End of the Year Estate Planning

The end of the year is a time to reflect on what happened over the past year and a time to think about the future. It is also a good time to contemplate any last minute estate planning actions and to think about estate and tax actions in the New Year. Hopefully, during the mad rush of the Holidays, you have a few minutes to address any estate planning issues.

The first item to address is a review of your estate plan. Wait, you don’t even have an estate plan? Well, then creating an estate plan should be the first issue to address. Many of my Estate of the Months articles have demonstrated the perils of not having an estate plan (see here) or having the wrong documents (see here, here, and here as examples).

That leads to end of the year item number two: if you have an estate plan in place, it is a good time to review those estate planning documents to confirm that your estate plan still reflects your goals and that there have been no life changing events. You can read more here about how to review your estate plan for life changing events. Maybe you only have a will and a trust might be necessary. You can click here to start my series on whether you should have a trust in addition to a will.

Maybe one of your New Year's resolutions is to get your financial life more organized. I have prepared a newsletter series describing the important estate planning and financial documents you should have and how they should be organized. You can review that series by clicking here.

The last item to think about is the end of the year gifting and its effect on federal gift and estate tax purposes. For 2015, the annual gift tax exclusion amount is $14,000 and the lifetime gift tax exemption amount is $5.43 million.

With end of the year items addressed, it is also a good time to think about what lies ahead in 2016. The IRS recently released the 2016 gift and estate tax exemption amounts. Here is a quick high level view of those federal and state exemptions:

• The estate tax exemption increases to $5.45 million per individual, up from $5.43 million in 2015.
• The lifetime gift tax exemption is also $5.45 million per individual.
• The annual gift tax exclusion amount remains at $14,000.
• The top tax rate on estates with assets valued above the estate tax exemption limit remains at 40%.
• For decedents in 2016 that lived in Maryland, the Maryland estate tax exemption level rises to $2.0 million.
• Unfortunately, for decedents dying in 2016 the resided in D.C., the estate tax exemption remains at $1.0 million because the revenue goals established by the Tax Revision Commission Implementation Amendment Act of 2014 were not met. Thus, the D.C. estate tax exemption amount was not raised.
• For decedents dying in 2016 that resided in Virginia, there is still no Virginia estate tax

Basics of Estate Planning: Who Wants to be a Personal Representative?

When a person creates an estate plan, the person generally has a good idea who will be appointed to act as the executor or personal representative ("PR"). But, what if the nominated person has become incapacitated, has predeceased the testator, or does not want to undertake that role for whatever reason? Further, given that 60% of Americans do not have a will, what happens if the person dies intestate.

As I have mentioned in the past, the government does not like chaos. The goal is to prevent a decedent's estate from never being administered because no one thinks that they can act as a PR because the estate is being administered by the wrong person, or because several people are fighting over who should act as the personal representative. To that end, each local state's legislature has passed laws creating an order of priority in who should be appointed personal representative when the person died intestate or the appointed PR does not want to act.

Virginia

Virginia's priority of appointment can be found under Virginia Code §64.2-500 and §64.2-502. §64.2-500 basically states that a PR appointed in a will or a person who is a residual or substantial legatee of the will has thirty days (note the confusion that the law does not stated thirty days from what) to present a will and apply for administration if nobody fails to apply for administration, the law operates as if that the decedent died intestate, and §64.2-502 becomes effective.

Virginia Code §64.2-502 characterizes the priority of appointment to be the PR by time frame from the death of the decedent:

1. First 30 days - the court or clerk may grant administration to a sole distribute of the estate or to any distributee, who presents written waivers of the right to qualify from all other competent distributees.
2. After 30 days - the court or clerk may grant administration to the first distributee that shows up.
3. After 45 days - the court or the clerk may grant administration to any nonprofit charitable organization that operated as a conservator or guardian for the decedent at the time of decedent's death if such organization certifies that it has made a diligent search to find an address for any sole distributee.
4. After 60 days - the court or the clerk may grant administration to one or more of the creditors or to any other person, provided such creditor or person other than a distributee certifies that he has made a diligent search to find an address for any sole distributee.

Lastly, under §64.2-502(B), if the court determines that it is in the best interests of a decedent's estate, the court may depart from the provisions of this section at any time and grant administration to such person as the court deems appropriate.

Washington, D.C.

Unlike Virginia, a court appoints a personal representative because of some relationship to the decedent or the decedent's estate. D.C. Code §20-303 provides a specific order for a person to become personal representative. The court is under no obligation to follow the priority, though the court needs a reason to appoint someone out-of-order.

A personal representative will be appointed by the court in the following order:

1. the personal representative named in the will,
2. the surviving spouse, domestic partner, or children of an intestate decedent or the surviving spouse or domestic partner of a testate decedent,
3. a residuary legatee(s),
4. the children of a testate decedent,
5. the grandchildren of the decedent,
6. the parents of the decedent,
7. the brothers and sisters of the decedent,
8. next of kin of the decedent,
9. other relations of the decedent,
10. the largest creditor of the decedent who applies for administration, and
11. anyone else.

The court examines several other factors in appointing a personal representative. A younger family member will be preferred over an older one of the same priority level. For example, the court prefers a niece/nephew over an uncle/aunt. It also can be very difficult for people at different levels of priority to be appointed as co-personal representatives.

Maryland

Maryland Estates & Trusts §5-104 sets forth the following order of priority:

1. The personal representatives named in a will admitted to probate;
2. The personal representatives nominated in accordance with a power conferred in a will admitted to probate;
3. The surviving spouse and children of an intestate decedent, or the surviving spouse of a testate decedent;
4. The residuary legatees;
5. The children of a testate decedent who are entitled to share in the estate;
6. The grandchildren of the decedent who are entitled to share in the estate;
7. The parents of the decedent who are entitled to share in the estate;
8. The brothers and sisters of the decedent who are entitled to share in the estate;
9. Other relations of the decedent who apply for administration;
10. The largest creditor of the decedent who applies for administration;
11. Any other person having a pecuniary interest in the proper administration of the estate of the decedent who applies for administration; or
12. Any other person.

Each state has small differences in the order of priority of appointment of PR, but there are some similarities. Each state places those with the most to gain - legatees near the top of the order of priority. But, each state also provides an avenue for a creditor to step in to administer the estate and the creditor has a claim that needs to be addressed.

Estate of the Month: A Beautiful Mind Provides an Estate Planning Lesson

Earlier this year, Nobel Prize winning economist John Nash and his wife, Alice Nash perished in a car crash driving in a taxi from the airport to their home in New Jersey. Nash was a mathematician who made fundamental contributions to game theory, differential geometry, and the study of partial differential equations. Throughout his life, as depicted by Russell Crowe in the movie "A Beautiful Mind," Nash also demonstrated signs of mental illness, and spent several years at psychiatric hospitals being treated for paranoid schizophrenia.

Sadly, his son is also afflicted with schizophrenia providing an estate planning teaching moment for all those with children that suffer from a mental illness. In a NY Post article, several friends stated the Nashs were worried as they aged about the well-being of their son. Alice Nash's biggest fear was that her son would eventually end up on the street like many other schizophrenics. They were worried about who would care for him and how that care would be accomplished. Many parents with special needs children share a similar fear.

In the past, due to their medical conditions, many special needs children would predecease their parents. With advancements in medicine and healthcare, special needs children are living longer and becoming productive members of society. That is a good thing. But, plans need to be in place if or when that special needs child outlives the parents. Many times, parents have been the ultimate caregiver to that special needs child and now the parents are gone.

I will not go into too much detail because each special needs case should be evaluated carefully. However, one option to reduce the death of a parent issues is to put special provisions into your estate plan to address your special needs child, such as establishing a regular revocable trust that includes special needs provisions for that special needs child in the trust. Another approach is to create a special needs trust specifically for that child carving out what assets should be dedicated to the special needs child from the assets that would go to any other heirs. Many times a special needs trusts would be established, put in and place, and functioning prior to the death of the grantors, in most cases the parent-caregiver. This is done for a variety of reasons with the main reason to address requests for government benefits for the care of the special needs child.

Nash was an advocate for making it easier for parents to establish a special needs trust. In fact, Alice Nash stated numerous times that the money she earned from A Beautiful Mind was set aside in a special needs trust for her son.

But, not everyone receives the royalty payments from a biographical movie about her husband. Are there other options? Yes. Only a year ago, Congress passed the ABLE act, providing additional financial resources that can be used to help care for a special needs child. I go into greater detail on the ABLE act here. While it does not fully replace a special needs trust, an ABLE act account does provide some ability for the special needs child to accumulate their own funds

Nash was a renowned economist and professor. Even in his death, he is providing a teaching lesson to all parents with special needs children.