Savings Bonds (Part 1) - Learning More about those Bonds

Category: Elder Law, Estate Planning, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Many people have invested in saving bonds at one time or another, or another has done so for them. For the most part, they sit in a safe deposit box until cash is needed (or you remember that you have them). However, there may be a need to find out more about the bonds or liquidate them as part of estate planning, estate administration, or elder law, or just sound financial planning for yourself.

Savings bonds are investment in the US government. There are various types of bonds, that earn interest in different fashions, and have unique tax consequences. Luckily, there are some wonderful resources on the web to cut through all of this information.

The US Government provides a very informative website at www.savingbonds.gov that goes through the purchase and redemption of various government investments (T-Bills, T-Notes, T-Bonds, I Bonds, EE Bonds, HH Bonds) and explains the differences between the various investments.

There is a very useful toolbox a the website for determining the current and future value of your investment:

Have Your Treasury Securities Stopped Earning Interest?

Savings Bond Wizard

Savings Bond Calculator

Growth Calculator

Savings Planner

Tax Advantages Calculator


Another excellent site is www.savingsbonds.com. This is a commercial site oriented to financial planning. It does have excellent step-by-step guides on bond redemption, including the practicalities of redemption and guidelines to the tax consequences.

Married and Don't have a Will? New Jersey has one for you

Category: Estate Planning, Probate and Estate Administration

Surprise! If you don't make your own Will, the State of New Jersey has one for you. While this might seem like a generous thing, the question is whether the will that New Jersey made for you matches what you would like done with your assets.

Survived by Spouse, not survived by parents or descendents: 100% to Spouse.

Survived by Spouse, and survived by descendents of both spouses (ie: no step-children: 100% to Spouse.

Survived by Spouse and a parent, but no descendents: the first 25% of the estate (no less than $50,000 and no more than $200,000) PLUS 50% of the balance of the estate to Spouse; the remaining balance of the estate to parents.

Survived by Spouse and a descendant who is not also a descendant of the Spouse (i.e.: a stepchild): the first 25% of the estate (no less than $50,000 and no more than $200,000) PLUS 75% of the balance of the estate to Spouse; the remaining balance of the estate to children.

The Value of an Inheritance? Preserve the Family History

Category: Elder Law, Estate Planning

This story from San Francisco reminds us that the memory of a loved one is not about the size of the bank account inherited, but the family history

HoustonChronicle.com - Baby boomers value family history over inheritance: "[B]aby boomers say their parents' personal keepsakes, family stories and final instructions are more important than the oft-publicized trillions of dollars they're expected to inherit."

Those memories, stories, values and wishes can be easily lost. Why not take some steps today to preserve them?

• Get those old family stories on tape. When I was a child, I had to "interview" my grandmother for a class project. On those tapes is her history, from her memories of when Queen Victoria died (1901), how she came over to Ellis Island, being an immigrant in America, and traveling home to Ireland to see the changes of her home country over nearly a century. Maybe this could be a project for the kids during the next family gathering - put that digital camcorders to use.
  
  
• Identify who is in old family pictures. You may have inherited the dusty box of family photos. Many times the older generation can identify who is in them - knowledge that can be later lost. You can even copy them all to the computer and upload them to a family website to get everyone's comments as to who is who, and allow others to download copies.
  
  
• Have a frank conversation about burial options. In the event of an unexpected death, the last thing you want to be doing is find out what a person "would have wanted". Discuss burial, cremation and what to do with the ashes. What kind of remembrance would the person want? One client wanted everyone to wear purple to the funeral as it was her favorite color.
  
  
• Create a list of who gets what personal property. Many times one to the most contentious issues in an estate administration is who gets the jewelry, artwork, etc., and what happens to any personal items nobody wants. You may decide to let your kids duke it out among themselves. Or, you may want to create a list identifying items of special significance to go to friends and family members.
  
  
• Appreciate what is being given to you. Many times children don't have an expectation of inheritance and downplay it ("I don't need or want your money", they say to their parents, "I just want you.") However, I have found in my practice that the older generation, who survived depression and are proud to still be independent and debt free, are equally proud to have something to give. So be gracious in your acceptance of gifts, and remember how much harder it was for them to create what it is they have given you then for you to create it yourself.

Best Places to Die?

<Category: Elder Law, Estate Planning

It is quite a tongue-in-cheek question, but is there a best place to die? Being that I practice in New Jersey and New York, which both have a state estate tax and state income tax, significant numbers of clients move to other jurisdictions (e.g. Florida) as they get older to avoid those taxes. However, I don't know of any that have really thought about quality of end-of-life issues as another point of consideration in where they settle down to spend their golden years.

Forbes.com has prepared a list of "Best Places to Die", looking at health care and long term care quality. Looked at by reverse rankings, it is also a list of "Worst Places to Die" list.

Of the "Best Places to Die", Utah ranks number 1. New Jersey ranks 46 (ouch!) and New York ranks 30. Note that Florida only ranks 21, scoring high marks for legal protections granted to the elderly, and low marks for quality of health care.

The States are further sub-ranked by Quality of Health Care (New Hampshire scores number 1 here, New Jersey 43 and New York 24); Legal Protection (Delaware tops the list, with New Jersey getting a grade of "B" and New York a grade of "B+"); and Most Likely to Die in a Nursing Home (here Rhode Island gets the dubious honor of top grade with 45% of its residents with cancer likely to die in an institutional setting. New Jersey and New York both come in at 20%)

The premise of Best Places To Die - Forbes.com is: "In America, the way we die is largely determined by where we live. Geography dictates what kind of care is provided to the dying and whether death following a long illness occurs at home, in a hospital or in a nursing home. But don't move just yet. Patients can gain control over how they die by talking about end-of-life care with their families and physicians. If patients speak up, sheer numbers will force the health care system to take better care of the dying. Over the next 30 years, the number of people older than 85 will more than double to 9 million."

Practical Thoughts for an Agent under a Power of Attorney

Category: Elder Law, Estate Planning

The simple General Durable Power of Attorney ("POA") is arguably the most important document in a person's estate plan. A properly drafted POA will let another person make financial decisions for you when you are not able - such as if you are incapacitated, or on even on an extended trip out of the country. As you age, a POA could also assist you in avoiding a costly and burdensome Guardianship provision - if you have not named someone to act on your behalf, the court will have to.

While many articles have described questions regarding the formation of a Power of Attorney (an excellent FAQ from the Office of New York State Attorney General Eliot Spitzer can be found here), one items that is discussed less often is what does it mean to be named an agent under a POA? If you are acting as agent to your spouse, or in a limited capacity (ie: a real estate closing) then the responsibilities of being an agent under a POA are not that burdensome. However, if being named agent under a POA involves suddenly managing another persons finances, with which you have no familiarity, the task can seem enormous.

Below are some practical tips that focus on what it means to act as a Power of Attorney, emphasizing the need to be organized and to understand your role as another person's agent. Note that the person executing the POA is the "principal" and the person empowered by and acting under the POA is the "agent":

• An Attorney to Advise You: If you find yourself suddenly acting as an agent under a POA, one of the first things you should do is speak to an attorney to clarify your role and advise you of some do's and don'ts. Not all POA are drafted the same: some have broad sweeping powers, others very limited powers that only apply in a small set of circumstances; some allow gifting or modifying beneficiary designations, others do not; some give the agent total discretion, others give the agent limited direction. You cannot act as the agent unless empowered under (i) the Power of Attorney document itself, and (ii) state law. Sometime state law will fill in powers not stated in the POA itself; other times state law might limit or forbid an action stated in the POA.
  
  
• Understand that you are a Fiduciary: When you are acting as an agent under a POA, you are acting in that person's best interest, not your own. Being named a fiduciary is being in a position of trust. This is manifest in clear concepts, like don't take another person's money for yourself (such as making accounts joint so they go to you on death, not through the Will). However, this tenent also colors all your actions as agent: how you invest, who you invest with, how you budget, who you pay and when, how you deal with third parties, how and if you take compensation. A general rule is that you owe the principal a higher duty of care then you would pay to yourself, as most people take shortcuts here and there that are not permissible for a fiduciary.
  
  Furthermore, as a Fiduciary, you are not only responsible to the principal, but to other interested parties that might question you on the principal's behalf, such as other family members, a third party who you are dealing with, or a court. If a court were to find that you did not act in a prudent manner as a Fiduciary, or that you are self-dealing (ie: taking advantage of being an agent to forward your own interests) then you can be found personally liable for any waste of the assets.
  
  
• Get a good Accountant: If the principal had an accountant, a top item should be to set up a meeting with him or her. At the meeting, you can learn about a person's customary income and expenses, as well as find out all the account information by looking at copies of the 1099s and other supporting income tax documents in the accountants files. Armed with this information, you will be in a position to take two more important steps (i) consolidate and control assets, and (ii) budget for income and expenses.
  
  
• Consolidate Assets and Income: When you are examining someone else assets, you will find it is amazing how many large and small accounts people can have (remember when you got a free toaster if you opened a new account?) When the multiple accounts are yours, they tend to be an annoyance, generally to be dealt with on another day. When the accounts are another persons, and you aren't familiar with them, nor the underlying investment, multiple accounts present a huge headache. First, you need to have all account statements directed to you. Next, as a Fiduciary you need to have a reasonable investment scheme. This is all much easier to accomplish with one or two accounts then ten. So, you may want to direct assets to be consolidated. Beware, however, of the tax consequences of large scale liquidation. You may want to speak to a financial planner with a tax background before you act.
  
  Also, you should try to get all income direct deposited to a single account from which you can write checks. This can be arranged with most employers, pension plans and investment houses.
  
  
• Prepare a Budget: Once you know the assets, anticipated income stream and expenses, prepare a budget to forecast where you will be if things don't change in 6, 12, 18 months. Then factor in the cost of anticipated changes (ie: might a move from assisted living to a nursing home be required?). Do you have enough money? If not, what other sources of financing the costs of living are available (Medicaid, Long Term Care insurance, Reverse Mortgage, etc.) From the budget you will be able to work with the Financial Planner to prepare an investment scheme to meet the principal's needs.
  
  
• Communication is Key: Do yourself a favor, tell your the principal's family what is going on. Get Quicken and email a report on a quarterly basis. Keeping everyone in the loop avoids problem, like your sister claiming she is going to sue you because you stole mom's money. The information in the report would be available if a claim were made anyway, so let everyone know what is going on so the family can deal with issues together.
  
  
• You are not Alone: As a follow up to the point above, another benefit of communication is that other people can help you. Just because you are the named agent, you don't have to do everything. You can delegate tasks to other people. Not only are other family member's there to support you, but there are knowledgeable professionals you can rely on. The principal likely didn't name you as the agent for your financial expertise - the principal probably named you because he or she thought you would make the best decisions. To assist you in making those decisions, professional advisors such attorneys, accountants, financial planners and social workers can inform you of your options, and in some cases reduce your burden by carrying out your wishes.
  
  
• You are not Personally Financially responsible: Unless you did something bad (or are married to the principal), when you are an agent, you are charged with spending the principal's assets on the principal's behalf. You are not obligated to use your own money, and there are laws in New Jersey and other states making it illegal to condition acceptance of a facially valid Power of Attorney on a personal guarantee of the agent named in the documents. Having said this, I have seen many examples of poor drafting in legal agreements, particularly with assisted living facilities and nursing homes, that appear to make the agent liable on the principal's behalf. This might manifest in language that the "agent guarantees the principal's obligations". While you can agree to use the principal's assets to meet his or her obligations, you cannot be forced to put your own assets at risk when the principals run out - you are the agent, not the bank. So rest assured that you can do a good thing for someone you care about without putting yourself at risk.
  
  

Don't just deed your house to your child

Category: Elder Law, Estate Planning, Tax Law and Planning

TimesDispatch.com MAIL BAG: Mom made a costly error in deeding house to child is an example of good intentions coupled with a lack of understanding of tax laws resulting in a large unexpected tax.

While the owner of their own primary residence enjoys an exemption from capital gains tax on the sale under IRC Section 121, a non-resident owner does not. See IRS Publication 523 for more information.

Here, mom gifted her house to son, and when he went to sell it to pay for mom's care, he found out that he owed capital gains tax on over $400,000 on the sale of the house. He (mistakenly) believed there was no tax on the sale of a home. He misunderstood that the tax exemption only applied (1) to his primary residence, not any residence he owned, and (2) only up to certain dollar limitations ($250,000 for a single person and $500,000 for a married couple).

This situation described in this article could have been avoided by considering several other alternative plan with the house such as:

• Mom selling house to son for a note - mom's sale is sheltered from tax through IRC Section 121, and son's basis in the house is the purchase price,
• Mom and son joining together to take out a home equity line so that she can keep the house but pay for her care,
• A reverse mortgage,
• A gift to son with mom retaining a life estate so she can always live in the house. The life estate would also include the house in her taxable estate, which in turn means that upon her death the son's basis is the fair market value at time of death (a "step-up" in basis under IRC Section 1014) - son can rent the house to generate income to pay for mom's care if she can no longer live at home.

Planning for Family Members with Special Needs

Category: Estate Planning

Do you have a mentally or physically disabled family member? If so, giving money to that family member, or leaving it to him or her in your Will, without considering the consequences of that action, could cause that person to lose benefits and actually become less secure then before the money was transferred to them.

If a person is mentally or physically disabled, the federal government, the state, and private organizations may all provide aid to this person. Many times, qualification for this aid depends on the person's assets and income. Just giving the person money could actually disqualify him or her from benefits that they are already receiving, including jobs and housing benefits.

Furthermore, if a person is disabled, can he or she manage money? If not, is there a Guardian or other person who should be the manager?

With proper planning, the special needs of a disabled individual can be easily met. A "Special Needs Trust" or "Supplemental Needs Trust" can be created to manage any gift or inheritance in such a manner that the disabled person continues to be eligible for benefits and aid, but has an additional nest egg of assets. The trust can be created as a separate trust document or in your Will. A "Special Needs Trust" or "Supplemental Needs Trust" typically describes a trust where the Trustee is granted unlimited discretion in making distributions to the beneficiary, with the caveat that the distributions should be made in such a manner as to not jeopardize any other benefits and aid the person might be receiving. For example, instead of giving the beneficiary money to purchase a new home, the trust could purchase the home and allow the beneficiary to live there.

If your child is incompetent, and they are an adult, it is critical that you become the child's Guardian. First, this grants you the legal authority to make decisions on behalf of your adult child. Second, it establishes the need for the Guardianship - if you were to die, would another person know where all the medical history is to easily establish the need for the Guardianship in court? Third, it allows you as the Guardian to suggest to the court who an appropriate successor Guardian might be.

Regardless of all the critical reasons to do special needs planning, if you haven't taken any steps to date, you are not alone. A survey discussed in the article Financial Planning For Kids With Special Needs - Forbes.com found:

* 88% of parents who have children with special needs haven't set up a trust to preserve eligibility for benefits such as Medicaid and Supplemental Social Security.

* 84% haven't written a letter of intent outlining an agreement for the future care of the child.

* 72% haven't named a trustee to handle the child's finances.

* 53% haven't identified a guardian for their child.

These statistics are scary in that the failure to plan will result in an additional burden and costs for the disabled person and his or family.

Federal Estate Tax Exemption to $2 million in 2006 - Effect on NJ Residents

Category: Estate Planning

The Federal Estate Tax ("FET") Exemption amount is currently scheduled to increase from $1.5 million to $2.0 million on January 1, 2006. While Congress has a September agenda item to hammer out a permanent repeal of the FET, NJ residence should understand what impact the increasing FET exemption may have on them.

On one hand, a sign of relief can be made by those with more then $1.5 million in assets and less than $2.0 million ($3.0 million and $4.0 million for married couples with a properly planned estate) - FET will no longer be a worry. On the flip side, the New Jersey Estate Tax ("NJET") will play an even larger role. The Exemption from the NJET is frozen at $675,000. This means that only those estates valued at less than $675,000 escape estate taxation in New Jersey. In 2005, an estate of $1.5 million is exempt from FET, but owes NJET of $64,400. In 2006, an estate of $2.0 million will be exempt from FET, but owe NJET of $99,600.

There is no cap on the NJET. As your assets increase, so does the NJET. Also, the NJET does not depend on the FET. If there is no FET, a NJET will still be due and owing.

Many steps can be taken to reduce the bite of the NJET - including gifts, creating exemption trusts in the wills, life insurance planning, and more sophisticated techniques. Unfortunately, many New Jersey residents don't think ANY estate tax applies to them since their assets are below the exemption level for the FET. Or, they confuse the New Jersey inheritance ("NJIT"), which exempts lineal descendents and spouses from tax, from the NJET, which only exempts assets passing to spouses from taxation.

Many clients come to our offices thinking the NJET is not such a big deal - but starting 1/1/06, you can pay no FET and have to write a check to NJ for $99,600 - that is a lot of real money that could go to your family with proper planning instead of the State.