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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.

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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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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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2018 Estate and Trust Tax Planning

Inflation Adjustments and Initial Observations on the 2017 Tax Act’s Impacts:

In late October, the Internal Revenue Service issued its inflation-adjusted exemptions, exclusions and tax brackets to be used for 2018 federal tax returns. See generally, Internal Revenue Notice 2017-178 and Revenue Procedure 2017-58 issued on October 19, 2017. In the estates and trusts area, the principal adjustments are as follows:

  • An individual’s federal estate, gift, and generation-skipping tax exemptions are increased after December 31, 2017 to $5,600,000. Thus, for decedents dying after December 31st with a gross estate (i.e., a taxable estate at death plus prior adjusted taxable gifts) of less than $5,600,000, there will be no federal estate tax due and no federal estate tax return is required to be filed. In addition, individuals may cumulatively make up to $5,600,000 in taxable lifetime gifts before any federal gift tax is imposed.
  • After years of remaining fixed at $14,000 per year, the federal gift tax exclusion will increase to $15,000. As a result, for calendar year 2018, individuals may make gifts that can be enjoyed immediately totaling $15,000 or less to any number of individuals without those gifts counting as lifetime taxable gifts (and without those gifts requiring the use of the $5,600,000 gift tax exemption mentioned above).
  • Finally, for trusts receiving and retaining taxable income, the federal income tax brackets have changed such that trusts do not reach the 39.6% marginal rate until they have taxable income in excess of $12,700. (Please recall that trusts get “distributable net income” deductions for amounts distributed to trust beneficiaries so that this maximum marginal rate will only be imposed on retained ordinary income above that amount. In turn, the beneficiaries receiving this distributable net income will pay tax on the income received at their personal marginal rates.) Note that the new bracket amount does not affect the Maryland income tax paid by the trust at Maryland rates on top of the federal tax.

Despite the IRS’s October pronouncement, a real question exists as to whether any of these limits will apply in 2018. As I write this article, House of Representatives and Senate conferees in Congress have agreed upon a final version for a bill entitled H.R. 1, “the Tax Cuts and Jobs Act of 2017” (referred to below as “the TCJA”). This “Conference Committee” version of the TCJA will now come before both houses of Congress for separate votes of approval. If, as expected, this Conference Committee report is approved by the House and Senate, the Conference Committee version of the TCJA will become law and generally apply with respect to tax years commencing after December 31, 2017. The Conference Committee approved version of the TCJA will substantially change the applicable 2018 estate and generation-skipping transfer tax exemption numbers already announced by the IRS and will change the income tax brackets for trusts:

  • The Conference Committee version of the TCJA will double the basic federal estate, gift, and generation-skipping tax exemptions from $5,000,000 to $10,000,000. With inflation adjustments back to 2010, the actual exemptions per individual will increase to approximately $11,200,000, and a married couple will be able to shelter over $22,000,000 for their post-mortem beneficiaries before having to worry about paying federal estate tax.
    On January 1, 2019, the Maryland estate tax exemption is scheduled to become “recoupled” with the federal exemption. As of now, were the TCJA to pass with the doubled estate tax exemption, that doubled estate tax exemption will apply for Maryland estate tax purposes as well. Time will tell how Maryland reacts to this substantial decrease in tax revenue.
  • The original House of Representatives’ version of H.R. 1 would have repealed the federal estate and generation-skipping transfer taxes entirely as of January 1, 2025. This repeal, however, is not included in the Conference Committee’s approved final version of the TCJA, and for now such repeal is no longer on the agenda.
    Since neither the House nor the Senate versions of the TCJA (nor the Conference Committee report) repeal or change the federal gift tax exclusion amount, it appears that the federal gift tax exclusion will in fact increase to $15,000 for 2018 and succeeding years (until inflation again requires an adjustment in a $1,000 increment).
  • Under the Conference Committee version of the TCJA, the brackets for trust taxable income will be changed as follows:
    • Retained trust income up to $2,550 would be taxed at 10% (a rate below the current 15% tax on such income);
    • From $2,550 to $9,150, retained trust income would be taxed at 24% (a rate also below that mandated by current law);
    • From $9,150 to $12,500, retained trust income would be taxed at 35% (a rate higher than that mandated by current law); and
    • Above $12,500, retained trust income would be taxed at the maximum 37% (a rate that is 2.6% less than that mandated by current law).

    Thus, under the Conference Committee’s version of the TCJA, the maximum bracket for federal income tax on retained trust income will apply at an amount slightly below that projected by the IRS in October, but the rate itself would be 2.6% lower.

  • Because estates and trusts are generally subject to the same rules for calculating taxable income as individuals and because the TCJA suspends most individual itemized deductions until December 31, 2025, estates and trusts will be subject to the same TCJA provisions as individuals with respect to the loss or limitation of itemized income tax deductions (e.g., a $10,000 limit on the deductibility of state and local property and income taxes, limits on the deductibility of home mortgage interest, and loss of the deduction for preparation of tax returns). In particular, trusts and estates will no longer be able to claim as deductions expenses that previously were allowable if they exceeded 2% of taxpayer’s adjusted gross income. However, trusts and estates will now be eligible for a new complicated deduction for certain “qualified business income” received for the taxable year with respect to pass-through business entities.
  • Since individual beneficiaries will not be able to make itemized deductions for these pass-throughs (at least until after December 31, 2025), residuary beneficiaries of estates and trusts will no longer be eligible to benefit from unused excess deductions for estate and trust administration expenses after termination of an estate or trust.
  • The TCJA does not change the “stepped-up” basis provisions of current law with respect to capital gains on inherited assets. As such, beneficiaries will continue to inherit capital assets with the date of death fair market value of the assets as their respective bases for capital gains purposes and without the potential of realizing income taxation on pre-mortem appreciation (or losses) in value.

To learn about how The Wright Firm can help you make adjustments to your estate planning, please contact us at (410) 224-7800, or shines@thewrightfirm.net.

All of this will make wonderful fun for the IRS’s tax return designers over the Holidays. Here’s hoping that your Holidays are merrier than theirs and that we all have a Happy New Year.

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Securing Your Family’s Future Using Inheritance Trusts: Part 1

PART 1: Inheritance Trusts and How They Work

The key to estate planning is understanding clients’ goals for the process. Generally, as a primary overarching goal, clients cite their desire to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. Nothing worries parents more than a creditor or divorcing spouse depriving their loved ones of the assets they worked so hard to pass on. Given this goal, it shouldn’t be any surprise that in our practice, once clients understand how Inheritance Trusts work, they choose to leave their estates to their loved ones by such trusts over 90% of the time.

Inheritance trusts have been with us for many years, primarily to manage funds for minors and others who would otherwise have trouble maintaining them. The basic idea was originally to separate management from benefit to protect the benefits for as long as necessary. The modern “wrinkle” has been the recognition that, by making the capable beneficiary the manager (i.e., the trustee) and by maintaining the trust in place, the protections and safety net remain in place for as long as possible without significant loss of beneficiary control or enjoyment.

In this installment, we describe Inheritance Trusts and explain how they work. To do so, however, we first have to review some basics:

The Law Underpinning our Use of Trusts

Trust law has developed over hundreds of years as an outgrowth of our laws of property and judicial support of fundamental fairness (equity). Under our law of property, the bundle of rights held by an owner includes the right to transfer his property in the manner he chooses. The law of equity will support and enforce such transfer as long as the transfer does not violate a paramount principle of public policy. In particular, the law grants primacy to the intent of the transferor in transferring his property, regardless of whether he transfers his entire bundle of rights in the property to one or more persons or whether he chooses to parcel out different rights in the property to different persons. Such differing rights could include the right to control how and/or how long property is used in a particular fashion, the right to receive the benefits of the property as so utilized, and the rights to transfer the property in the future and to administer the proceeds of such future transfer. This potential, indeed likelihood, for court enforcement of the transferor’s intent is the fundamental “glue” that underpins the use of trusts.

A trust is really nothing more than a transfer of property that separates the owner’s bundle of rights in the property at the time of transfer. In the case of an Inheritance Trust, that separation generally occurs after someone’s death, most likely, when a beneficiary might otherwise have inherited the property outright from the decedent.

What is a trust?

A trust is a court enforceable relationship established by a property owner when he transfers property to someone who will thereafter own and use the property according to a set of instructions that binds the new “owner” as to what he can or cannot do with the assets subject to those instructions. This relationship generally involves three types of parties: the original owner who is called a “settlor” or “Trustmaker”, a “Trustee” who will thereafter own the property and put it to use, and a “Beneficiary” who will now or at some time in the future enjoy the benefits of the property while it is owned by the Trustee. (Please note that although the words, “Trustmaker”, “Trustee”, and “Beneficiary”, are used here in the singular, there may be more than one Trustmaker, Trustee, and/or Beneficiary; and a person may simultaneously hold one or more of these capacities with respect to any trust.)

The Trustmaker is the party who establishes the trust by transferring property to the Trustee and by creating the instructions (i.e., in a will or trust agreement) that control that property in the Trustee’s hands. The Trustee is the party who actually has title to the trust property and who carries out the instructions. As the name suggests, the Beneficiary is the person who is intended to benefit from the trust assets and the Trustmaker’s instructions. It is the Trustee’s legal fiduciary duty to carry out the Trustmaker’s instructions for the benefit of the Beneficiary. If he or she fails to do so, the Trustee’s personal wealth is subject to court order to rectify any breaches of the terms of the trust (i.e., the Trustmaker’s intent).

If the Trustmaker retains the right to take back the property initially transferred to the Trustee or to change the instructions that control that property in the Trustee’s hands, the trust is called a “revocable trust”. If the Trustmaker expressly fails to retain or no longer has such rights (e.g. by reason of his death), the trust is called an “irrevocable trust”. Additional distinctions exist depending on when the trust is created: If the owner/Trustmaker establishes a trust during his lifetime, the trust is called a “lifetime”, “living”, or “inter vivos” trust. If the trust is created after the owner/Trustmaker’s death (e.g., a trust created under the Trustmaker’s will), the trust is generally styled as a “testamentary” trust. Absent express language in the trust document to the contrary, a Maryland lifetime or living trust is deemed to be a revocable trust. Since the Trustmaker is no longer alive to change his instructions, a testamentary trust will be irrevocable unless a court finds that the Trustmaker’s instructions (intent) have become impossible to achieve or that a unanimously agreed upon modification of trust terms is not inconsistent with a material purpose of the trust.

Examples Of Inheritance Trusts

Let’s say you and your spouse would like to establish Inheritance Trusts for your two daughters after both your deaths. You and your spouse will first create a will or living trust as a Trustmaker. Each of these documents will contain instructions to establish trusts for your daughters together or for each of them and will transfer your property to the Trustees of those trusts after both of you have passed.

You believe your oldest daughter is already prepared to manage the assets transferred to her trust, so you name her as the trustee of her trust so that she can control that property and you give her discretion as to when she can distribute property income (or the trust property itself) to herself or her descendants.

You would like to see your younger daughter grow into her future role as Trustee, so you name her as a Co-Trustee of the trust (with her sister or another trusted family member or friend as the other Co-Trustee) until your younger daughter reaches a certain age (e.g., 30). At that time, the trust instructions say that she will become her trust’s sole Trustee. While your younger daughter serves as a Co-Trustee with the consent of her Co-Trustee required to make decisions, your trust instructions require the Co-Trustees to distribute certain amounts to her annually so that she can count on receiving those annual benefits.

Once each daughter becomes sole Trustee of her respective trust, each will act as caretaker of the inheritances and manage their investment until they are ready to pass them on to their own children and/or more remote descendants.

In the meantime, while her trust remains in existence, you state in the trust document for each daughter that no right to benefit from the trust may be transferred by any beneficiary as such, and no creditor of a beneficiary may attach trust property or any trust interest. Trust property will remain transferrable by the Trustee, but under Maryland law, “[a] creditor may not . . . reach or otherwise compel distribution of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust, . . . except to the extent that the interest would be subject to the claim of the creditor were the beneficiary not acting as cotrustee or sole trustee of the trust.” Subject to certain limited public policy exceptions for unpaid taxes, child support, and alimony, each daughter’s interest in the trust and the trust property itself is therefore protected from claims by potential creditors.

Stay tuned for future installments

In future installments of this series about Inheritance Trusts, we will explain these and other benefits of using Inheritance Trusts in your planning. We will also explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 2

PART 2: The Benefits of Using Inheritance Trusts

In part 1 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the particular benefits they offer at relatively little cost.

Benefits of Receiving Your Inheritance in Trust

There are three significant benefits to receiving your inheritance in trust rather than outright: (1) asset and creditor protection, (2) transfer (i.e., estate, gift, and GST) tax minimization, and (3) disability planning.

Asset Protection

As we discussed in Part 1 of this series, inheritances held in Inheritance Trusts are typically what are commonly referred to as “spendthrift” trusts. This term comes from the trust provisions that prevent a beneficiary from being able to pledge, assign, or otherwise anticipate their interest in the trust before he or she actually receives it. Because the beneficiary has no right to receive trust distributions ahead of the time when the Trustee (who may be the beneficiary himself but who acts in a fiduciary, as opposed to an individual, capacity) actually distributes them to him, the beneficiary’s creditors similarly cannot reach his trust interest until it is actually in his possession. As a result, his individual judgment creditors will not be able to reach the assets owned by the beneficiary’s Inheritance Trust unless they are creditors of the trustee (in his or her separate role as trustee) or creditors of a beneficiary with respect to alimony, child support, or taxes. In other words, the Inheritance Trusts’ assets are protected from lawsuit judgments against the beneficiary (or the beneficiary’s descendants or siblings).

Asset protection is important in a litigious society where the divorce rate hovers around 50%. The value of trust asset protection cannot be emphasized enough, especially since public policy generally makes it impossible for an individual to obtain this level of asset protection with respect to his or her personal assets. Spendthift trust creditor protection is made possible by the law’s view that, as long as he does not violate some important public policy in doing so, the manner in which a Trustmaker ties up his assets after death is his business and an entitlement resulting from his ownership of these assets in the first place. Spendthrift trusts are not deemed to be violative of public policy.

Future Transfer Tax Minimization

Inheritance Trusts also implement important estate and generation-skipping transfer tax planning. Under this type of planning, the assets in an Inheritance Trust will not be included in the beneficiary’s gross estate for federal or state estate tax purposes, no matter how much they grow in value. While the beneficiary can control the trust as its Trustee and has powers in this regard that are quite broad, those Trustee powers are by design insufficient under federal and state law to make them the functional equivalent of outright ownership. The same is true as to inherited rights as a trust beneficiary. As a result, while retained in the Inheritance Trust, the trust assets are not taxed for estate tax purposes as a part of beneficiaries’ respective taxable estates, and they can be passed on to the next generation (i.e., the Trustmaker’s descendants) without being subjected to estate tax.

An Inheritance Trust can be passed on to the next generation tax-free because it is exempt for the federal generation-skipping transfer tax (“GST Tax”). This is a tax equal to the federal estate tax that becomes payable when trust assets are distributed to beneficiaries more than one generation below the person in whose taxable estate the trust assets were last included. In essence, the federal GST Tax is designed to capture the estate tax that would have been payable from a generation where estate tax on trust assets is skipped. To limit the reach of this GST Tax on “smaller” estates, Congress allows an exemption from GST Tax for each individual taxpayer. Inheritance Trusts can be specifically designed to take advantage of all of the GST Tax exemptions of both the Trustmaker and the Trustmaker’s spouse. (The current GST Tax exemption available to a decedent is $5,450,000, but this amount will be indexed for future inflation. In the case of spouses, those exemptions can be doubled with careful planning). Unfortunately, unused GST Tax exemptions are not portable from a prior spouse to his survivor, so each spouse will need to use an estate plan utilizing Inheritance Trusts to take advantage of his or her GST Tax exemption.

Beneficiary Disability Planning

While a beneficiary is alive and able to manage his finances, he can serve as Trustee of the Inheritance Trust set up for his benefit. In addition, Inheritance Trusts often authorize the beneficiary to determine who will succeed him as Trustee when he is no longer willing or able to serve. To do so, the beneficiary will have to nominate a person, persons, or entity as Successor Trustee in a written document executed with the level of formality required in the trust instructions. If the beneficiary fails to nominate a successor trustee, the Trustee of the Inheritance Trust will be as the Trustmaker originally nominated in the trust by default. Please note that if a beneficiary wants his spouse to serve as Trustee of his Inheritance Trust if he cannot do so, he will usually need to create a writing that specifically makes this designation. To avoid complications of any potential divorce, a spouse is not generally otherwise named as a part of a line of succession.

In any event, if the beneficiary becomes disabled, management of his trust assets for his benefit is assured without court appointment of a guardian of his property or the ambiguities of enforcing a power of attorney.

 

In the final installment of this series about Inheritance Trusts, we will explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 3

The Logistics of Inheritance Trusts

In parts 1 and 2 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the mechanics of setting up and operating an Inheritance Trust.

Titling Trust Assets and Setting Up Trust Accounts

When an Inheritance Trust is established, its Trustee (and in particular, a Trustee who is also a beneficiary of the trust) will need to keep inherited assets (as well as assets acquired in the future using the proceeds of these inherited assets) segregated from his personal assets. He does so by the titling of trust property and by using a separate trust taxpayer identification number.

Title to all newly inherited trust assets (and the proceeds of these inherited assets) should be kept in the name of the Inheritance Trust at all times. We prefer the following format for titling assets in the name of an Inheritance Trust:

“Gloria Sample Jones, Trustee of the Gloria Sample Jones Inheritance Trust under Article Twelve of the John Sample Living Trust dated December 24, 2008”

Obviously, each beneficiary Trustee would insert his or her name in this language and the particulars of the source document when titling inherited assets to his trust. However, to avoid future problems with banks and financial houses, it is important to use a title that references the document that states the authority for the trust, the trust administration provisions, as well as the source for Trustee powers and succession provisions.

Merging Separate Inheritance Trusts from Each Parent

Often, children of the same parents will technically receive an Inheritance Trust from each parent. To avoid having multiple trusts, the source document will generally have a merger clause allowing the Trustee to merge multiple trusts with the same beneficiaries and trust provisions. As such, the substantially identical trusts set up by each parent can be merged by having the Trustees sign what is known as a Trust Merger Agreement. Thus, two separate Inheritance Trusts (i.e., one received each parent) are consolidated into a single Inheritance Trust for the beneficiaries involved.

Utilizing the Assets of An Inheritance Trust

In order to provide the asset protection and tax benefits described in Part 2 of this series, there need to exist certain technical restrictions on beneficiary Trustee access to an Inheritance Trust’s property. However, beneficiary Trustees need not feel particularly limited by these restrictions because these provisions are purposefully drafted to be as expansive as possible without causing tax effect. The beneficiary Trustee will generally have complete authority as to the investment of trust property and broad authority as to when to make distributions.

A Trustee of an Inheritance Trust may make distributions of trust property to trust beneficiaries (including himself) for their education, health, maintenance or support. These terms have very broad meanings as demonstrated below:

Education

Includes payments for tuition, fees, books, supplies, living expenses, travel and reasonable spending money related to private pre-school, kindergarten, elementary school, middle school, college preparatory high school, undergraduate college, graduate college, and vocational, professional, or other specialized training

Health

Includes payments for medical services, prescription/over-the-counter drugs, and/or medical equipment, and, in general, anything directly promotive of the good health of trust beneficiaries

Maintenance or Support

Includes payments to keep the beneficiaries living in the manner that is reasonable given the amount of funds which can be devoted to this purpose, i.e., anything reasonably required to maintain the beneficiary’s lifestyle. (In addition, Trustees are often given the discretion when and whether to take the beneficiary’s other resources into consideration in making such lifestyle maintenance distributions.)

The principal limitation here is that Inheritance Trust assets may not be used to benefit persons or entities other than those persons who are currently the beneficiaries designated by the Trustmaker.

Types of Property an Inheritance Trusts Can Own

In general and unless otherwise specified in the Trustmaker’s instructions, Inheritance Trusts may own any type of property that is readily available to the public, such as: real estate, farming/ranching businesses, stocks, bonds, commodities, options, metals, partnership interests, limited liability company interests, and other types of closely-held business interests. The limitations here are that the Trustee is obligated to the beneficiaries to invest prudently and to avoid self-dealing.

Inheritance Trusts may also own life insurance or annuity products. However, you should consult with an estate planning attorney prior to purchasing a life insurance or annuity product with an Inheritance Trust. Notwithstanding trust provisions, if the Trustee of a trust owns life insurance on his own life, that life insurance can be made taxable as a part of his estate.

Other Ongoing Trustee Duties

In addition to the duties discussed above, Trustees of Inheritance Trusts need to remember that they now have fiduciary duties to others to be responsible for many of the same tasks they would have been doing if they owned the property in their own name (rather than as Trustee of the Inheritance Trust), such as:

Insuring trust property against potential hazards/casualties;
Keeping records of the trust’s financial history; and
Filing annual federal and state income tax returns for the trust on April 15th of every year.

It is important to note that Inheritance Trusts will each be separate income taxpayers and will require their own respective income tax returns. To this end, Trustees need to use separate federal tax identification numbers for their trusts. Because trusts pay federal income tax based on very compressed tax brackets (in 2017, a trust’s undistributed income is taxed at 39.6% once that income totals only $12,500), Trustees will probably want to do some distribution planning to make sure that as much of this income as possible is taxed at lower rates available to trust beneficiaries.

Trusts currently written as a Maryland trust are also subject to Maryland income tax. However, beneficiary Trustees who reside outside of Maryland may change the taxing state if the trust is being administered outside of Maryland and was not created under the will of a Maryland resident. One of the first administrative activities a beneficiary Trustee might want to consider undertaking is an examination with a local accountant or attorney as to where it makes the most sense to have the trust taxed.

Finding Assistance

Much of this may seem new to you, but it is not “rocket science”. We are in business to help our clients plan their Inheritance Trusts and to help with their implementation and administration. If you would like to speak with us about achieving your goals for the future, please give us a call at (410) 224-7800.

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Becoming A Personal Representative: Begin With The End In Mind

 

A Personal Representative is the individual who is appointed to carry out all of the duties of collecting a decedent’s assets, paying the decedent’s outstanding obligations, and distributing the remaining property to the decedent’s legatees or heirs.

When you become a Personal Representative, it’s important to begin with an understanding of what will be required during the course of the administration. Within nine months of appointment, and at least every six months thereafter until the administration is completed, the Personal Representative must submit for review and approval by the supervising county Orphans’ Court an accounting describing all receipts of the Estate and any purchase, sale, transfer, compromise, disbursement, or distribution of the Estate’s assets. Any of these transactions are subject to examination by the Court’s staff. With this in mind, a Personal Representative will want to follow appropriate procedures to keep track of this information while setting up and managing the Estate.

 

LETTERS OF ADMINISTRATION CERTIFICATE

When new Personal Representative is appointed, he or she is given multiple copies of a certificate known as “Letters of Administration” that proves his or her appointment. Financial institutions are very careful when dealing with surrogates for their depositors, so a Personal Representative will need to prove that he or she is entitled to deal with the decedent’s assets. The Personal Representative therefore needs to always be prepared to supply a Letter of Administration certificate when collecting the decedent’s financial assets or when opening a new account.

THE ESTATE’S TAXPAYER IDENTIFICATION NUMBER

One of the first steps in our process for a new Personal Representative is to obtain a new taxpayer identification number (or “TIN”) for the Estate. When a decedent dies, his Estate becomes a new taxpayer for federal and state income tax purposes. The federal income tax rates applicable to estates and trusts differ markedly from those applicable to living individuals. The decedent’s Social Security Number is therefore no longer available as an identifier for the income earned on the property belonging to the decedent before death since that income will no longer be taxed to the decedent as an individual. Because financial institutions are required to report this income to the IRS and applicable state tax authorities, they will not change the ownership of the decedent’s funds or open any new account for the Personal Representative without first receiving and verifying the Estate’s new TIN. Consequently this TIN and the Letters of Administration will both be required for the Personal Representative to begin his or her financial duties.

DEPOSITS INTO THE ESTATE BANK ACCOUNT

If you are a new Personal Representative, you will want to begin by gaining access and closing out any individual accounts held by the decedent. Once closed, deposit the funds along with any cash and checks belonging to the decedent into a separate Estate account (usually a checking account) in your name as Personal Representative with all income on the account being taxed to the Estate’s new TIN. Keeping an Estate account separate from your personal account is both a fundamental Personal Representative duty and a primary means of obtaining and keeping information needed for the Estate account.

Knowing that you will be required to account for all Estate financial transactions, be sure to keep written records of all checks received and deposited by making photocopies or scanning and storing images of the checks as digital files. Because bank statements only list the total amount of a deposit (and not the separate deposited items), one very good idea is to list on each deposit slip exactly what checks were included in that deposit or to staple the deposit slip to copies of those checks. Keep this backup information and a list of all checks and cash received with the amount, the payer, and the reason for the payment of the funds in question. That way, this information will be readily accessible when it comes time to prepare the required Estate account. Not having such information will lead to needless expense down the road if it needs to be reconstructed.

PAYING ESTATE EXPENSES

Make sure also that you have copies of all checks written or a complete check register for all Estate expenditures. If your bank will supply copies of checks written, make sure you sign up for this service for the Estate checking account. Accounts dedicated to an Estate cannot be used for your personal expenses or for Personal Representative compensation or attorney’s fees without a court order. Also, while telephone and cable TV and internet bills initially received by the Estate can be deducted as Estate accrued liabilities, they will generally not be allowed afterwards at accounting time, so be sure to cancel the services as soon as they are no longer necessary for the administration of the Estate.

MAKE THE ESTATE ACCOUNT AN ONGOING EXERCISE

Make sure that you supply copies of your records to your attorney no less than every two months. At The Wright Firm, we ask our clients monthly to deliver or mail us their bank statements with copies of their canceled checks written to date. As soon as we know what comprises the Estate assets, we start and maintain the accounting of the activities they perform as Personal Representative throughout the administration process to ensure that we get all the details we will need and that all expected rules and procedures are accurately followed. It’s much easier to keep the account contemporaneously than to have to reconstruct activities after their details are forgotten. If we start early with a good understanding of the financial transactions involved and with assembling the proof of those transactions that we may need at the end of the process, preparation of the final required accounting at the process’ end is much easier and less expensive.

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Team Building and Collaboration Project

The Anne Arundel Estate Planning Council announces its 2016 Team Building and Collaboration Project

In the past, members have repeatedly requested programs and opportunities to meet and to learn how to collaborate with other estate planning professionals on estate planning projects. In response, the Anne Arundel Estate Planning Council is pleased to announce its 2016 Team Building and Collaboration Project.

Project Goal:
To build multi-discipline estate planning teams, to learn by experience how to collaborate on estate planning projects with other professionals, and to learn how best to communicate estate plans to clients in differing walks of life

How to Participate:
Assemble a team that will together plan for the growth and transmission to family members of the estates of a married couple under three sets of assumed facts:

• A married couple with assets totaling less than $1,000,000;
• A married couple with assets totaling approximately $7,000,000; or
• A married couple with assets totaling approximately $13,000,000

Each team should be comprised of at least 3 members including AAEPC members from multiple professional disciplines (e.g., an attorney, a CFP, and an insurance professional or a CFP, an accountant, and an insurance professional).

When your team is assembled, please register your team with the Project Monitor, Rich Wright, at RWright@thewrightfirm.net or (410) 224-7800.

Facts for each scenario will be designed by the AAEPC Executive Committee with an eye toward including the expertise of all types of represented member professionals.

Each assembled team will choose which of these scenarios they wish to address.

Intended Product:
An effective presentation of your team’s estate plan as you would do so to clients who are not avid readers PowerPoints and diagrams are encouraged. Extended written text is not. The goal here will be to teach all viewers how best to present a proposed estate plan.

Project Timeline:
By May 1, 2016 – Assemble and register your team with the Project Monitor
May 1, 2016 – Fact scenarios will be distributed to registered teams
By June 1, 2016 – Each team should choose and register with the Project Monitor which fact scenario they will be using
Summer, 2016 – Each team should meet and prepare the plan for the couple in the chosen scenario and decide how to present that plan
November 10, 2016 – AAEPC meeting presentation of the plans by each team with responsive comments to be provided by a common
review panel and the audience of AAEPC members (Note: This is not a competition. The panel will serve to provide feedback in the place of the client couple.)

Scenario 1: Harry & Sally
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Scenario 2: Jack & Diane
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Scenario 3: Brenda & Eddie
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Any Questions? Contact the Project Monitor, Rich Wright, at:

The Wright Firm
888 Bestgate Road Suite 211
Annapolis, Maryland 21401
Email: RWright@thewrightfirm.net
Phone: (410) 224-7800

NAEPC-logo-big-b&wAnne Arundel Estate Planning Council (AAEPC) was created by a group of tax, legal, insurance, and financial advisors to provide a forum for local wealth planning professionals from various disciplines to exchange ideas and build relationships.  AAEPC hosts 3-4 educational and networking events for advisors each year, offering opportunities for its sponsors to gain exposure to Anne Arundel County’s leading estate planning professionals.  The AAEPC functions under the 501(c)(3) umbrella of the Community Foundation of Anne Arundel County (CFAAC) – your leading local resource for charitable giving.