According to statistics, at least sixty percent (60%) of you reading this newsletter have not done any estate planning.   You have taken no steps to have your own will or trust prepared.  Nevertheless, you do have a will!  The State of Florida has drafted one for you.  So, if you have not yet taken things into your own hands, here is what your will says: 

MY WILL

(According to the State)

            (1)       I leave everything to my surviving spouse, so long as I have no lineal descendants.

            (2)       If I also have surviving lineal descendants, all of whom are the lineal descendants of my surviving spouse, then I leave the first $60,000 of my estate, plus ½ of the balance of my estate to my spouse.  I leave the remaining assets equally to my lineal descendants, per stirpes.  (“Per Stirpes”, . . . what?)

            (3)       If I have lineal descendants who are not the lineal descendants of my surviving spouse, then I leave ½ of my estate equally to those lineal descendants, per stirpes, and the other ½ of my estate to my surviving spouse.     

            (4)       If there is no surviving spouse, I leave everything equally to my lineal descendants, per stirpes.

            (5)       If I have no lineal descendants, I leave all of my estate to my father and mother equally, or to the survivor of them.

            (Still reading?  Keep going, it gets better . . .)

            (6)       If I have no surviving spouse, lineal descendants or parents, I leave everything equally to my brothers and sisters, as well as the descendants of any deceased brothers and sisters.  (Say what?)

            (7)       If there is none of the foregoing, I leave ½ of my estate to my paternal relatives and the other ½ to my maternal relatives in the following order:

                        (a)       to the grandfather and grandmother equally, or to the survivor of them; or

                        (b)       if there is no grandfather or grandmother, then to uncles and aunts and descendants of deceased uncles and aunts; or

                        (c)        if there is either no paternal kin or maternal kin, the estate shall go to the other kin who survive, in the order stated above.

            It does keep on going until you completely run out of living relatives, but you get the point.

            Now that you know what the State of Florida has in mind for you, is that what you want?  Terrific!  Is it time you took charge and began your own planning?  Please give us a call and we can help.

We have just finished our series on the 6 common mistakes people make when naming guardians for their minor children.  If that series doesn’t convince everyone with minor children about the need for careful estate planning, then I give up!  But what about parents with adult children?  Why is it important for them to plan?

            I have heard many people say something to the effect of “why do I need an estate planning attorney, I’ll just add my adult children to the deed on my house and add them to my bank accounts.  Then I won’t have to pay a lawyer to design an estate plan, nor will I have to pay probate fees.”  These “self-help” remedies ARE viable estate planning alternatives, if done properly.  However, if you do not have a complete understanding of the gift tax law and know the difference between a “completed” lifetime transfer and “incomplete” transfer, then you may know just enough to get into trouble.

            As the gift tax law now stands, everyone may give away up to $13,000.00 to another individual in 2010 without filing a gift tax return.   You also currently have a One Million Dollar ($1,000,000.00) lifetime gift tax exemption amount, so no gift taxes would be owed until you have given away over your lifetime a cumulative total of over One Million Dollars.  However, if you give a gift to any one individual in a calendar year that exceeds $13,000.00, then a gift tax return is legally required to be filed.  So, let’s look at how the gift tax applies to joint bank accounts and “adding a person to the deed”. 

            Adding an adult child’s name to your bank account does not result in a completed gift until the child withdraws money from that account.  If the child (or sibling or other friend or relative) withdraws more than $13,000.00 from that account in a calendar year, then you must file a gift tax return.  

            There are other problems with adding an adult child to the bank account such as:  is it your intent to “give” the child complete access to the funds or are you doing it just “in case of an emergency”? If there is no written agreement as to the use of the funds, misunderstandings can occur which could result in ugly lawsuits between family members.

            Contrary to the joint bank account situation, adding an adult child to the deed is a complete gift at the time it is made.  This is so even if you are retaining a traditional life estate in your home and giving only a remainder interest to the child.  This is a taxable gift of a future interest based upon the full value of that remainder interest.  If it is valued in excess of $13,000.00, then you must file a gift tax return for the year in which the child is “added to the deed”.

            The problem with not knowing enough to file a gift tax return is that, although no taxes or civil penalties would be due until you have given away over One Million Dollars ($1,000,000.00), there is a criminal penalty for failure to file a gift tax return which could expose you to a fine of up to $25,000.00 plus 1 year in jail.  So, without proper legal advice, it is not inconceivable that you could end up in jail for “adding a person to the deed”.

            The moral of this story is that before you can decide “I can do this myself”, stop and think whether you really know enough about the legal ramifications of what you are about to do.  Most of us have no trouble with calling a plumber or an electrician to perform work which we are not trained to do.  Consulting with a lawyer is no different – and sometimes even less expensive!

This is the final newsletter in our series on the six common mistakes parents make when naming guardians for their children.  MISTAKE #6.  YOU MAY NOT HAVE NAMED ENOUGH ALTERNATES TO SERVE IF YOUR FIRST CHOICE CANNOT SERVE.

            Deciding on who should be a guardian for your children is a difficult question.  Often you will struggle just to find one person who you feel might do an adequate job.  Unfortunately, if that ideal person should die before you, then the State will name a successor guardian, if you have not done so.  We recommend naming at least a second and even a third alternate guardian, to avoid this problem.  Of course, an ideal solution is to have an ongoing relationship with your estate planning attorney, including an annual estate planning “check up”, so that your plan may be revised in a timely manner in the event of an unforeseen occurrence such as the death of the person you have named as primary guardian for your children. 

            This concludes our series on the Six Common Mistakes Parents Make When They Are Naming Guardians For Their Children.  Avoiding these mistakes is easy.  When you work with us – we specifically focus on the needs of parents – like you!

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            We are pleased to announce that we will offer a series of “Lunch and Learn” workshops on a quarterly basis in 2010.  The first “Lunch and Learn” will be from noon to 1:00 p.m. on Thursday, February 25, 2010 in the Learning Center in our office.  We will discuss Advance Healthcare Directives, Healthcare Surrogates and Living Wills.  These sessions are designed to discuss a topic of general interest in an informal setting.  Clients in the annual maintenance program will be given first opportunity to attend and if there are remaining seats, we will open the workshop up to other newsletter subscribers.

There is a hidden trap for middle-income Americans in the repeal of the estate tax for 2010.  What most people don’t know is that also repealed along with the tax is the provision which allowed beneficiaries to receive a “stepped up basis” in assets which they inherited.  Many Americans who inherit assets in 2010, without that stepped up basis, will be exposed to a capital gains tax on the increase in value from the time the assets were initially purchased until the time they are sold. 

            Those wage earners in the lowest income tax brackets (10% and 15%), which includes married couples earning up to $61,300.00, will be somewhat protected by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), because that law dropped the capital gains rate for people in those brackets to 0% for the years 2008 through 2010.  (But, if the gain on inherited assets puts you over that amount . . .)  For a large number of Americans in the 25% - 35% brackets, capital gains taxes on the sale of inherited assets will be owed, when no tax would have been owed had the current estate tax law remained in effect.

            In 2009, everyone had a personal estate tax exemption of $3.5 million dollars.  Accordingly, if a person died in 2009 with less than $3.5 million dollars in assets, all of those assets could be devised to their loved ones without any estate tax.  Additionally, those assets would have passed with a “stepped up” basis, meaning that the beneficiary would inherit those assets at the monetary value of the assets on the date of the decedent’s death.  In 2010, there only will be an exemption for the first $1.3 million dollars of capital gains within an estate.  It is estimated that 70,000 estates will owe taxes under this “repeal”, whereas only 5,500 estates would have been affected had the current estate tax law remained in place.

            To illustrate:  Suppose Dad already has passed away and Mom died in 2009.  You are her beneficiary.  At the date of her death, she owned the family home in which she has lived the past 40 years.  It had a value of $510,000 on Mom’s date of death.  It was purchased 40 years ago for $10,000.  Mom also left oil stocks valued at $1,510,000, which had been inherited from her grandmother.  When her grandmother purchased those stocks many, many years ago, she paid $10,000. 

            In 2009, because this estate was valued at $2,020,000, no estate tax would have been due.  (estate is less than 3.5 million)  You would have inherited the home, with a basis of $510,000 and you would have inherited the stock with a basis of $1,510,000.  If you then turned around and immediately sold each asset for those prices, you would have owed no capital gains tax from the sale.  Total tax to the estate would have been zero.  Total tax to you would have been zero.

            Now, compare what happens if Mom dies in 2010 under the same scenario.  Again, there is no estate tax to Mom.  However, if you turn around and sell the home and the stocks for their face value, you will owe capital gains tax on $2 million dollars in gain.  ($2,020,000 value - $20,000 cost).  After your 1.3 million dollar exemption, you would pay 15% capital gains tax on $700,000.  This will result in a $105,000 tax bill for you in 2010, which would NOT have been owed had the current estate tax law been continued.

            In this example, tax would be owed even if you are in the 10% or 15% tax bracket because the 0 % capital gains tax rate only applies to gains, which added together with your income, would still fit within those brackets.  So, if you and your spouse together earned $60,000 and then had a $2,000,000 capital gain from the sale of inherited assets in 2010, you would pay the full 15% ($105,000) on the sale of those inherited assets. 

            If you are married, it is even worse.  Under the current law, you could leave your entire estate to your spouse tax free.  Now, you only can leave $4.3 million dollars in assets with capital gains to a surviving spouse. This is a large amount, but it is not unlimited like it has been for decades.

            Accordingly, a significant number of Americans who receive inherited assets in 2010 will be worse off for the repeal of the estate tax.  Who is better off?  . . .  the extremely wealthy, those one percent (1%) of the population who may have estates worth more than $3.5 million and pass away in 2010.  Then, instead of an estate tax rate of 45% on the amount of assets greater than $3.5 million, the beneficiaries of those estates would pay only a 15% capital gains rate on the actual capital gains owed on those inherited assets. Thus, the repeal of the estate tax in 2010 is a boon for the most wealthy among us, of little concern to the least wealthy, but is a major concern to many people in the middle.

“The Holidays” can mean travel, excitement, gathering together with those you love, stress, conflict, and any or all of these things!

We wish you the happiest of holidays.

            We also urge you to take the time this holiday season to talk with those you love about what’s truly important to you, and what’s important for them to know.  Make sure you tell them that you love them.  Make sure you tell them about your estate plan, about where they can find your important legal and financial documents in an emergency, and who your important advisors are (e.g. estate planning attorney, financial advisor, accountant).  We understand that these conversations with family members can be difficult to start.    But they are important.  Talk to those you love about the legal, financial and health care decisions you have made, and take the time, while you still can, to explain your choices.

            Talking about your healthcare directives can be a good lead-in to talking about your other personal and financial choices with those you love.  It’s important – for you and for them.  Take this extra step to ensure that everyone knows what you want while you can still answer questions and provide feedback.  And then eat a lot, annoy your little sister, have a wonderful time, and enjoy your holiday!

            We wish you the best holiday season.  Our offices will be closed from December 24, 2009, to December 28, 2009, and from December 31, 2009, to January 4, 2010.  We look forward to working with you next year!

            Happy Holidays!

This is the third newsletter in our series discussing the 6 common mistakes parents make when naming guardians for their children.          Mistake #3:  You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your children.

            Have you thought about excluding someone who might challenge your guardianship decisions or who you are certain you would never want raising your children?  In every family, there is at least one relative that you just try to avoid.  Whether it is crazy Uncle Leo or snobby sister Jennie, you know that under no circumstances would you ever want that person to raise your children.  However, (a very important word here!) if you do not spell out your concerns in writing, who do you think would be the first person to approach the Court and ask to be named guardian of your children?  So, what can you do to prevent this from happening?

            In our comprehensive Children’s Protection Plan, we include a document called “Confidential Exclusion of Guardian”.  This document is meant to see the light of day only if crazy Uncle Leo really does ask to be named guardian of your children.  In this document, you would list anyone who you absolutely would not want to serve as guardian and you will list all of the reasons why you feel that way.  These reasons usually are sufficiently embarrassing enough to the person you have named that they would not want them made known and likely would withdraw their challenge to your choice of guardian.  (For example:  “I am concerned that Uncle Leo’s 20 year history of alcohol abuse, including 2 DUI’s, would compromise my children’s safety.”)

            By planning ahead and addressing all contingences, you can select the right guardians for your children and also exclude the wrong ones. 

            It sounds like a broken record - - - but planning …….. works …… try it!

Well, well… It was 25 years ago today that I hung out my shingle on a vintage house built in 1906 (behind a car wash) in Pensacola, Florida.  The car wash was the source of many jokes at my expense!  I scrounged up some used furniture, bought a brand new IBM Selectric typewriter and hired a legal secretary with sensible shoes.  The Law Office of Jeffrey A. Cramer was open for business.  The practice grew and we opened a second office in Jacksonville over 16 years ago.  The commute back and forth while managing 9 attorneys and 26 support staff in offices 350 miles from each other started to become more management and less law.  I had a decision to make, and my decision was to focus my efforts on Jacksonville. So, here we are today folks.  I want to thank all of you who have put your faith in us over the years and we look forward to the next 25 years!

This week I thought that I would share with you some comments on an interesting book I just finished:  Mrs. Astor Regrets by Meryl Gordon.  This is the story of Brooke Astor, the last Mrs. Astor, who lived one hundred and five years before passing away in August, 2007.  The book is captivating because it tells the story of one of the richest women who ever lived and is full of anecdotes about the rich and famous.  The Rockefellers, the Whitneys, Henry Kissinger, Tom Brokaw, and Oscar de la Renta are just a few of the famous names that moved in and out of Brooke Astor’s life.  These stories alone make for fascinating reading.

            However, it is the subtitle of the book “The Hidden Betrayals of a Family Beyond Reproach” that makes the book riveting.  Who really expects or plans to live to age 105?  What happens when an 80 year old son is tired of waiting for his inheritance? 

            When John Jacob Astor went down with the Titanic, he left $87 million to his son Vincent.  Vincent later married Brooke.  When Vincent Astor died in 1959, he left an estate worth over $120 million.  $60 million was left in trust for his wife and another $60 million was left to the Astor Foundation.  Brooke Astor was well known for her active philanthropy as the head of the Astor Foundation.  Over the next 40 years, she gave away $200 million to New York City charities, making her the most influential person in the City.  She also lived the “good life” and thought nothing of wearing a $250,000 necklace when dressing to go out for dinner. 

            Brooke Astor lived a vigorous and active life right on through her 100^th birthday party, but her mental and physical health then began to deteriorate.  Her last years of life became tragic because she did no disability planning.  The richest woman in America did not have a Revocable Living Trust.  Instead, her estate planning was confined to a Will and many codicils (she changed her Will 38 times). 

            As her mental health deteriorated, her only son “took over” and acted in ways that ultimately resulted in his being indicted on criminal charges of elder abuse and theft.  He cut his mother’s staff, shut her up in her Park Avenue apartment, isolated her from her friends and seriously diminished the quality of her healthcare.  As a result, her close friends, led by Annette de la Renta, filed a court petition to have a formal guardianship established.  Needless to say, the filing of this guardianship petition was heaven for the tabloids and the family tragedy was page-one news in every New York newspaper.  Eventually, Annette de la Renta was appointed as Brooke Astor’s guardian and Mrs. Astor’s last year of life was made more tolerable. 

            The irony is that the world’s richest woman could have avoided this entire spectacle had she planned for disability by establishing a Revocable Living Trust, leaving specific instructions and appointing someone she trusted to administer her affairs according to those instructions, if she became mentally incapacitated.  Her failure to do so resulted in a family tragedy of Shakespearian proportions, tabloid headlines, millions of dollars of attorney’s fees and her only son being indicted.  His criminal trial is going on right now, providing more grist for the tabloids’ mills.  (see:  http://www.nypost.com/seven/07082009/news/regionalnews/manhattan/marshall_collapses_in_courthouse_mens_ro_178228.htm) 

All of this could have been avoided by a common estate planning technique that is readily available to everyone, not just the mega-rich.  Don’t let a similar family tragedy occur to you, your friends, or clients.  Everyone needs to plan for the potential of being alive, but mentally incapacitated.  Estate planning is not just about what happens after death.  Brooke Astor’s final years are a fascinating testament to this fact.