President Obama's State of the Union and Estate Planning

On January 20th, President Obama, fulfilling his requirements under Article II, Section 3, Clause 1, of the U.S. Constitution, made his first State of the Union address to a Congress controlled by the Republican Party. He touched on many topics but the one of interest to me, and my readers, were his proposals on estate planning. While the likelihood of his proposals being adopted is slim, his speech informs as to issues that might need to be addressed on the estate planning/estate tax horizon.

Eliminating Step-up of Basis for Capital Gains Tax. This proposal is likely to be the most controversial for estate planning purposes. Under current law, assets received upon the death of decedent receive a "step-up" in basis of the assets. In other words, for capital gains tax purposes when a beneficiary receives an asset from a decedent, the beneficiary's basis equals the fair market value of the asset at the time the decedent dies. For example, if you bought Google stock for $25 a share and it soars to $1,000 a share, you can pass the entire amount on to your heirs without paying capital gains tax on your $975 gain. Instead, the entire amount passes tax-free to your heirs, and their cost basis - the amount used to determine capital gains tax - would then rise to $1,000. If you passed it on before your death and your heirs sold the Google stock, the heirs would pay capital gains tax on the $975 gain.

The proposal includes exemption levels of $100,000 - $200,000 in the case of joint filers - that would free from tax. Couples would have an exemption of $500,000 on the gains on their personal residences, and no taxes would be due on inherited small-family businesses until the greater time between those businesses being sold or 15 years. Further, any donations to charity would be exempt.

One issue with this proposal is its workability. There was no step-up in basis for capital gains two other times recently - in 2009 under EFTRRA and back in the 1970s (the law was passed but repealed before the law took effect). Each time, determining the original basis was deemed completely impractical from a tax collection point of view and a basis determination on the part of the taxpayer. The burden would be excessive based on how that tax would be collected. For example, would the tax be collected as part of the estate or when it's transferred to the individual? If at the estate level, estate tax returns would need to be filed to determine and pay capital gains tax for decedents that did not have assets that exceed the federal estate tax exemption level. On the taxpayer side, it would require potentially beneficiaries to determine basis in their parent's assets' possibly going back decades. Not an easy task.

Removal of Favorable Tax Treatment for 529 Accounts. A 529 account is a tax-advantaged investment vehicle designed to encourage saving for education expenses of a designated beneficiary. Money is invested in 529 accounts, generally by parents and grows in the 529 account tax-free. Currently, amounts withdrawn to pay for college are totally tax free, as long as the money is used to pay for tuition, room and board. Further, many states give their residents income deductions or tax credits for funding 529 accounts. On Tuesday, January 27th, the Obama administration withdrew this proposal but like Jason from the Friday the Thirteenth movies, bad tax ideas always pop back up and it is good to be aware of the issue.

President Obama's proposal aimed to turn the clock back to the pre-2001 rules. Under pre-2001 rules, earnings growth in 529 plans would be taxed as ordinary income when money was disbursed. All current 529 accounts would be grandfathered in under the current rules but any future 529 account deposits or new accounts would be taxed at ordinary income rates. I thought everyone wanted to make the tax code simpler?

How does this change impact estate planning? Very simply, grandparents love opening 529 accounts to fund college educations for their grandchildren. Not only does it include the altruistic goal of helping their grandchildren pay for college, but the money used to fund a 529 account is removed from the grandparent's estate for estate tax purposes.

There were some other general tax issues raised during President Obama's speech but these were his big proposals with respect to estate planning. I don't foresee either going very far politically but it is instructive.

Basics of Estate Planning: What Non-Estate Planning Documents Should Every Person Complete?

A new year is a good time to take stock of what has come to pass in our financial life. January is also an excellent month to build on last year's topic related to what estate planning documents every person should have. The following is a list of the non-legal documents you should consider preparing, completing or reviewing to confirm they are correct, include:

• Beneficiary Designation document forms - A beneficiary is a person designated as the recipient of funds or other property under a will, trust, insurance policy, etc. In the context of non-legal documents, a beneficiariy is someone that you name as the recipient on your life insurance policy, IRA, Roth-IRA, 401(k), TSP, etc. Typically, when you start at a new company, the first day is spent going through stacks of HR documents. One of those documents addresses designating a beneficiary on your 401(k). Reviewing who is listed as the beneficiary on all of your beneficiary designation documents can prevent any erroneous distributions. Remember, when an asset designates a beneficiary that asset is a non-probate asset and your will can not override designated beneficiary on that asset.
• Inventory of Assets - A list of all of the assets you own will help anyone that might need to clean-up your affairs. Creating a list of assets should start with a listing of bank accounts, financial institution assets, retirement accounts etc. This will give your personal representative, or, in the case of your incapacity - guardian, the ability to quickly manage your affairs and not consume time locating assets. The list of inventory of assets should also include real property and where to find the deed to real property. Any property that is associated with a title - like a car or boat - should also be included on the list. You might also want to list personal tangible property. Tangible personal property is property, excluding land or buildings, that can be seen, weighed, measured, felt, touched, or otherwise perceived by the senses. e.g. all your stuff. I would only list highly valuable property like jewelry, artwork, valuable collectibles, expensive electronics and the like. I would not list your average $19 coffee table you bought from Ikea. This document is also nice to have in the event of a burglary.

• List of Contacts - an AMD allows you to state what level of medical care you want if you are unable to make decisions for yourself. Specifically, you can direct that a specific procedure or treatment be provided, such as artificially administered hydration (fluids) or nutrition (feeding); direct that a specific procedure or treatment be withheld; and appoint a person to act as your agent in making health care decisions for you. In short, it says what medical care you do or do not want and possibly appoints someone to make medical decisions, if you are unable to make them. Your life will be in the hands of another person of your choice because, by appointing that person your agent, that person has decision-making priority over any other individuals who could, by law, make health care decisions for you, if it is determined that you are unable to make health care decisions for yourself.
• Guide to Digital Assets - Last time, I provided an update to digital assets, that would remind you that these assets should be accounted for in your estate plan. But, digital assets should also be incorporated into your non-legal affairs. If you have a large digital presence, creating a list of what to do on your passing with those digital assets is becoming more and more important. Even creating a list of what encompasses your digital estate would aid in locating those assets.
• Funeral Arrangements - Ensuring what happens at your funeral is very personal. As we have seen in the past, from the Whitney Houston and Kasey Kasem Estates of the Months, not having an adequate plan in place can result in undue tension. Funeral arrangements does not have to be elaborate but it should list out whether you want to be cremated or buried, whether you made arrangements somewhere for your internment or burial, etc. It also should be a separate document from your will because, generally, people do not look or recover the will until after the funeral when it is too late for your wishes to be followed.

Estate of the Month: Joan Rivers

It has been a sad couple of months for the comedy world. The passing of Robin Williams was shocking for many, and it was quickly followed up by the passing of another comedic great leaving to soon, Joan Rivers. Though many could find her tough-talking style of satirical humor harsh, there is no argument that she was a pioneer in the comedy world for other female comedians.

On August 28, 2014, Rivers entered an outpatient clinic for scheduled endoscopy to help diagnose her hoarse voice and sore throat. The procedure involved the insertion of a camera down her throat. Upon completion of the procedure, Rivers' personal doctor conducted a biopsy on her vocal cords. During the biopsy, she experienced serious complications and stopped breathing. She was resuscitated and transferred to a NY hospital, where she was later put on life support. She died on September 4th, due to brain damage caused by a lack of oxygen.

Rivers compiled an estate estimated at $150 million from not only her comedy routines but her work on a TV fashion critique show "Fashion Police" and hawking items on QVC. We can only say estimated at this point because most of her estate was in trust. But, given her tangential relationship to the celebrity gossip business, numerous leaks have been reported on her estate.

The leaks, mostly from beneficiaries, report that Melissa Rivers, Joan's daughter and cohost on "Fashion Police, is allegedly set to inherit most of her late mother's estate, including $75 million in cash and Rivers' $35 million French-inspired 5000 square foot New York City condo. Joan Rivers' estate allegedly will provide for her grandson, Cooper. Rivers was also survived by four rescue dogs and her estate will provide for the care for them in some form of pet trust. Though, hopefully, Joan Rivers has learned a lesson from another NYC estate, Leona Helmsley, and did not give her dogs millions of dollars.

Rivers should be commended, like Robin Williams, to create an estate plan that limits public access. Rivers did the smart estate planning move to transfer most of her assets into a trust. But, estate would need to be opened to deal with any personal injury claim owed to Joan Rivers. And, an estate was opened on December 5, 2014. You can read the Rivers' will here. And, on January 26th, Melissa Rivers, as the personal representative of the estate of Joan Rivers, filed suit against the New York medical clinic where her mother went into cardiac arrest under a claim of gross negligence.