrusts.)

I find that the decision whether or not to proceed with CRT planning is not generally based on the amount of the charitable income tax deduction. It does not play a major role in most people’s decision-making process, possibly because the capital gain issue is of much greater concern. As in all planning, the motivation of each person differs, and it is the task of your advisors to make sure your planning fits these motives.

CRT Contributable Trust Assets

Using cash is the easiest method to fund a CRT. There are no initial capital gains tax savings when cash is given to a CRT, but the charitable deduction that can be taken is a maximum of 30 percent of taxpayer’s “contribution base.” If these limits keep the trustmaker from deducting the entire amount that is predicted to go to charity, he or she may carryover the unused amount of the deduction for up to five additional years.

The second easiest assets to give to a CRT are publicly traded securities. Because these securities are traded publicly, they are easy to value and can be readily sold. Charitable deductions can also be taken for CRT gifts of marketable securities up to a maximum of 30% of the contributor’s contribution base with any unused charitable deduction amount subject to carryover for up to five years.

CRTs can accommodate gifts of assets which are difficult to value as long as there is an independent trustee. These hard-to-value assets include:

  • Real estate
  • Closely-held stock
  • Tangible personal property

CRTs are generally not designed to accommodate gifts of:

  • Assets encumbered with debts (such as real property subject to a mortgage or deed of trust)
  • Business inventory
  • Limited partnership and limited liability company interests
  • Real estate investment trust interests
  • Options to acquire or sell securities
  • Installment obligations

Contributions of these types of assets could invalidate the trust or create significant income tax problems and should be avoided in almost every situation.

The Irrevocability of a CRT and the Gifts to it

A CRT is irrevocable; its essential terms cannot be changed. As a result, great care should be taken to make sure that every CRT document provides the exact instructions of its trustmakers and the precise handling of the innumerable contingencies that might arise in the future. It is imperative that these trusts be carefully designed and written by experts.

Just as the trust documents are irrevocable, the gifts that are made to them are also irrevocable. They are not conditional and cannot be taken back.

Additional gifts cannot be made to Charitable Remainder Annuity Trusts, but additional gifts can be made to any type of charitable remainder unitrust. Note, however, that, if circumstances change and a new CRT is desired, the provisions of the new CRT do not have to be the same as the original one. It may be a good idea to make a series of CRTs, especially if you believe that interest rates will be increasing over a long period ahead.

As you can gather from our discussions about the details of CRTs, they are powerful strategies if implemented by those who know what they are doing. They should only be created with the help of an experienced tax planner and trust attorney. If you think that a CRT might be a solution for your situation, I would be honored if you contacted me for assistance with this strategy.

© Richard Wright 2019


Nitty-Gritty Details About Charitable Remainder Trust Participants

We previously provided an overview of Charitable Remainder Trusts (CRTs) and suggested that they might be a good strategy to employ to avoid immediate capital gains taxes on appreciated or concentrated marketable securities positions. That overview has sparked a number of specific questions about this strategy. In this article, we review details about who can and should be involved in creating a CRT. We will follow with a final installment in this series detailing flexibility in choosing ultimate charitable beneficiaries, how the charitable income tax deduction is calculated, and what types of trust assets should be contributed to a CRT and what types should be avoided.

Who Can Be the Trustmakers and Income Beneficiaries of a CRT

Any CRT can have one or more trustmakers. Sole trustmakers are generally either unmarried or a married person who chooses to fund the trust with his or her separate property. Married spouses who own property jointly often elect to create a joint CRT where they are both trustmakers.

The trustmakers of a CRT also can be its income beneficiaries. A trustmaker’s spouse, children, grandchildren, or anyone else for that matter, can be an income beneficiary.

A CRT can have a sole income beneficiary, or it can have multiple beneficiaries. Multiple beneficiaries can receive their income concurrently or successively. “Concurrent” beneficiaries each receive payments. (For example, “I want the income of my trust paid equally to my spouse and me.”) A CRT can also name a succession of income beneficiaries. (“I’ll receive the income first; on my death my spouse will receive it, and after her death, my children will receive it equally.”)

If there are income beneficiaries other than the trustmaker or the trustmaker’s spouse, it is important to note that (as discussed in more detail below) a gift taxable transfer can occur. This, however, may be a good way to lock in high federal estate tax exemptions that will be halved in 2026. The IRS has already ruled that gifts made using the higher exemption will not be “clawed back” into a donor’s estate.

How Much Income Should Be Taken?

A concern of almost all who are considering a CRT is what percentage of income they should take out of their CRT each year. By law, this income percentage can be no less than five percent and can go as high as 50 percent, as long as the predicted value of the assets ultimately passing to charity are at least 10 percent of the value of the contributed assets. (For CRATs only, there is an additional requirement that there exists at least a one in 20 probability that the charity will receive some of the trust property end of the period of distributions to noncharitable persons.)

At first blush, it is the tendency of most people to opt for a higher percentage as representative of a greater benefit. However, on reflection they often change their minds because of two very significant reasons:

  1. The charitable income tax deduction is inversely proportionate to the income percentage: the higher the income percentage, the lower the immediate charitable tax deduction will be, and vice versa.
  2. By selecting a lower income percentage, the trust principal will appreciate faster and generate more income to the income beneficiaries over time. There is power in tax-free compounding of income and appreciation inside the CRT. A lower percentage taken as against a larger principal will often yield a greater overall income return than a higher income percentage over the same period. Taking out a great deal of income does not allow the principal to grow.

Be sure to look at a number of projections about the ultimate return before deciding on a particular CRAT annuity percentage or CRUT unitrust amount. If your income is likely to decrease in the future, you may want to vary the income amounts received at different times using a NIMCRUT.

Multiple Income Beneficiaries

Sometimes, a CRT names multiple income beneficiaries. Naming more than one income beneficiary creates some planning complexities. These can be positive or negative based on each individual’s personal situation.

A trustmaker’s spouse can be named as either a current or successor income beneficiary without any adverse tax consequences because of the unlimited marital deduction law. Most trustmakers routinely name their spouses as income beneficiaries.

If a parent names children as immediate income beneficiaries (“I want the current income beneficiaries of my CRT to be my children”) or concurrent income beneficiaries (“I want the income from my CRT split equally between me, my spouse, and my children”), then the trustmaker has made a gift to his or her children. The amount of the gift is the present value of their income interest based on their life expectancies. While this may seem like a very complex computation, the Internal Revenue Service has tables that can be used to readily ascertain the amount of the gift.

If a parent names children as successor beneficiaries (“I want my trust income paid to me and my spouse for our lives, and then equally to our children for their lives”), the gift to the children will either be subject to immediate gift taxation or to estate tax on the death of the survivor of their parents. The timing of the gift depends on how the CRT is drafted. While a federal gift tax return will be required for a lifetime gift to children, the practical effect of today’s $11,400,000 estate and gift tax exemption is that actual current taxation of this gift is unlikely to occur. The gift will, however, reduce the amount of this exemption available in the future.

When children or grandchildren are named as concurrent or successor beneficiaries, the present value of the amount that is ultimately going to pass to charity is going to be very low or nonexistent. As a result, the charitable income tax deduction is going to be very small or nonexistent. The CRT will not qualify for beneficial tax treatment if this amount predicted to go to charity is less than 10% of the amount initially contributed to the CRT. Therefore, this is not a good strategy to use when current income taxation is important to the overall planning.

Selecting Who Can or Should Be Trustee

You can be your own trustee. As trustee, you can, in effect, retain total control of your trust assets during your lifetime. If you choose to act as your own trustee, you must name a special independent trustee in your CRT–someone who is not related or subordinate to you. Having a special independent trustee is important when a CRT acquires hard-to-value assets such as business interests and real estate holdings. Because these types of assets can create conflicts of interest when the trustmakers are also the trustees, the special independent trustee acts to ensure that any conflicts are resolved. A special independent trustee is especially important if the trustmaker gives real estate or closely-held stock in a corporation to a CRT.

Almost all people who decide to create a CRT name themselves as trustee of their trusts. However, a few of them name corporate fiduciaries or children as their trustees. These decisions are based upon unique situations and are in the minority.

As you can gather from this discussion about CRT participants, there are a number of interrelated considerations to decide before obtaining the powerful benefits of a CRT. If you think that a CRT might be a valuable solution for your situation, I will be happy to assist you with this strategy.

© Richard Wright 2019


Charitable Remainder Trusts

Time To Revisit Charitable Remainder Trusts?

With clients worried about a perceived stock market top in the near term and a potential recession in the next 18 months, it’s probably a good time to look at an old favorite in our Estate and Trust planning toolbag: the Charitable Remainder Trust (generally referred to as a “CRT”).  A CRT is a useful type of irrevocable trust that allows its maker(s) to retain (or give to others) certain fixed benefits from the trust for one or more lifetimes or a period of years before ultimately distributing the remainder of the trust to a favorite charity.  Once established in accordance with statutory requirements, the IRS will treat the trust itself as a type of charity.

The Benefits of Implementing a CRT in Your Planning

While this strategy can be used appropriately for estate planning purposes, there is one tax reason that stands head and shoulders above all of the many CRT benefits:  the ability to avoid immediate capital gains tax on the sale of appreciated assets.  Using a CRT, a client can lock in appreciated gains, diversify out of concentrated positions, and/or go to cash, without immediate tax implications.

The CRT strategy offers a number of other significant planning advantages.  A person who uses this strategy can also expect to:

  • Receive an immediate federal income tax deduction for his or her gifts to the trust that will put an additional charitable deduction directly into his or her pockets as a bottom line income tax savings;
  • Create an income stream for life or a period of years that is greater than if the asset was held or sold;
  • Diversify their investment portfolios without having to pay a tax penalty to do so;
  • Shelter large amounts of principal from the claims of potential unforeseen creditors;
  • Avoid potential federal and Maryland estate tax on the value of the assets that will pass to charity; and
  • Benefit preferred charitable organizations in lieu of the federal and state governments.

The mixture of which benefits are most important to a particular person varies depending on circumstances and goals, but there is one given for virtually all people who are interested in CRT planning:  The desire to sell appreciated assets free of tax and retain substantial benefits from those assets.

A Brief Description of the Strategy

When a person owns appreciated property that they would like to sell, they are faced with the conundrum of having to pay capital gains taxes on their profit, much of which may be attributable to pure inflation rather than a real increase in value.  If they instead transfer their appreciated property to a CRT that is created just for them, those assets can be sold without the immediate payment of any federal or state capital gains tax.  Structured correctly, giving property to a CRT can result in a greater rate of return for an individual and a greater amount of assets passing to family members than if the same assets were sold during the owner’s lifetime and then were passed to family members at death.

While a CRT is a complex planning strategy, its basics are relatively simple.  Here, in essence, is how a CRT works:

  1. The person who wants to make a gift, called the trustmaker, transfers appreciated property to the trustee of the CRT.
  2. The trustee can be the trustmaker(s) or other individual(s), or it can be a bank trust department or trust company.  The trustee administers the trust, invests the trust assets and sells the appreciated assets.  Because the trust is treated like a charity with regard to the recognition of income, the proceeds are free from all immediate income tax.
  3. When the trustmaker gives property to the CRT, the income beneficiary or beneficiaries receive income from the trust for life or for a period of up to 20 years.  This amount is chosen by the trustmaker, but cannot be less than a 5 percent return on the value initially transferred.  The trustmaker(s) are usually the income beneficiaries, but in some cases others are additional income beneficiaries.
  4. CRT distributions are income taxable to the income beneficiaries when received from the trustee under the “four tier” structure discussed below.  As such, except for the share of trust income and capital gains that ultimately passes to a charity or charities (that pay no income tax), income tax on CRT income and recognized capital gains is deferred, not escaped.  However, such deferral is a powerful tool when income recognition is postponed until years when the rate of taxation is lower or when additional deductions may be available.  For example, with proper planning, income might be deferred until later years when overall taxable income is lower or when, such as after 2025, we revert to the allowable tax deductions that were available before the 2018 Tax Cuts and Jobs Act.
  5. The trustmaker gets a current income tax deduction in the year the trust is established for the value that is ultimately predicted to go to charity.  Note that because the CRT makers are only giving away the principal that is left after a predicted or prescribed period of years, this deduction is not for the full value of the assets that are placed into the CRT.  The amount that ultimately should go to charity is calculated using annuity and life expectancy tables and an interest rate prescribed monthly by the Internal Revenue Service.  The income tax deduction will vary depending on the ages of the income beneficiaries (or the period of years that the income benefit will be paid to him, her, or them), the amount of projected income that the income beneficiaries will receive on a regular periodic basis, and the value of the initial gift made to the CRT.  At the time the CRT is created, the present value of what is predicted to pass to charities at the end must be at least 10 percent of the value of the contributed assets.  This deduction is fixed at the outset, regardless of the actual performance of the CRT and what actually passes to charity in the future.
  6. Upon the death of the income beneficiary or beneficiaries (or the passage of a prescribed period of years), whatever is left in the CRT passes to one or more public charities.  These charities must meet certain tests to be qualified charities, but these are generally the same tests that must be met to make a charitable contribution income tax deductible.
  7. Any amounts that pass, or are predicted to pass, to qualified charities after the death of the trustmaker are not taxed in the estate of the trustmaker for federal and state estate tax purposes because of the estate tax charitable deduction.

Types of Charitable Remainder Trusts

There are generally three kinds of CRTs:

  • Charitable Remainder Annuity Trusts (“CRATs”),
  • Charitable Remainder Unitrusts (“CRUTs” or “S[tandard]CRUTs”), and
  • Charitable Remainder Unitrusts with Net Income Make-up provisions (“NIMCRUTs’)

It is also possible to combine the advantages of the NIMCRUT and the standard CRUT by having the NIMCRUT convert into a standard CRUT after the occurrence of a specified event (e.g., a birthday or a date or the sale of property for which the market is uncertain) that is theoretically outside the control of the trustmaker.

The Charitable Remainder Annuity Trust

A CRAT guarantees the income beneficiary a fixed percentage of the original amount that was given to the trust.  For example, if the terms of the CRAT state that the income beneficiary is to receive a 10 percent return on the $5 million the trustmaker originally placed in the CRAT, then the income beneficiary would receive $500,000 each year from the CRAT regardless of whether that principal grows to $10 million or drops to $3 million.  Investment performance does not affect the amount of the annuity payment.

The CRAT technique is usually embraced by older people who are betting that we are more likely to have economic deflation than inflation, that want to lock in historically high rates of inflation, or who simply do not want to take the chance that they will receive less than the amount originally chosen.

Because of the fixed nature of the annuity required in a CRAT, additional contributions cannot be made to these trusts.  The original gift cannot be enhanced.

The Charitable Remainder Unitrust

A CRUT is distinguished by the feature that it guarantees the income beneficiary an income equal to a percentage of the changing value of the trust assets.  If the terms of the CRUT state that the income beneficiary is to receive a 10 percent return on the value of the CRUT’s assets and the trustmaker made an initial gift of $500,000, then the income beneficiary would receive more than $50,000 each year if the trust increases in value, and less than $50,000 each year if the trust decreases in value.  Investment performance determines the amount of the income interest that the income beneficiary receives.

The CRUT technique is most effective for people who believe that inflation and/or appreciation will continue, allowing their CRUT payments to rise with that inflation and/or appreciation.

Because of the flexibility of CRUTs, many makers contribute additional cash or property to them throughout the years.

The Charitable Remainder Unitrust With Net Income Make-Up Provisions

A NIMCRUT can be distinguished from a regular Charitable Remainder Unitrust in that there is trust language that allows the income beneficiaries to forgo taking income in those years when it is not needed and to defer that income to later years when it will be needed.  The income that is not taken currently is not taxable until it is taken out of the trust in future years, allowing effective income tax deferral.

Especially when it is combined with a standard CRUT after a designated “flip” event, a NIMCRUT offers immense planning opportunities.  It allows individuals who have a high current income to shelter their capital gains while deferring income to years where their income may not be as high.  In addition, the trustmaker can give additional contributions of cash or property whose growth will also be sheltered on a tax deferred basis.  A NIMCRUT also can be a substitute for a qualified retirement plan.

Taxation of CRT Income Distributions

Income received from a CRT by recipients who are not charities is taxed for income tax purposes under a “four tier” structure that is based on the historical nature of the trust’s operations.  First, distributions are taxed to recipients as ordinary income to the extent that the trust has at any time previously earned such ordinary income (e.g., dividends and interest) that has not previously been taxed.  To the extent that all prior ordinary income has thus been distributed, distributions are next taxed as capital gains to the extent that the trust has at any time realized such profits and has not previously distributed them.  When all prior capital gains have been distributed, distributions are reflected as tax-free income (e.g., municipal bond interest) if and to the extent that the trust has received such tax-free income.  Finally, when all of these income categories have been distributed, distributions are treated as a distribution of nontaxable trust principal.

As the result of IRS requirements for the income taxation of CRT distributions, CRT trust accounting can be rather complicated.  The use of a knowledgeable CPA or professional CRT administration firm is often a good idea.  Fortunately, the expense required to pay for such accounting is incurred by the trust itself and not directly by the trustmakers or income beneficiaries.

Likely Candidates for CRT Planning

While CRT planning usually best coincides with clients who ultimately want to make some ultimate contribution to charity, this is not always the case.  Income tax deferral can make these trusts useful, regardless of charitable intent.  In fact, such deferral is so useful that the IRS limits the types of investment that are eligible for CRT use.  For example, the contribution of hard-to-value assets (like real estate, closely-held stock, and tangible personal property) will require the CRT to have an independent Trustee.  And CRTs are generally not designed to accommodate gifts of assets encumbered with debts, business inventory, limited partnership and LLC interests, real estate investment trusts, listed options, and installment obligations.  Contributions of these types of assets could invalidate the trust or create significant income tax problems and should be avoided in almost every situation.  On the other hand, appreciated marketable stocks and bonds are wonderful candidates for contribution to a CRT.  That’s what makes the CRT worth considering if the stock market is nearing its top or a recession is impending.

If you find yourself worrying about how to liquidate appreciated and/or concentrated security investments or a need to diversify your investments without immediate capital gains taxation, please feel free to call me at (410) 224-7800 to discuss if a CRT could be a solution to your problem.


A.R.T. and Estate Planning

Assisted Reproductive Technology and Estate Planning: 
When Science Gets Ahead of the Law

Traditionally, Americans and the law have thought of families as mothers, fathers and their children conceived by conventional methods and brought to term in the mother’s womb.  However, since the 1978 birth of Baby Louise Brown after laboratory fertilization and implantation, individuals and couples have increasingly turned to Assisted Reproductive Technology (“ART”) to have children when impaired fertility, anatomical anomalies, or risks of future infertility or death otherwise make this difficult.  For these reasons and changes in family social structures, the birth of a child and the creation of a family relationship are no longer limited to instances resulting from human copulation.  In addition, children born as a result of changes in social standards (without ART) call to question whether biological parentage should always be the measure of family composition.  At the same time, however, like the mindsets of many, the law remains deeply rooted in concepts of family and descendancy that fail to consider these new methods of human gestation and family structures.  This paper suggests some considerations about these scientific and social developments and the law’s slow response that clients should contemplate in planning to achieve their hopes for future generations.

The Increasing Number of Non-Traditional Families

ART is the use of laboratory procedures that include the handling of human eggs or embryos to help a woman become pregnant other than by sexual intercourse.  ART includes techniques such as in vitro fertilization, egg and embryo cryopreservation for deferred use, egg and embryo donation, and the use of a gestational surrogate other than the ultimate child’s actual mother.  The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that today, approximately 1.7% of all infants born in the United States every year are conceived using ART.  Between 1999 and 2013, the CDC reports that about 2% (30,927) of all ART “cycles” used a gestational carrier, resulting in some 13,380 deliveries and, because of the high incidence of multiple births, 18,400 infants.  Additionally, the U.S. Department of Health and Human Services Office of Population Affairs reports that there are now more than 620,000 cryo-preserved embryos in the United States awaiting future use.

As the science of ART develops, so too is the likelihood of future increases in the birth of infants as a result of ART and outside traditional family structures.  This past November, a Chinese biophysics researcher and former professor, He Jianjui, announced that he had used ART to prevent HIV vulnerability in the first genetically edited babies brought to term.  Although this announcement was met with widespread ethical condemnation, it illustrates a potential new use of ART and new questions about the descendancy of the ART produced children with genetic alterations.

According to the U.S. Census Bureau in 2011, there were approximately 13.7 million single parents in the United States; and those parents were responsible for raising some 22 million children.  Although these single parent families are presumed to be mostly biological in nature, single parent adoption and ART now allow persons to be single parents by choice.  In addition, since the Supreme Court’s 2015 decision granting same-sex couples the constitutional right to marry nationwide, same-sex marriages now allow couples of the same sex anywhere in the U.S. to have children where at least one spouse will not be the biological parent.

Longer Ranged Estate Planning

We have noted in the past about the benefits of estate planning on a multi-generational basis.  In particular, such multi-generational planning using life-long Inheritance Trusts protects inherited assets from future beneficiaries’ potential creditors and estate taxes.  Effective multi-generational planning, however, demands that we be able to identify who the beneficiaries of that planning are intended to be.  For decades we have used such terms as “child”, “children”, “descendants” and “issue” in our estate planning documents to define the persons for whom we are planning.  ART and new family structures may now be making these terms fuzzy and call to question who a trustmaker intends to benefit.  For example, is a baby born to a gestational carrier who brings another couple’s embryo to term a “descendant” or the “issue” of the gestational carrier?  How do we know whether a trustmaker intends to include among his descendants children conceived using donated sperm from his biological male offspring who are not married to their mother?  In the future, how much genetic engineering will result in children that a trustmaker would not intend to include among his beneficiaries?

Maryland’s Limited Response to ART Children and Non-Traditional Families

To date, legislatures and the courts have lagged in providing answers to these and similar questions.  Fortunately, since the 1940s in Maryland, unless a will clearly indicates otherwise, the words, “child”, “descendant”, “heir”, “issue”, or any equivalent term in a will includes a person who is adopted; and an adopted child is treated as a natural child of his adopting parent or parents.  Adoption, therefore is one means of clarifying a child’s ancestry unless a testamentary document declares otherwise.  Similarly, Maryland law is clear that a child conceived by “artificial insemination” of a married woman with the consent of her husband is the legitimate child of both of them; and a child born to parents who have not participated in a marriage ceremony with each other is considered to be the child of the mother, unless a testamentary document declares otherwise.  Less clear is the status of an ART child whose married father has not documented his consent to parentage and whether a person born to parents who have not participated in a marriage ceremony is deemed to be the child of the father.  In the latter situation, the person is legally deemed to be child of the father only if the father is judicially determined to be the father in legal paternity proceedings, has acknowledged himself to be the father in writing, “has openly and notoriously recognized the child to be his child”, or has subsequently married the child’s mother and orally or in writing acknowledged himself to be the father.

In 2012, the Maryland Bar brought to the Legislature’s attention a developing legal issue concerning the posthumous use of decedent’s genetic material: how long should the decedent’s estate be kept open to determine who his or her legatees or heirs would be?  To allow estates to be expeditiously concluded for decedents leaving genetic material for future use, Maryland law was amended to legitimate a child conceived from the genetic material of a decedent if the decedent consented in a written record to be the parent of a posthumously conceived child, if the child is born within 2 years of the decedent’s death, and if, with respect to any trust, the decedent was the creator of the trust and the trust became irrevocable on or after October 1, 2012.  Unfortunately, this law is therefore inapplicable to trusts other than those of the decedent leaving genetic material for posthumous use, where the decedent has failed to consent in writing to posthumous use of his or her genetic material, or where a child conceived from the genetic material is born more than two years after the decedent’s death.

The Importance of Declaring your Intent About ART Questions in Your Estate Planning Documents

Given the current status of the Law, determination of questions about how ART and non-traditional family structures affect the interpretation of estate planning documents will rest largely on judicial findings of trustmaker intent at the time his or her documents were created.  How is this possible if these issues have never been considered or if a testator or trustmaker leaves no written statement of intent?  When the Law provides no default position on these questions, the need is magnified for consideration of the potential issues involved and effective expression of how you feel they should be resolved.  If you disagree with the Law’s limited resolutions made to date for these issues, you need to say so in your testamentary documents because the Law’s resolution will apply unless you state otherwise.

For over two years, we have included in our pre-initial conference Estate Planning Questionnaires a page with questions about “Determining Family Relationships”.  (My hope was that this page would itself become a statement of intent that could be used as a future reference.)  I find, however, that few clients fill in answers on this page in the belief that these issues will never apply to their situations.  Where they do complete the form with respect to children conceived by ART, most will indicate that “[c]oncerns about ART children are unlikely to apply in my family.  I accept any judgments made in this context by applicable Maryland law.”  When I explain why I think this is short-sighted (in light of the statistics quoted above and my own family’s experiences), most recognize the need for considering these concepts, especially when planning on a multi-generational basis.  The concepts involved are so new that most have not come to grips with how these issues should be involved in their particular situations.

You need to know that these issues are far more likely to affect you, your family, and your estate planning than you think.  I hope that this paper will spark a sensitivity to these trends that will motivate you to express your intent in your documents about how these issues should be resolved if they affect your family and its membership.


Federal Gift Tax Considerations

Keeping Away The Holiday Grinch:
Federal Gift Tax Considerations

Each year, the approaching Holidays spark questions about the federal gift tax and its applicability to year-end gifts.  We all quite naturally want to make gifts in this season so that we can watch our loved ones enjoy them.  For those who can afford to do so, this also becomes an opportunity to transfer wealth that may otherwise be taxed in the future for income or estate tax purposes.  Typically, a question I often get from clients is “please remind me again how much am I allowed to give…?  The simple but unresponsive answer to the question is that a person may give away whatever he or she wants.  Aside from proscriptions against defrauding creditors, there is no law restricting how much one may give away.  It is the costs of making the gifts that in reality define the situation.  Among those costs, as this article will explain, are the potential ramifications of the federal gift tax.

Gift Tax Considerations for Donors

The federal gift tax is a levy that the federal government collects from donors for the privilege of making gifts, i.e., transfers of property and other valuable interests without receiving value (“consideration”) in return.  Besides raising revenue, its purposes are to underpin the federal estate tax (i.e., the federal governments levy on decedents for the privilege of passing wealth after death) and the federal income tax.  Because of the federal gift tax, taxpayers may not defeat the estate tax by giving away their assets before they die.  At the same time, the gift tax theoretically prevents high bracket income taxpayers from giving away income-producing assets to lower bracket taxpayers to force the income taxation on such income at the recipient’s lower brackets (before the income recipient returns the property and/or its income to the donor).  The federal gift tax does not prohibit taxpayers from making gifts of any size.  It merely means that if one makes a taxable gift that is not otherwise exempt, as discussed below, the federal government may impose a 40% excise tax on the value of the gift transferred.  If applicable, that tax becomes a cost that the donor needs to consider in making the gift.

Maryland does not have a comparable state gift tax, but transfers of a material part of a decedent’s property within two years before death and lifetime transfers by a decedent “in contemplation of death” may be subject to Maryland inheritance tax after the donor’s death.  Recall however that transfers made to spouses, lineal descendants, parents, grandparents, siblings, and qualified charities are in any case exempt from Maryland inheritance tax.

Lifetime Exemptions from Gift Taxation

Fortunately, Congress has decided that the gift tax should only apply to relatively wealthy people.  Like the federal estate tax and until January 1, 2026, federal gift tax is not currently imposed on an individual’s first $11.18 million in otherwise taxable transfers during his or her lifetime.  The Internal Revenue Service has recently announced that, with inflation, this amount will be $11.4 million starting in 2019.  Thus, while lifetime gifts reduce the amount of transfers that can be made estate tax-free after death, married individuals will have a total of some $22.8 million dollars after the end of 2018 that will be exempt from federal transfer taxes on gifts or post-mortem transfers.  And with “Portability”, surviving spouses may use whatever exemption goes unused by a first decedent spouse after his or her death if an estate tax return is filed for that spouse.

Unfortunately, current law provides that on January 1, 2026, these exemptions will be decreased by half.  For 2026 and beyond, the Internal Revenue Code will limit gift and estate tax-free transfers to a total of $5.7 million (plus an adjustment for future inflation), or a total of some $11.4 million for married couples.  Even if this reduction stands, the $5.7 million future exemption amount means that most individuals can make very substantial tax-free gifts if they choose to do so.

Gift Tax Deductions and Annual Exclusions

In addition to the lifetime exemptions from federal gift tax, the Internal Revenue Code also provides for deductions for the value of gifts made to spouses and charities.  Because of these deductions, transfers between spouses and contributions to charity do not generally reduce the taxpayers’ lifetime exemptions.  (For example, if a taxpayer makes a $20,000 transfer to his spouse, the net value of the gift becomes the $20,000 transferred minus a $20,000 marital deduction, or a net taxable gift of $0.)

Additional annual “exclusions” from gift tax are also available that are designed to allow smaller gifts without reducing the taxpayer’s available lifetime exemption.  In essence, these are the lifetime gifts (such as Holiday, anniversary and birthday gifts) with which the IRS does not wish to be bothered.  The federal government is actually pretty generous with these annual exclusions.  Every taxpayer may annually give any number of individuals up to a total of $15,000 each without such gifts reducing his or her lifetime gift and estate taxation exemption.  Moreover, spouses may combine their $15,000 annual exclusions so that one spouse may use all of this $30,000 combined exclusion.  (Such “split” gifts do, however, require the spouses to file a federal gift tax return for the year in question to alert the IRS that both are consenting to this combination, and the consent will apply to all gifts made by either during the year.)

The “wrinkle” for annual exclusion gifts is that they are limited to only those gifts the recipient can immediately enjoy.  Examples of these are gifts of cash or marketable securities made outright to a gift recipient and most ordinary Holiday, birthday, engagement, and wedding gifts.  These eligible annual exclusion gifts are known as “gifts of present value” as opposed to “future value gifts” that cannot be fully enjoyed until some future time.  Examples of future value gifts are transfers made to trusts for beneficiaries and gifts that don’t take effect until a future event.  Only gifts of present value are eligible for inclusion in a donor’s annual gift tax exclusion.  For future value gifts, the donor’s lifetime exemption must be applied to prevent gift taxation.

Annual Gift Tax Returns

For most individuals, the real problem with making gifts of future interests or gifts of present value in excess of the annual gift tax exclusions is the requirement that an annual Form 709 United States Gift Tax Return must be filed for years in which such gifts occur.  For most, the size of the lifetime exemptions is enough to prevent actual gift taxation, but the return is still required so that the federal government (and the donor) can track where the taxpayer stands with regard to his or her remaining exemption.  Like federal income tax returns, these Forms 709 are due by April 15th of the year following the taxable year and are somewhat arcane and difficult to prepare.  The cost of worrying about, preparing, and documenting these returns thus becomes the real cost of making gifts that are not covered by available annual exclusions. If all gifts made are present value gifts totaling less than $15,000 for each recipient, returns are not required.

In this context, what most people mean when they ask how much they are “allowed” to give is “how much may I give to family members and friends without complications like having to file a gift tax return?”  From that limited perspective the answer becomes (for 2018) up to $15,000 per person in total annual gifts (including Holiday and birthday presents) if such gifts may be immediately used and enjoyed by the recipients.

The Internal Revenue Service’s End of 2018 Gift to Wealthy Taxpayers

This description of Holiday gift taxation would not be complete without noting the Internal Revenue Service’s November 26th “gift” to the wealthy.  From the above description, you will note that a taxpayer may make a total of up to $11.4 million in lifetime exempt gifts before January 1, 2026, and spouses may make such nontaxable gifts before then totaling some $22.8 million.  What happens if an individual uses all of his $11.4 million lifetime exemption (or any part in excess of $5.7 million) before 2026 when the exemption is scheduled to be halved?  Prior to the IRS’ gift, a very real worry existed that the excess gifts over $5.7 million would be taxed for estate tax purposes when the donor dies because lifetime taxable gifts are added (“clawed back”) into a decedent’s taxable estate for estate tax purposes.  Worry not!  On November 26th, the Internal Revenue Service announced proposed regulations that will, in essence, increase the lifetime estate and gift tax exemption after 2025 by the value of the gifts given tax-free before 2026 in excess of the post-2025 exemption.  As a result, if these proposed regulations are finalized, the added exemption for the pre-2026 tax-free gifts will be locked in forever.  And to that, I say Merry Christmas!

On this happy note, we sincerely wish you and your loved ones a Joyful Holiday Season and a safe and healthy New Year.

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Personal Independence & Incapacity Care

Personal Independence and Incapacity Care

This is our third article about the importance of planning for physical or mental disability.  In a prior article, we focused on financial management planning alternatives for persons facing potential health crises and incapacity.  In our last article, we noted that planning for nonfinancial issues may have even greater personal impact and suggested how to effectively communicate your wishes about your future health care.  In this article, we address how to make decisions about your future living arrangements and personal care while you are alive, how to make decisions about your remains after your death, and how such decisions can be legally and effectively communicated.

Your Personal Care is First and Foremost a Family Affair

For centuries, personal care of the elderly has been love-based and family-centric.  Just as we love and feel responsible for caring for our juveniles, part of our culture is that we reciprocate this affection and attention for those who cared for us when we were young and could not effectively do so.  As family members age and face impending incapacity, where they will live when they can’t maintain the normal routines of daily living is generally a personal or family decision.  With that in mind, it makes sense to have these discussions early so that all family members are clear and on board as to how this will work when this time comes.  Evidence these decisions by memorializing them in writing to make it clear what your wishes are if the time occurs when you can no longer voice your desires.  This evidence need not be legalistic or formal.  The evidence is better if it is clearly a communication of your personal desires and intent.  Letters and email messages will suffice if they are maintained where they can be found and read in the future.

Court-Appointed Guardians of Your Person

What happens if you are incapacitated and there is no family to rely on or if, in a diminished state, you clash with what others think is best for you.  This may be where a court is called upon to step in to determine who or what decision-making is in your best interest.  In Maryland, a court is authorized to appoint a “guardian of the person” for a person who is judged from clear and convincing evidence to lack “sufficient understanding or capacity to make or communicate responsible decisions concerning his person, including provisions for health care, food, clothing, or shelter…”.  In this regard, the court looks to determine whether the person before it is “unable to provide for the person’s daily needs sufficiently to protect the person’s health or safety” and who “as a result of this inability requires a guardian of the person.”

After appointment, this guardian of the person becomes an officer of the court who is designated to decide what is best for the ward.  With this in mind, it is a good idea to designate in advance who you would prefer to be the guardian of your person were a court to find that you need one.  Indeed, Maryland law provides a priority list for who is entitled to appointment as a guardian of a disabled person, and first on that list is “a person, agency, or corporation nominated by the disabled person if the disabled person was 16 years old or older when the disabled person signed the designation and, in the opinion of the court, the disabled person had sufficient mental capacity to make an intelligent choice at the time…”  Such designations are often made a part of power of attorney documents because these documents are required to be carefully witnessed (and, in the case of financial powers of attorney, notarized).

In the absence of a designated person, the statutory order of priority entitles persons to be appointed in the following order:  the disabled person’s health care agent; then his or her spouse; then parents; a person, agency or corporation nominated by the will of a deceased parent; children; heirs if the disabled person were deceased; a person, agency or corporation nominated by a person caring for the disabled person; and, finally, any other person, agency or corporation considered appropriate by the court.  Note, however, that for good cause, a court may pass over a person with priority and appoint a person with a lower priority.  Therefore, in case guardianship proceedings are commenced in the future, it is best to make your wishes in a written form that can be presented to the court for use in its determination.

Maintaining Your Independence

How long you maintain your independence from family or guardian care will depend on a number of factors.  First and foremost, if you are a citizen of the United States, you have a constitutional right to “liberty” guaranteed by the Fourteenth Amendment that cannot be taken from you without due process of law.  Even family members cannot deprive you of that right without court action.  Importantly, as noted above and assuming that you have not committed a crime, a Maryland court cannot take that liberty away from you without a determination based on clear and convincing evidence that you lack sufficient understanding or capacity to make or communicate responsible decisions concerning your person.  Thus, as long as you can make or communicate responsible decisions, you have the right to do so and to live on your own.

Practically speaking, your ability to remain independent may depend on your personal finances.  If you can make and communicate your desire that your resources be devoted to maintaining your independence and if your finances are such as to allow these expenditures, you remain in control even though you cannot provide for your daily needs yourself.  In effect, your finances allow you to provide for your daily needs by employing others (such as hired caretakers) to do so or by entering an assisted living facility.  While decreased mobility (e.g., an inability to drive a vehicle) is often a reason for moving in with a family caretaker, this need not be the case if you can offset this decreased mobility using your resources (e.g., by hiring drivers and/or shopping services, etc.) or if, because of assisted living circumstances, such mobility is no longer so necessary.  For these reasons, planning to maximize your financial resources (including providing for long-term care and other insurance) and for who will manage your finances as you direct (if you no longer manage them yourself) becomes a very important practical aspect of maintaining your personal independence.

Anatomical Gifts and the Disposition of Your Remains

The capacity to make and communicate responsible decisions not only determines the extent of your independence while alive, it also allows you to plan and determine what happens to your body after your death.

First, under Maryland law, “an advance directive” may contain a statement by a declarant that the declarant consents to the gift of all or any part of the declarant’s body for the purposes of transplantation, therapy, research, or education.  Typically, one evidences such a gift in one’s health care advance directive, in a separate anatomical gift form witnessed by two adult witnesses, or in the donor’s will.  In any of these instances, it is best to also cause a statement or symbol indicating that the donor has made an anatomical gift to be imprinted on the donor’s driver’s license or identification card to make sure that health care providers are made aware of your wishes.  After making an anatomical gift, a donor may by law amend or revoke the document in which the gift is reflected.  You may wish to also note that any individual may instead explicitly refuse to make an anatomical gift of the individual’s body or part by signing or directing another to sign a record to this effect or by placing such refusal in his or her will.

In addition to planning for anatomical gifts of usable organs, “[a]ny individual who is 18 years of age or older may decide the disposition of the individual’s own body after that individual’s death without the predeath or post-death consent of another person by executing a document that expresses the individual’s wishes regarding disposition of the body or by entering into a pre-need contract” signed by the individual and a witness signing in his or her presence.  Such a document may provide for cremation as opposed to burial with embalmment and may designate who can make post-death decisions about these and other matters concerning the disposition of the individual’s remains.  If a person has not signed such a document, the following persons, in the order of priority stated, have the right to arrange for the final disposition of a decedent’s body: the decedent’s spouse or domestic partner; an adult child of the decedent; a parent of the decedent; the decedent’s adult brother or sister; a person acting as a representative of the decedent under a signed authorization of the decedent; the guardian of the person of the decedent (if any) at the time of the decedent’s death; and then any other person (including the decedent’s personal representative) willing to assume the responsibility.  If a decedent has more than one survivor, the majority of the class may serve as the person in charge of the body disposition.


When I ask clients for their goals in undertaking estate planning, I find that their primary concerns turn out to be maintaining control of their persons and property while alive and taking care of themselves and their loved ones if they become incapacitated.  Even more important than the transfer of family wealth is using those resources to maintain independence and control while alive.  I hope that this article has given you some food for thought about discussing with your family your decisions about your future living arrangements and personal care and about how to effectively memorialize those decisions so that they will be followed in the future.  Please feel free to contact us if we can help you clarify your thoughts and assist you through this process.

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Planning & Communicating Health Care Decisions
& Surrogate Decision-Making

Planning and Communicating Health Care Decisions and Surrogate Decision-Making

As we live longer, we face an increased likelihood of physical or mental disability.  In our last article, we focused on financial management planning alternatives for persons confronted with potential health crises and incapacity.  While financial management is important to assure the resources to carry through life and to pass on to loved ones, planning for nonfinancial issues may have even greater personal impact.  Whatever your resources, they may be ineffective if you don’t properly plan and designate future caretakers who will make the types of personal and health decisions you want made.  In this article, we address how personal health care decisions can be legally and effectively communicated.

Advance Directives for Health Care

Under common law, absent a public interest otherwise, we each have a right to determine who can touch our body or not touch our body at any given time.  For the purposes of deciding among health care alternatives, Maryland law provides that “[a]ny competent individual may, at any time, make a written or electronic advance directive regarding the provision of health care to that individual, or the withholding or withdrawal of health care from that individual.  Notwithstanding any other provision of law, in the absence of [such] a validly executed or witnessed advance directive, any authentic expression made by an individual while competent of the individual’s wishes regarding health care for the individual shall be considered.”  Note however that, for your wishes to be considered when you can no longer communicate, they should be spelled out in writing so that they can be read by health care providers without involvement of a court, or, if court involvement becomes necessary, so that the court has proof upon which to make a decision.

As Justice William Brennan noted in his dissent in the Supreme Court’s landmark 1990 Cruzan decision, “Medical technology has effectively created a twilight zone of suspended animation where death commences while life, in some form, continues.  Some patients, however, want no part of a life sustained only by medical technology.  Instead, they prefer a plan of medical treatment that allows nature to take its course and permits them to die with dignity.”  If you wish to limit or eliminate artificial measures to prolong your life, you will want to execute a type of advance directive called a “Living Will Declaration”.  In effect, a Living Will Declaration is an advance directive that, in certain defined situations, health care should be withheld or withdrawn.  Maryland law facilitates such communication by defining common instances for such decisions in the event that you suffer a “persistent vegetative state”, “end-stage condition”, or “terminal condition” so that health care providers have a common understanding as to what these terms mean.  While you may wish to specify other situations where you don’t want your life prolonged by artificial measures (such as if you become a paraplegic) or you may wish to modify the Maryland definitions (such as to define the word “imminent” in the State’s definition of “terminal condition”), these definitions become a good starting point for expressing your intent about end-of-life treatment in a manner that others will understand.

In addition to living will declarations, Maryland and other states now require health care facilities to maintain a “Medical Order for Life-Sustaining Treatment” (commonly known as a “MOLST”) as a part of a patient’s medical records.  A MOLST is a written medical order signed by a physician, physician’s assistant, or nurse practitioner concerning the use of life-sustaining procedures, use of medical tests, patient transfers from a hospital to a nonhospital setting, and other appropriate treatment matters across various health care settings.  By law, the MOLST is supposed to be consistent with the patient’s known decisions and advance directives (and the decisions of his or her health care agent or surrogate decision maker) so it is important that you provide copies of all of your advance directives for care to your health care facility upon entry.  It is generally a good idea to review and prepare a MOLST form ahead of time to go over the decisions to be made at the health care facility’s MOLST interview.  (You can download one of these forms from our website at My experience is that if a competent patient has completed a reasonably contemporaneous MOLST worksheet, that will be the basis of the one ultimately entered at the health care facility.  Such a completed written MOLST worksheet is itself also an effective written advance directive regarding your wishes about your health care or the withholding of health care.

Advance Directives for Surrogate Health Care Decision-Making

Since it is virtually impossible to anticipate all the potential health care decisions that might need to be made were one to become incapacitated, it is important to designate a surrogate to make those decisions in the manner that you would want them to be made.  In this regard, Maryland law authorizes “[a]ny competent individual . . ., at any time, [to] make a written or electronic advance directive appointing an agent to make health care decisions for the individual under the circumstances stated in the advance directive.”  When making an advance directive to appoint a health care surrogate, be sure to designate alternative agents to act in this capacity in case one designated surrogate is unable or unwilling to act.  Both primary and alternative health care agents may be appointed to act together as co-agents, individually by themselves, or consecutively in a line of succession.

Unless otherwise provided in the document, an advance directive by law only becomes effective when the declarant’s attending physician and a second physician certify in writing that the patient is incapable of making an informed decision.  “Incapable of making an informed decision” means the inability of an adult patient to make an informed decision about “the provision, withholding, or withdrawal of a specific medical treatment or course of treatment because the patient is unable to understand the nature, extent, or probable consequences of the proposed treatment or course of treatment, is unable to make a rational evaluation of the burdens, risks, and benefits of the treatment or course of treatment, or is unable to communicate a decision.”  Know therefore that, in naming a health care agent, you are not giving up the right to make your own decisions.  You retain that authority until two doctors determine that you can no longer make informed decisions for yourself or unless you designate other circumstances as to when you want your nomination to become effective.  Should you choose to do so, you may designate persons (such as family members) other than physicians to decide when the designation takes effect.

If you fail to designate who you want to make health care decisions for you when you can no longer make informed decisions and the need for a surrogate arises, Maryland law provides a priority list for who is entitled to be your decision-maker in this order: your guardian, if one has been appointed; your spouse or domestic partner; an adult child; your parent; your adult brother or sister; or another friend or relative who demonstrates specific facts and circumstances that show regular contact and familiarity with your activities, health, and personal beliefs.  Individuals in one particular class may be consulted to make a decision only if all individuals in the next higher priority are unavailable.  Since the first priority class is a guardian appointed by a court, it is generally always better to name who you want to serve in an advance directive rather than to leave such a court appointment to chance.

HIPAA Authorizations for Release of Protected Health Information

In 1996, Congress passed a law entitled the Health Insurance Portability and Accountability Act (“HIPAA”) that limits the use, disclosure, or release of a patient’s “individually identifiable health information”.  While the main purpose of HIPAA was to help consumers maintain health insurance coverage as they changed locations and jobs, Congress was concerned that in doing so, it was increasing the likelihood for inadvertent disclosures of private health information as people moved around.  Congress decided that such disclosures could only be avoided if harsh penalties were imposed on health care providers who released individually identifiable health information without explicit patient authority.  HIPAA’s success and the resulting provider reluctance to release health information to persons other than their actual patient make it important that, in addition to declaring who you want to be your surrogate decision-makers, you authorize them to obtain individually identifiable health information about you.  A written Authorization for Release of Protected Health Information (or “HIPAA Waiver”) is a means to make sure that your designated surrogate can obtain the information necessary to make meaningful decisions.  Very often, the designated surrogate will need to get health care information about you from many different sources, not all of whom know your particular current circumstances.  A HIPAA Waiver is a proactive approach to making sure such health care information will be available to your health care agent from sources who otherwise fear being hit with a large fine for disclosure.  In addition, you may wish to allow family members to have individually identifiable health information about you to provide them with information about inherited health conditions.  Therefore, make sure that your HIPAA Waiver names both your designated health care agents and such family members and that the HIPAA Waiver survives your death.


The common thread here is that federal and Maryland law provide for and encourage you to plan and communicate your wishes in advance about how your personal health care decisions should be made if you are incapable of doing so at a later time.  We encourage you to think about and make these decisions now rather than to risk never addressing them.  As you can see, there are many tools available to document your wishes in writing so you can make sure they are available and understood when the need arises.  As always, I will be happy to discuss your future health care wishes with you and how available legal documents can insure that your expectations will be carried out.

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Surrogate Financial Management Planning with Powers of Attorney
and Revocable Trusts

In our last article, we focused on the importance of lifetime planning for Mature Single Individuals and some of the impediments they face in accomplishing such planning.  This article focuses on financial management planning alternatives for persons confronted with potential health crises and incapacity.

The Deceptive Ease of Creating a Power of Attorney

Because it is relatively easy to designate a surrogate to manage and control one’s property by means of a document called a “power of attorney”, a court-supervised guardianship of the property of a disabled person generally means that either the person failed to plan effectively for his incapacity or that he or she had no available potential surrogates from which to choose.  In a power of attorney, a “principal” grants authority to an “agent” or “attorney in fact” to act for the principal.  In the case of a power of attorney for property and/or financial management, the authority granted is to act with respect to the principal’s property for the benefit of the principal.  Under the Maryland General and Limited Power of Attorney Act (“the Act”), the agent has a legal duty to “[a]ct in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, act in the best interest of the principal; [to a]ct with care, competence and diligence for the best interest of the principal; and . . . only within the scope of authority granted in the power of attorney.”  Unless otherwise provided in the power of attorney, the agent has a further legal duty to “[a]ct loyally for the principal’s benefit; . . . [and] so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest; …”

The Act facilitates the designation of naming such an agent by including two statutory forms that can be used for this purpose.  However, when designating a surrogate, it’s extremely important to pay attention to the details of what is provided in the power of attorney document.  Because powers of attorney are such powerful instruments, the Maryland Court of Appeals has long held that it is a “well settled” rule that powers of attorney are “strictly construed as a general rule and [are] held to grant only those powers which are clearly delineated” in the instrument.  One cannot merely designate that his agent has “all the powers that I have” in a simple one-page document without designating specific authorities for specific types of property.  As a result, while they will work in many common situations, one cannot rely on use of just one of Maryland’s statutory form powers of attorney for effective management of all potential situations.  For example, the commonly used “Personal Financial Statutory Form” includes no provisions with regard to dealing with tangible personal property or business assets, and neither statutory form includes effective gifting authority to enable the agent to engage in effective tax or Medicaid planning. Maryland attorneys typically use two property powers of attorney for their clients: one of the statutory forms for ease of enforceability in the common situations an agent is likely to face that are covered in the statutory form and a second, supplemental power of attorney for the special situations that the statutory forms don’t cover.

A problem may occur with regard to when an agent is first allowed to exercise authority.  Under the Act, unless the principal provides in the document that it becomes effective at a future date or on the occurrence of a future event or contingency, a power of attorney is effective when executed.  Such immediate effectiveness can be contrary to the intent of the Mature Single Individual who wants to name a surrogate but, because of the parties’ relationship or lack thereof, does not want to give that person immediate control over her property.  While signing a power of attorney does not relinquish the principal’s rights with regard to property, allowing someone else to have that control as well can be unsettling.  In such cases, the person planning for a surrogate may want to employ a “springing power of attorney” that only becomes effective upon a designated future event or contingency (such as incapacity).

Pitfalls When Utilizing Springing Powers of Attorney

While springing powers of attorney are recognized in Maryland, they are not without problems of their own.  As with any power of attorney, there is always a fear by banks and securities brokers that they may somehow be found liable for giving credence to a power of attorney granted fraudulently or after a disqualifying incapacity has already occurred.  In the case of springing powers, there is an added concern as to whether the event initiating the power of attorney’s effectiveness has actually occurred.  For example, if a power of attorney states that it is not effective unless the principal is incapacitated, how does bank teller know whether this is the case?  When a springing power of attorney is deemed to be appropriate, it is always better to specify an ascertainable contingency such as when two licensed doctors make a specific written certification rather than just defining the springing event as one without requiring tangible evidence conclusively proving that the event has occurred.

A second related problem with springing powers is that they are not recognized under the laws of some states.  In Florida, for example, the banking industry convinced the Florida Legislature in 2011 that dealing with springing powers of attorney was so difficult that it would be better not allowing them at all.  While this situation is probably not enough to preclude a Maryland resident from using a springing power of attorney when nervous about his or her potential agents, the questions involved in using such powers should not be ignored.

One poor alternative when worried about an immediately effective power of attorney while at the same time wishing to avoid the problems of springing powers is that of executing an immediately effective power of attorney but giving all copies of the document to a third person (such as a friend or an attorney) who is to decide when it’s appropriate to provide the agent with the power of attorney document.  In essence, this is creating a fiduciary to decide when to empower a surrogate.  This alternative makes little sense.  Who would want to subject himself to the potential liability of making a wrong decision about a potentially untrustworthy agent?  What does the decision-making fiduciary do if the designated agent declines to serve when the decision is made?  How does a financial institution know whether the principal intended the agent’s authority to be effective if the instrument was dated years before.  Does the designated agent not already have effective powers even though he or she may not know what the document says?

Planning for the Needs of More than One Person

One final problem with using powers of attorney for surrogate property management is that they have historically been used only for managing property and financial assets for the benefit of the principal granting them and not for others as well.  A person might want his or her agent to exercise authority with regard to his or her assets for the benefit of someone else, such a spouse, an elderly parent, or a disabled child.  This problem becomes even more cumbersome if a principal wants his property used for the benefit of both himself and the person he or she designates to serve as his agent.  Without specific language to the contrary in the power of attorney, the agent’s duty of loyalty to the principal in this situation will prohibit him or her from using the principal’s assets for the agent’s benefit.  While a principal may include language making clear what his wishes are and who he wants his assets to benefit, there is little or no law making it clear how a court (or financial institution) will interpret the agent’s authority to share the principal’s property benefits.

In short, financial powers of attorney are relatively easy to implement but not without pitfalls that can minimize their utility.

Using Revocable Trusts for Surrogate Property Management

Revocable trusts have long been touted as desirable to allow a decedent’s family to avoid probate after the decedent’s death.  Mature Single Individuals may not, however, place much value in avoiding probate after their death or, in fact, may welcome probate as a means of making sure their designated Personal Representatives carry out their wishes.  What is often overlooked is the very real utility of revocable trusts for Mature Single Individuals to allow them to maintain control of their assets for as long as possible before giving a fiduciary surrogate authority to manage them in their behalf.  This utility derives from the rich and extensive history of revocable trusts as fiduciary mechanisms for carrying out the wishes of the trustmaker, the nature of trusts as relationships designed to accommodate changing situations over extended periods of time, and courts’ familiarity with the use of trusts to take care of multiple parties.  The shortcomings of powers of attorney noted above are routinely handled using revocable trusts.

By means of a revocable trust, the financial surrogate (i.e., the successor trustee) is not vested with authority unless and until the events designated by the trustmaker occur.  Until that time, the trustmaker can act alone or with a supervised co-trustee.  Financial institutions rarely question how a successor trustee (as surrogate for the original trustmaker/trustee) exercises authority over assets held in trust when they have had ample opportunity to see how the original trustmaker intended that authority to be put to work.  And in those rare case where probate is desired to provide court oversight to assure appropriate postmortem distribution, the trustmaker can provide that the revocable trust be added to her estate to be distributed in accordance with her will.

In conclusion, the importance of making plans for the occurrence of incapacity cannot be overstated.  In addition, it is relatively easy to name a surrogate for management of your property and finances if and when incapacity occurs.  However, this process is not without potential pitfalls and should be guided by an experienced professional.  We welcome the opportunity to serve you in this role.

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Read Part 3 »


Lifetime Planning for Mature Single Individuals

Lifetime Planning for Mature Single Individuals

Estate planning generally addresses three primary goals: keeping the client in control of his or her person and property while he or she is alive and well; taking care of the client and his or her loved ones if the client becomes incapacitated; and carrying out the client’s wishes after death. Clients in different life stages tend to give different priorities to these goals. Younger clients without children seem inclined to favor the first goal over the latter two. For those with a spouse and/or children, effecting post-mortem goals becomes much more important. Older clients tend to be more concerned with incapacity and post-mortem goals because the threats posed by these life stages seem closer at hand. In fact, with lengthening mortality rates, incapacity planning is taking on increasing importance for everyone.

Mature Single Individuals and the Problem of the “Short Bench”

For those who are not married and who have no children (“i.e., Mature Single Individuals”), planning for the disposition of property after death may not be as important as it is for those with closer family ties. The potential costs of such planning often encourage one to delay or avoid such planning. With greater importance attached to the designation of surrogates in the event of incapacity, life planning for the Mature Single Individual can actually be more challenging than for the married couple with children.

The basic problem for Mature Single Individuals in planning for their incapacity (or death) is the recognition that while surrogates are understood to be needed, fewer trusted fiduciary alternatives seem available. In our society, incapacity care tends to be rooted in close familial connections built over lifetimes. Where such close familial connections are not available or are available only to a limited extent, the question becomes how to find suitable surrogates to act for the incapacitated client while assuring fidelity and proper attention to these fiduciary duties. Without close family ties, the goal is often also to postpone the designation and implementation of surrogacy until the last possible moment when it becomes necessary.

Court-Supervised Guardianship – The Default Nobody Wants

In the absence of planning, the State provides a default means of determining such surrogacy. Under Maryland law, a court may appoint a guardian to act for a “disabled person” who is unable to manage his property or unable to provide for the person’s daily needs to protect his health or safety. Once such an appointment is made (following a mandated procedure intended to protect the alleged disabled person from unneeded interference), the court stays involved in the guardianship by supervising the guardian’s activities for as long as the incapacity continues. Such court participation inherently requires use of the disabled person’s resources to pay for this process and the guardians involved.

The choice of who serves as the disabled person’s guardian is made in the court’s discretionary determination of what is best for the disabled person and in accordance with a statutory priority list of possible surrogates ranging from a spouse, parents, or the disabled person’s children to heirs at law or any other person, agency, or corporation nominated by a person caring for the disabled person or otherwise considered appropriate by the court. Importantly, however, the statutory priorities list is topped by a person, agency, or corporation nominated by the disabled person if he had the foresight to do so while he has (or had) sufficient mental capacity to make an intelligent choice. As a result, even if a guardianship is not deemed to be objectionable and regardless of the age of the individual involved and the length of the potential “bench” of potential surrogates, it becomes quite important to address the issue of surrogacy by planning well before the onset of any “physical or mental disability, disease, habitual drunkenness, addiction to drugs, . . . compulsory hospitalization, or disappearance”.

The Importance of Addressing Lifetime Planning Issues

A court-supervised guardianship of a disabled person generally means that either the person failed to plan effectively for his incapacity or that he or she had no available potential surrogates from which to choose. This is unfortunate because it is relatively easy to designate a surrogate by means of two types of documents: financial powers of attorney and revocable trusts for the management of an incapacitated person’s property and money; and health care powers of attorney and advance directives to manage his or her health and personal well-being. (We intend to cover these types of documents in greater detail in upcoming articles.)

The primary point here is that the Mature Single Individual should not put off addressing incapacity issues that may have a great impact on his future quality of life. Inertia should not be allowed to control just because the Mature Single Individual does not particularly care about post-mortem planning or because his “short bench” of potential surrogates makes decisions difficult. Most will not want these issues resolved by the discretion of a disinterested court acting at the request of some distant heir or other person nominated by a care agency or otherwise considered appropriate by the court. “Estate” planning involves both lifetime planning and post-mortem planning. Lower prioritization for one does not preclude the importance of the other. And talking through difficult decisions with an experienced professional will often clarify potential resolutions. The critical step in this process is the first one: picking up the phone to make the initial appointment. Once one begins, the rest is easy.

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The Shifting Role of Taxes in Estate Planning

The Shifting Role of Taxes in Estate Planning

I am often asked if Estate Planning has gotten easier as a result of recent changes in federal and Maryland estate tax law. My response: Estate Planning has not gotten easier, it has just become different. Coupled with other changes in society (e.g., lengthening mortality, volatile securities markets, a lengthy period of extremely low interest rates, and new artificial methods of conception), the need for flexibility in Estate Planning seems to have taken on new importance. This article focuses on how the concerns planners address are evolving in light of recent tax law changes.


Generally speaking, if a decedent’s assets are subject to potential estate taxation when he or she dies (and even if available exemptions are present to preclude such estate taxation), the capital gains basis of such “property acquired from a decedent” in the hands of his beneficiaries “steps up” (or “steps down”) to its fair market value at the date of the decedent’s death. Such beneficiaries as a result receive this property without the inherent capital gains income that was realizable before the decedent’s death. (Note, however, that this principle does not apply to property that is “income in respect of decedent” such as IRAs and other retirement plans, annuities, Series E savings bonds, or other property where inherent ordinary income has been earned but not yet taxed when a decedent passes away.)

Because the reduction of potential future capital gains taxes by “step up” requires potential exposure to estate taxation at the time of the decedent’s death, a fundamental tension has long existed in estate planning (especially for married couples) between saving estate taxes and saving capital gains taxes. Do we maximize the amount we can exempt from estate tax by placing the first decedent spouse’s assets after his death in a “credit shelter trust” designed to benefit the surviving spouse without having those assets included in her taxable estate? Or do we expose as much of the couple’s net worth as possible to potential estate tax at the death of the survivor to maximize basis “step-up”? A comparable tension exists in Medicaid planning for single individuals where the question becomes: should the potential Medicaid recipient gift his property to family members (who receive the donor’s cost basis) to “spend down” assets to qualify rather than leaving these assets to beneficiaries at his death with a stepped-up capital gains basis?

For a long time, resolution of this tension was easy. If likely estate taxation would occur at 55% of date of death value for federal purposes and from 8% to 16% of such value for Maryland estate tax purposes, there was no question that avoiding such estate taxation by preserving all available exemptions far outweighed the potential of future 15% income taxation on capital gains. Such easy resolution has, however, become very much more difficult in the recent past for a number of reasons:

First, recent dramatic increases in estate tax exemptions have significantly decreased the number of estates where estate taxation is potential or likely. Where a decedent could once only shelter $600,000 from potential federal and state estate taxes, decedents dying before 2026 can each now shelter some $11.2 million of their asset value from federal and Maryland estate taxation. After 2025, even if the federal law is not changed, decedents will still be able to shelter some $6 million from estate taxation. For persons likely to die before 2026 with less than $11.2 million or afterward with no more than $6 million, estate planning to minimize future capital gains taxes has become obvious because their families will not have to worry about estate taxation.

Second, since 2010, a predeceasing spouse can avoid wasting his estate tax exemption by means of “Portability” without using a credit shelter trust that precludes a step-up in basis at his surviving spouse’s death. Portability allows the executor of a deceased spouse to make an election on the first decedent spouse’s estate tax return to transfer or “port” such deceased spouse’s unused estate tax exemption to the surviving spouse’s estate. For example, if two spouses each have $5 million in assets, prior law would have required the first decedent spouse to use as much of his estate tax exemption as possible for a credit shelter trust to avoid his family’s loss of its benefits. In so doing, no further basis step-up would be available for that trust property when the surviving spouse died. Now, however, the first decedent spouse can leave his entire estate to the surviving spouse to be potentially estate taxed when his surviving spouse dies (and with everything other than income in respect of decedent getting a basis step-up at this later date) when the surviving spouse’s estate will potentially have available exemptions of over $16.2 million until 2026 (i.e., $5 million “ported” from the first decedent spouse plus the survivor’s personal $11.2 million exemption) or some $11 million (i.e., the first decedent’s $5 million and the survivor’s $6 million) thereafter. For married couples with larger estates, it is now possible to leave up to $22.4 million before estate taxes apply, with all such property potentially receiving a stepped-up basis at the second death. With such large exemptions from estate taxation available at the survivor’s death, getting as much capital gains basis step-up as possible at the second death has become the primary priority in many more couples’ estate planning. Note, however, that obtaining the advantages of such Portability requires the time and expense of preparing and filing of a federal estate tax return when the first decedent spouse dies; and, unlike credit shelter trust assets, appreciation of “ported” assets do not escape inclusion in the surviving spouse’s taxable estate.

Finally, the rates of taxation for these two planning alternatives are narrowing. Federal estate taxation is now at 40%, rather than 55%, of fair market value at death. For those assets to which Maryland estate tax applies, the combined federal and state estate tax rate is just under 50%. At the same time, capital gains income tax rates have climbed over the years. In addition to the original 15% federal rate, an additional 3.8% net investment income tax on capital gains now exists for individuals earning more than $200,000 (or $250,000 for married couples filing jointly) and an additional 5% capital gains tax (above the net investment income tax) applies for individuals earning more than $425,800 annually (or $479,000 for married couples filing jointly). In addition, state income taxes on capital gains apply with most taxpayers paying between 7% and 9% of such gains, depending on income and county of residence. Thus, combined federal and state capital gains rates of tax at over 30% has become closer to combined federal and Maryland estate tax rates at just under 50%. This is not to say that the taxes paid for capital gains will be more than the estate tax due because the tax base for each is very different. However, the increased burden of capital gains taxation has taken on new importance when estate taxes (and especially federal estate tax) are no longer a major consideration because of increased exemptions and Portability.

As I noted at the outset, these tax changes have not made Estate Planning easier, just different. We often now focus more on capital gains tax minimization than we do on estate tax minimization. If, as expected, Maryland this year reverses its 2019 recoupling with the federal estate tax exemption (because it doesn’t want the Maryland estate tax exemption to climb to $11.2 million), another level of complexity and an increased need for flexibility will be introduced. As we try to emphasize to all our clients, such law changes and changes in family dynamics make it extremely difficult to plan for more than the next 3 to 5 years. Estate Planning is a process, not a one-time event; and providing flexibility to accommodate change is increasingly critical.

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