As you may be aware, the tax reform legislation from 2017 impacts not only the federal income tax but also other taxes potentially affecting your estate plan (such as the estate, gift, and generation-skipping transfer taxes (“GST”)).
The legislation doubles the estate, gift and GST tax exclusion amounts to $11.2 million in 2018 (to be adjusted for inflation from a base year of 2010). These increases are effective for decedents dying and transfers made after 2017 and before 2026. Due to these changes, it may be necessary to adjust certain provisions in your plans where you may have previously created formulas for gifting and estate allocation based on lower estate tax exemption amounts. Such older formulas could result in unintended consequences in this higher federal estate tax exemption environment, including unintended disinheritance of certain beneficiaries or higher taxes if certain gifts are “overfunded” because of the new exemption amounts.
After 2025, the increased federal estate tax exemption amount is scheduled to sunset, returning the exclusion amount to an amount calculated under current law ($5.49 million for 2017). Please note that Oregon’s estate tax exemption remains at $1,000,000 and is not indexed for inflation.
Additional changes to individual, corporate, and pass-through entity taxation provisions may also impact estate plans. Some of the provisions included in the law that may affect your plans include:
In light of the numerous changes made by this tax legislation, we recommend a review of your estate plan to make sure that it continues to satisfy your tax- and family-related objectives while remaining as flexible as possible. If it has been a few years since you have updated your plan, now would also be a good time to touch base with us to make sure trust funding, beneficiary designations, and other details are up to date.
Gifting is the cornerstone of a comprehensive estate plan for many families. Planned giving can create a legacy by providing benefits to loved ones and meaningful causes, while also reaping significant tax savings. But actually achieving those ends requires careful planning. Your needs, values, and whether you wish to retain control over gifted assets are all important considerations in a gifting plan.
As you consider gifting, keep in mind that because of the differing effects of income, capital gain and estate taxes on various types of assets, not all gifts have the same tax impact—even if the gifted assets have the same value (more on that in a future post). Your attorney, accountant, and financial advisor can help you identify appropriate assets for gifting to maximize your tax savings while preserving wealth to maintain your standard of living. Outright gifts may be the simplest approach, but other methods such as gifting through a trust, foundation, or donor advised fund can yield significant additional tax advantages and control. For gifts to friends and family, you may also consider making direct payments to education and medical providers or contributing to an education savings plan. Your attorney can help you determine the appropriate gifting vehicle given your individual circumstances.
If you are unsure about a fitting charitable recipient, a private philanthropy advisor or community foundation can help you identify charitable organizations that align with your interest and intent. Such advisors can help you identify and vet charitable organizations, draw up a gift agreement, and then periodically review and assess your gift for alignment with your intent.
Depending on the kinds of gifts you make, your accountant or attorney can assist you with tax compliance by proper documentation and reporting to ensure completion of the tax planning aspect of your gifts. Faulty documentation can reduce or eliminate the benefits a well-planned gift ought to achieve. The importance of careful and accurate tax reporting cannot be overemphasized.
There are many twists, turns, and caveats in the gifting world. Relying on your team of professionals is a sure way to leave a lasting legacy.
Oregon law now permits a Transfer on Death Deed (“TOD Deed”) that allows the owner or owners of real property to execute a deed that names one or more beneficiaries who will succeed to ownership at the owner’s death without a probate. However, as with any estate planning device, TOD Deeds have several pros and cons to consider. A TOD Deed creates no current legal or equitable interest in a beneficiary, can be revoked at any time, and does not affect the rights of the transferor’s creditors. As such, the completion and recordation of a TOD Deed is not a completed gift for tax purposes. The owner retains control over the property and cannot only revoke the deed, but can transfer title to third parties. Accordingly, the TOD Deed is superior in many ways to tenancies with right of survivorship or life estates as the transferor retains control and ownership.
In summary, TOD Deeds can be a useful tool, but must be used wisely. Given that real property is often the single largest portion of any decedent’s estate, TOD Deeds should be considered and drafted as carefully as a traditional will or trust.
Many people fail to plan for incapacity because they mistakenly assume that their spouse or child will be able to handle their finances or health care if something happens to them. No one should rely on such assumptions given our ever increasing regulatory environment. Most institutions cannot legally deal with family members without proper documentation. Accordingly, we recommend that you have the following two documents in place, at a minimum, to direct who is to make financial and health care decisions for you if you become incapacitated:
1. Power of Attorney (POA). In a POA, you appoint an “Agent” to make financial decisions for you. The POA will include a list of the various financial powers that the Agent will possess, and typically includes the following: buying and selling assets, voting shares, paying bills, filing tax returns, calling social security, and updating beneficiary designations, to name just a few. POAs should be updated at least every five years. Banks and investment institutions can be reluctant to accept a POA that is more than a few years old. A word of caution: there are several different types of POAs so you should be careful to work with a knowledgeable professional to craft a POA that is right for your particular situation.
2. Advance Directive (AD). In an AD, you nominate a “Health Care Representative” to make health care decisions (including tube feeding and life support) for you if you become incapacitated and unable to communicate your wishes. In the AD, you specify whether you would want tube feeding and life support in some, all, or none of several end-of-life situations outlined in the document. The AD Form can be obtained from the hospital or on-line, however, the form can be tricky to complete so we recommend doing so with someone knowledgeable about the form and proper execution formalities.
If you do not have a POA or AD, and if you become incapacitated, your family may be required to petition the court to establish a guardianship or conservatorship to assist in making medical and financial decisions on your behalf. In many cases, proper planning with a POA and AD can obviate the need for this costly step. A revocable trust is also an option in addition to the POA when planning for incapacity, particularly when probate avoidance and/or tax planning are also priorities.
Retaining the community property nature of assets can be quite beneficial from an income tax standpoint. Under the Internal Revenue Code when an individual dies his or her interest in both real and personal property receives, in most cases, a new income tax basis equal to their fair market value as of the date of death. In separate property jurisdictions, states which are not community property states, only the interest of the decedent in most assets receives a new income tax basis at death. However, in community property jurisdictions, not only does the decedent’s one-half interest in a couple’s community property receive a new income tax basis but the surviving spouse’s one-half interest in the community property assets also receives a new income tax basis. The following example illustrates the different income tax basis results for couples living in separate property states and those living in community property states:
Bob and Sarah, both lifelong residents of Oregon, purchased 1,000 shares of ABC, Inc. stock in 1990 for $15/share. Bob and Sarah equally contributed towards the $15,000 purchase price with earnings from their employment. In 2014, when the stock is selling for $100 per share, Bob dies. Under the Internal Revenue Code, because Bob and Sarah were always residents of Oregon, a separate property jurisdiction, only Bob’s one-half interest in the stock will receive a new income tax basis equal to $50,000. Sarah’s tax basis of $7,500 (her one-half of the cost) remains unchanged. If Sarah sells all 1,000 shares of ABC, Inc. stock at the $100 per share value, she would recognize $42,500 of capital gains tax.
Assume the same facts as above, except that Bob and Sarah purchased the ABC, Inc. stock in 1990 while residents of California and then moved to Oregon and 2012 after their retirement. On Bob’s death in 2014, not only will Bob’s one-half community property interest in the stock receive a new income tax basis of $50,000 but Sarah’s one-half community property interest in the stock will also receive a new income tax basis of $50,000. As such, if Sarah sells all 1,000 shares of the ABC, Inc. stock at $100 per share, she will not recognize any taxable gain.
As demonstrated above, it is very important for couples relocating to Oregon from a community property state to, if at all possible, retain the community property character of their assets. To help preserve the community property nature of assets our clients bring to Oregon from community property states, our firm has (i) these clients enter into a property agreement ratifying the community property status of their assets, and (ii) these couples carefully document the community property origin of their assets, whether the assets are located within Oregon or elsewhere. This tracing can be very important at a later point in time to help substantiate the status of assets as community property, especially if the asset has changed form or been converted into other assets.
Read Part 1 of this post by clicking here.
Most Oregonians do not realize that in the early 1940s, Oregon enacted legislation which allowed married couples to own assets as community property. However, the community property statute was repealed before the end of the decade, and since that time Oregon has remained a separate property state.
However, though Oregon is not a state where community property can be created from separate marital property, Oregon does recognize community property which is brought into this state from another community property jurisdiction. What this means is that a couple who accumulates community property in a state that recognizes community property (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington or Wisconsin (Alaska has an elective version of community property)) and then relocates to Oregon does not, for disposition of death purposes, necessarily lose the community property character of their marital property.
Specifically, Oregon recognizes as community property any personal property or real property which was acquired as or became and remained community property under the laws of a community property jurisdiction, as well as any proportionate part of such property which was acquired with rents, income or proceeds from community property. Note that if an asset is characterized as community property, the appreciation and earnings are also characterized as community property even if the appreciation or income occurs while the married couple are residents of Oregon.
The word “probate” often comes to mind when we think about the disposition of our property at death. So, what exactly is probate? Probate is the formal court process for clearing title to property and transferring a decedent’s assets to the decedent’s devisees or heirs at death. During the probate proceeding, assets are collected, debts are paid, disputes over the decedent’s estate are settled, and title to property is transferred. While probate is an effective method to achieve these objectives, probate can be a long, expensive, and cumbersome process. Below is several estate planning techniques to avoid probate of certain assets.
Jointly Held Property
If a decedent holds property jointly with another person, either as tenants by the entirety (available for married couples) or with rights of survivorship, title to the property immediately vests in the survivor at the time of the decedent’s death. Real property, vehicles, and bank accounts are examples of property that can pass outside of probate if owned jointly.
Property with Beneficiary Designations
Many types of property can pass by beneficiary designation, including but not limited to real property, securities, life insurance proceeds, annuity payments, retirement accounts, pay on death (POD) accounts, and transfer on death (TOD) accounts. Upon the death of the decedent the named beneficiary becomes the owner of the property. If no beneficiary designation is made, the property will likely become a part of the decedent’s estate and will be subject to probate.
Bank Accounts with Value of Less Than $25,000
Under Oregon law, if the decedent is the sole owner of a bank account with a value of less than $25,000, and the total deposits in all bank accounts in Oregon amount to less than $25,000, a simple affidavit may be submitted to the bank to claim the funds. Most banks require that their own affidavit be used, which can be obtained at a branch office. Oregon law establishes priority as to who may claim the funds (spouse, children, etc.). One caution to relying on an affidavit to avoid probate: the bank is not required to pay the funds as requested and may require a probate or small estate affidavit.
A trust is a separate legal entity that survives the decedent. Property that a decedent transfers to a trust prior to his or her death is therefore not subject to probate. As a result, a trust is the most common means to avoid probate. There are situations, however, where a trust may not be the best probate avoidance tool given an individual’s particular set of circumstances and the nature of the individual’s assets. In these situations, the other alternatives to probate discussed above may be advisable.
Small Estate Proceedings
In Oregon, a small estate affidavit is an expedited probate proceeding for estates with a gross value of under $275,000, and with with no more than $75,000 of that amount attributable to personal property and no more than $200,000 attributable to real property. The affiant (similar to a personal representative) is responsible for taking control of the property of the estate, providing notice to heirs, devisees, and creditors, paying expenses of the estate, and distributing the property of the estate. While this proceeding sounds very similar to a “full” probate, the administrative requirements are far less, thus making the process much quicker and less expensive.
With proper estate planning, property that would normally be subject to probate can be transferred outside of probate, saving you and your family time, money, and more. Of course, there are exceptions to each of the methods described above and circumstances under which these methods would not be advisable. Be sure to speak with your estate planning attorney to determine the best way in which to protect and transfer your assets at your death – a little bit of planning can go a long way!
When must a participant in a qualified retirement plan (QRP) begin taking mandatory required distributions (MRDs)? The rules governing retirement plans and mandatory distributions can be tricky. Assuming the plan participant is not an owner of 5% or more of the company maintaining the plan, the required beginning date (RBD) is April 1 of the calendar year following the later of (1) the calendar year the participant attains age 70.5, or (2) the calendar year in which the participant retires from employment with the employer maintaining the plan. The rules of the individual plan should be consulted because not all employer-sponsored plans are required to recognize the latter of the two rules, and may choose to require all employees to begin distributions by April 1 of the calendar year the participant attains age 70.5. If the participant is an owner of 5% or more of the company maintaining the plan, then the RDB is April 1 of the calendar year in which the participant attains age 70.5.
Are the rules for the RBD the same for IRAs? No. The RBD for a distribution from a traditional IRA is April 1 of the calendar year following the calendar year in which the participant attains age 70.5. For a Roth IRA, there are no RBDs because there are no MRDs for the participant.
What if the plan participant has two different employer sponsored plans, one from an existing employer and one from a former employer? If the participant is still working at the time he or she attains the age of 70.5, he or she could potentially have two different start dates. If the plan permits, the RBD for the current employer’s plan could be delayed until April 1 of the year following the year of retirement. The RBD for the former employer’s plan would be April 1 of the calendar year following the calendar year the participant attains the age of 70.5.
If a participant has two different employer sponsored plans as described above, can the participant roll the proceeds from the former employer’s plan into the current employer’s plan to delay required distributions until retirement? Maybe. First, the current employer’s plan would have to permit such a rollover. Second, it could depend on the age of the participant at the time of the rollover. If the participant attains the age of 70.5 in the year the rollover is contemplated, the participant would still be required to take the first distribution from the former employer’s plan for that year (even though technically the first distribution could be delayed until April 1 of the following year). Any distribution received from the plan in the year the participant attains age 70.5 would be considered a minimum distribution for that year and cannot be rolled over. The balance of the account in excess of the minimum distribution may then be rolled over. Again, the plan participant should consult with the individual plan to confirm that the plan would permit such a rollover.
The Oregon Court of Appeals ruled on a trust administration case yesterday. In Head v. Head, No. A149899 (Or. Ct. App. Mar. 5, 2014), the plaintiff/beneficiary brought an action against the successor trustee claiming that the previous trustee (his father) had failed to carry out the terms of the trust after the Trustor’s (plaintiff’s mother’s) death.
While living, Mr. Head and Mrs. Head had created “his and hers” revocable living trusts. Under both trusts, on the death of the first spouse, a credit shelter trust was to be created with the assets from the deceased spouse’s trust estate up to an amount equal to the credit shelter exemption available at the time of the first spouse’s death. To the extent the first spouse’s estate exceeded the credit shelter exemption, the excess amount would ultimately be distributed outright to the surviving spouse. The credit shelter trust was to be irrevocable on the death of the first spouse. During its administration, the assets in the credit shelter trust were to be used for the lifetime benefit of the surviving spouse subject to certain restrictions, and then on the death of the surviving spouse, the remaining principal was to be distributed to the Heads’ three children: the plaintiff, George, and Roderick.
When the first spouse (Mrs. Head) died, her estate was less than the $1.5 million federal credit shelter exemption in place at the time. Per the terms of the trust, her entire estate was to be allocated to the credit shelter trust and administered as provided in her trust. Mr. Head, acting as Trustee, however, treated the assets as his own, even going so far as to transfer assets from Mrs. Head’s Trust into his own revocable living trust. Mr. Head then modified the terms of his trust (which was revocable), disinheriting one of his sons, the plaintiff.
The plaintiff argued that if the credit shelter trust established under his mother’s trust had been properly funded and administered, he would have been entitled to a distribution of an equal share of the credit shelter trust when his father died. The trial court found that the trustee had not followed the terms of the trust, but went on to find that the trust agreement did not reflect Mrs. Head’s intent. Therefore, the court, sua sponte, modified the terms of the trust under ORS 130.205(1) (modification because of unanticipated circumstances) and ORS 130.225 (modification to achieve settlor’s tax objectives) to meet what the court found to be Mrs. Head’s probable intent. The Court of Appeals reversed the modification because the court was without authority to do so where neither party reasonably contemplated such relief and the relief represented a substantial departure from the pleadings and legal theories upon which the parties had relied.
The case has been reversed and remanded to the trial court. While the Court of Appeals has made clear that a trial court cannot rely on ORS 130.205(1) or ORS 130.225 to modify an otherwise irrevocable trust where the parties have not requested such relief, this case is an equally important reminder to estate planning practitioners that clients need to understand the implications of the term “irrevocable” in a mandatory tax plan and the importance of trust funding on the death of the first spouse.