Sunday, March 25, 2012

How Often Should You Update Your Estate Plan?

By David A. Diamond

Clients often ask me how often their estate plan should be reviewed or updated.  Generally, I recommend that you review your living trust or will with your estate planning attorney every five to seven years. However, certain life events may require more frequent reviews. Here are some examples of the types of life events which make it prudent to consider an earlier review:

Changes in Family Relations

Birth of a new family member
Death of a family member or named fiduciary
Marriage in the family
Divorce in the family
Children or grandchildren reaching age of majority

Changes in Economic Situation

Substantial increase or decrease in net worth
Change in income needs
Purchase of new assets
Sale of existing assets
Starting a new business
Sale of existing business
Receipt of inheritance

Change in Health Status

Sudden change in your health status, such as diagnosis of terminal illness
Sudden change in spouse’s or other loved one’s health
Revelation of substance abuse by a family member

Other Circumstances

Change in the estate or gift tax law
Change of residence to another state
Revelation of financial irresponsibility of a beneficiary or named fiduciary

If several of these life events sound familiar and you have not yet reviewed your living trust or will with your estate planning attorney, please do not procrastinate. Call your attorney today to schedule an appointment.

Dave

David A. Diamond
Hines Carr Diamond LLP
1561 Third St., Napa, CA 94559
Tel 707.258.6234 | Fax 707.258.6264
Certified Specialist, Estate Planning Trust and Probate Law
California State Bar Board of Legal Specialization

Wednesday, March 21, 2012

Why I Don't Do Medi-Cal Planning

By David A. Diamond

I often get calls from prospective clients about Medi-Cal planning.  Medi-Cal is California’s version of Medicaid, which is a welfare program for poor people, some of whom are elderly -- not to be confused with Medicare, which is a government subsidized health care program for elderly people. Medi-Cal planning is a sub-specialty of estate planning that often comes under the heading “elder law.”

Elder law attorneys who provide Medi-Cal planning services typically advise elderly clients who need to move into an assisted living facility or nursing home how to give away their residence and financial assets, usually to their children, so they can qualify for Medi-Cal long-term care benefits. In other words, these attorneys help people transfer their assets to their children so they appear poor when they apply for Medi-Cal. It is often the children’s idea to get mom on Medi-Cal so that her nursing home care can be paid for by the state’s taxpayers (you, me, and every other working Californian), while the children enjoy their new found wealth.

Elder law attorneys will argue that what they are doing is legal (admittedly, it is), that they are just protecting the elder's life savings, and that they are only playing by the rules of the game.  Some will also argue that this is no different than arranging rich people’s estate plans so that they pay less estate tax. However, in my humble opinion, there is an important distinction between helping people avoid paying more tax into the system in the first place (estate and gift tax planning) and giving assets away in order to qualify for a taxpayer-funded government handout (Medi-Cal planning).

As a lawyer, I merely find Medi-Cal planning distasteful.  But as a taxpayer, I find it outrageous.  So when prospective clients call me with Medi-Cal questions, I refer them to my elder law colleagues who operate in that particular sub-specialty of estate planning law.  I am not legally obligated to take every client who comes my way, and life is way too short to provide legal services that I find personally offensive.

Dave

David A. Diamond
Hines Carr Diamond LLP
1561 Third St., Napa, CA 94559
Tel 707.258.6234 | Fax 707.258.6264
http://www.lawhcd.com/ | ddiamond@lawhcd.com
Certified Specialist, Estate Planning, Trust & Probate Law
California State Bar Board of Legal Specialization

Sunday, March 18, 2012

Understanding Portability


-- By David A. Diamond

The two-year estate tax compromise package passed during the lame duck session of Congress and signed into law by President Obama on December 17, 2010, introduced a radical new concept into the estate tax law: “portability” of exemption between spouses.

Under prior law, the exemption was a “use it or lose it” proposition. If the first spouse to die did not use his exemption by leaving assets to the children or, more typically, in a credit shelter (or “bypass”) trust for the benefit of his spouse, the exemption was wasted. Consider the following hypothetical:

Homer and Marge have a community estate of $5 million ($2.5 million each) and no estate plan.  They have three children, Bart, Lisa, and Maggie.  Homer dies in 2007 when the estate tax exemption is $2 million. Because they had no estate plan, Homer’s $2.5 million estates passes to Marge outright, meaning she now has an estate of $5 million.  Marge dies in 2009 when the exemption is $3.5 million.  Marge’s $5 million estate exceeds her $3.5 exemption by $1.5 million, generating an estate tax of $675,000.

Why is there is an estate tax of $675,000?  What happened to Homer’s $3.5 million exemption?  The answer is that because Homer’s estate went to Marge outright, his exemption vanished.  He didn’t use it, so he lost it.

Had Homer and Marge visited an estate planning attorney, they likely would have been advised to establish a living trust with “A/B” provisions, i.e., Homer’s share of the estate up to his exemption amount ($2 million) would have been funneled into an irrevocable credit shelter trust and the balance ($500,000) would have passed into a revocable survivor’s trust for Marge, along with Marge’s own $2.5 million of assets.  Marge could serve as trustee of the credit shelter trust and receive distributions of income, as well as principal for her health, support, and maintenance.  When Marge subsequently died in 2009, her taxable estate would have been $3 million rather than $5 million. The $2 million in Homer’s credit shelter trust would not be included in her taxable estate because they were owned by a trust, not her. Because Marge’s exemption amount in 2009 was $3.5 million, Bart, Lisa, and Maggie would inherit the entire estate tax free, saving $675,000.

Under the new portability rules, Homer and Marge could achieve the same tax savings without paying a lawyer to draft an A/B trust plan.  At Homer’s death, his $2 million “DSUEA” -- Deceased Spouse’s Unused Exemption Amount -- would pass to Marge along with his assets.  Marge would still have a $5 million estate, but under portability she would have had a $5.5 million of exemption (her $3.5 million plus Homer’s unused $2 million), wiping out the $675,000 estate tax bill.

So with portability of exemption, couples no longer need to hire a lawyer to draft an A/B trust plan anymore, right?  Wrong!  What if Homer has children from a prior marriage?  Homer may not need a bypass trust to save taxes, but he still needs one to ensure that his estate ultimately passes to his children at Marge’s death rather than to Marge’s next husband or Marge’s children from a prior marriage.

In theory, portability simplifies estate planning and reduces the cost of estate planning for married couples -- at least for those in first marriages.  But closer examination reveals that the purported cost benefits might not be realized in the long run.  The reason is that the only way to preserve the unused estate tax exemption of a deceased spouse is to file a timely estate tax return.  

Currently, an estate tax return is not required where the deceased spouse’s estate is less than the exemption amount. However, under portability, a surviving spouse would be well advised to file an estate tax return regardless of the size of the estate in order to preserve the DSUEA “just in case.”  After all, even if the surviving spouse does not have a taxable estate today, one cannot predict with reasonable certainty the value of the estate at death.  What if the surviving spouse wins the lottery or remarries and inherits from a wealthy second spouse or rich uncle? 

Thus, the legal fees the couple theoretically saved on estate planning services at the front end may instead be spent on estate tax return preparation costs at the back end.  So much for simplification and cost savings….

Portability of exemption is not a permanent part of the estate tax law. It is part of the two-year compromise that expires at the end of 2012.  If Congress does not act this year, the pre-2001 law will automatically reappear on January 1, 2013, with its $1 million estate tax exemption, 55% maximum rate, and no portability of exemption. Nevertheless, portability is supported by both parties and is likely to stay as part of any compromise.  In fact, it was included as part of President Obama’s transfer tax proposals released in February.

It looks like portability of exemption will be around for the foreseeable future, but stay tuned for further developments, especially as we approach the end of the year.

-- Dave

David A. Diamond
Hines Carr Diamond LLP
1561 Third St., Napa, CA  94559
Tel 707.258.6234 | Fax 707.258.6264
http://www.lawhcd.com/ | ddiamond@lawhcd.com
Certified Specialist, Estate Planning, Trust & Probate Law
California State Bar Board of Legal Specialization

Welcome!

Welcome to LAWHCD, the blog of the law firm of Hines Carr Diamond LLP!

First off, we are pleased to announce that Napa estate planning attorney David A. Diamond has joined the firm of Hines & Carr LLP, which will henceforth be known by our new name, Hines Carr Diamond LLP.

Dave is a Certified Specialist in Estate Planning, Trust and Probate Law (California State Bar Board of Legal Specialization) and a Northern California Superlawyer (superlawyers.com) with 27 years of experience in the field of trusts and estates.  Prior to joining Hines & Carr, Dave was a shareholder with the Napa law firm of Dickenson, Peatman & Fogarty, where he served as managing director during 2011. Before that, he ran a successful solo practice in Napa for a number of years.

Hines Carr Diamond LLP has two offices, one near Union Square in San Francisco and the other in downtown Napa. Our firm's practice focuses on estate planning, estate and trust administration, estate and gift taxation, estate and trust litigation, business law, and tax. Dave Hines, also a Certified Specialist in Estate Planning, Trust and Probate law, is based in our San Francisco office, while John Carr, a Certified Specialist in Taxation Law, is based in our Napa office, along with Dave Diamond.

We are also pleased to announce the launch of our new web site, LAWHCD.COM, on March 14, 2012.  We will use this blog, LAWHCD, to post articles of interest on legal subjects for the general public, with an emphasis on it areas of speciality, including estate planning, trusts, business, and tax.  Please subscribe to our blog to receive new posts automatically.