Category Archives: Estate Planning

Five Reasons to Update Your Estate Plan

Learn when life changes may necessitate an update to your Will or Revocable Trust, such as after a move, divorce, birth or death of a beneficiary or fiduciary, or if the size and composition of your estate has changed. Watch here to learn more.

Erin MacDonald to speak at Oregon State Bar Estate Planning Seminar

Erin MacDonald, a partner in Karnopp Petersen’s Trust and Estates Practice, will speak in Portland on November 15th on the topic of estate tax portability, which became a permanent part of the tax code in the American Taxpayer Relief Act of 2012.  The all-day seminar presented by the Oregon State Bar, “Basic Estate Planning for Oregon Taxable Estates,” will provide education to estate planning attorneys from across the state on topics such as credit shelter trusts, marital deductions, disclaimer tax planning, portability, lifetime gifting, and more. Erin is a member of the Executive Committee of the Estate Planning & Administration Section of the Oregon State Bar.

An Introduction to Individual Charitable Deductions

A podcast about what you need to know regarding income tax charitable deductions for individuals following the 2017 Tax Cuts and Job Act from an estate planning expert:

 

 

Listen here:

How does a revocable trust avoid probate?

2017 Tax Reform Alert

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:

  • New deduction for certain business income earned through pass-through entities.  The legislation creates a new deduction for individuals, generally equal to 20% of the qualified business income received by the individual from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) have special limitations, and there are other income limits and conditions placed on the receipt of the deduction that we should discuss if you earn income from such entities.
  • Increase in charitable contribution limit for cash donations.  The legislation increases the amount of cash contributions to charitable organizations that may be deducted from 50% of a taxpayer’s contribution base (generally equal to adjusted gross income) to 60% of the contribution base for tax years after 2017 and before 2026.
  • Extension of the holding period for “carried interest.”  The legislation prevents individuals holding so-called carried interest in private equity or hedge funds or similar investment vehicles from claiming long-term capital gain treatment on gains realized from the disposition of such an interest until the interest has been held for three years (compared to the one-year holding period required for other capital assets). The legislation also creates certain restrictions on related-party transfers of carried interest during a similar three-year period.

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.

Leaving a Legacy – A Team Approach

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.

TOD Deeds

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.

  • When a TOD Deed May Be Indicated. TOD Deeds are most likely to be advantageous for smaller estates with simple dispositive plans without multiple beneficiaries or contingencies. The TOD Deed may also be useful for unmarried or unregistered partners as it can be easily revoked if the relationship does not continue. In addition, a TOD Deed could be used for funding a revocable trust when lifetime transfers are problematic, such as property being marketed for sale, or property encumbered by a trust deed or other security instrument that prevents a current change of title.
  • When to Avoid a TOD Deed. The TOD Deed may be unsuitable for larger estates, particularly if the estate plan is complex and/or the transferor desires to provide for even fairly basic contingencies. For example, people with several children typically want to provide that grandchildren would take a parent’s share in the event the parent were to predecease the transferor – easily done with a will or trust. A TOD Deed cannot accomplish such contingency planning very effectively (at least as the law is currently drafted). Alternate beneficiaries take a share only if none of the primary beneficiaries survive the transferor. Also, a blended family may not be an appropriate situation for a TOD Deed given that the surviving spouse would still retain the ability to revoke or execute a new TOD Deed naming only his or her surviving children. Finally, when a transferor anticipates that the beneficiaries will want to sell the property quickly, a TOD Deed is not ideal. Under the TOD law, interested persons and creditors have 18 months in which to contest or make claims on property transferred by a TOD Deed. Such uncertainties make title insurance very difficult to obtain during the 18-month period, thus making the property equally difficult to sell. In contrast, a traditional probate or trust administration allows sale almost immediately.
  • Practical Points. Professional guidance is still important even if a TOD Deed seems to be a good fit, both to confirm that a TOD Deed does makes sense in the circumstances and to ensure that the actual language of the TOD Deed accomplishes the transferor’s wishes. There are many aspects of TOD Deeds that are unlike conventional deeds and beneficiary designations – making them tricky to draft. Beneficiaries of a TOD Deed must be identified by name – class gifts (such as “to my children”) are void. Similar to wills and trusts, if a transferor’s marriage is dissolved after the recording of the deed and the transferor’s spouse is named as beneficiary, all provisions in favor of the former spouse are revoked by law unless the deed specifically provides otherwise. On the other hand, an omitted spouse or child is not protected under the TOD Deed statute. A subsequent marriage or birth after the execution of a TOD Deed does not change the TOD designation. Further, when multiple concurrent interests are transferred to designated beneficiaries, the designated beneficiaries receive equal and undivided interests with no right of survivorship – there is no mechanism for providing different percentages of ownership among beneficiaries. A trust can be a beneficiary of a TOD Deed, but one should be careful to name a specific trustee along with the trust rather than simply “the XYZ trust” as the statute requires naming of specific persons rather than a class of persons. Keep in mind also that the title transferred by a TOD Deed is subject to all existing mortgages or others liens, so the transfer needs to be coordinated with other elements of an overall estate plan. Finally, note that a TOD Deed must be recorded prior to the transferor’s death in order to be effective.

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.

 

Planning for Incapacity

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.

Oregon Community Property – Part 2

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.

Oregon Community Property – Part 1

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.