Living trusts can be set up as either revocable or irrevocable. If revocable, the creator of the living trust retains control over the trust during his lifetime. If irrevocable, the creator of the living trust does not retain control over the trust during his lifetime. The benefit of creating an irrevocable trust is to avoid tax liability upon the estate tax of the funds within the trust. This is important only in estates over approximately $600,000.
Living trusts can be set up relatively simply; however, they must be funded (by naming the trust as beneficiary, for example), and the trust document must be created and properly executed. How this must be done depends on the jurisdiction or state law where the creator of the living trust resides.
I. Estate Taxes:
The Estate Tax is a tax on the transfer of property at death. It consists of everything owned at death. The fair market value of these items is used, which can be much different from what their values were when acquired. The total value of this is termed the “Gross Estate.” The Gross Estate may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
To determine the “Taxable Estate,” certain deductions or reductions to value are permitted. These deductions can be mortgages and other debts, estate administration expenses, property passing to surviving spouses and qualified charities. Also, in some cases the value of operating business interests or farms can be reduced.
Then, the value of lifetime taxable gifts (since 1997) is added to the above number to determine the tax. The tax is then reduced by the available unified credit. In 2010, there is no taxable estate amount, but next year there will be a taxable estate amount. However, this taxable estate typically affects only a minority of Americans because of their larger estates. In years with a taxable estate threshold, most relatively simple estates (which include cash, publicly traded securities, small amounts of other easily valued assets, and which have no special deductions, elections, or jointly held property) do not require the filing of an estate tax return.
II. Gift Taxes:
Donors are generally responsible for paying the gift tax, unless the donee agrees to pay it. Any transfer to an individual where full consideration (monetary payment) is not received in return. Most gifts are taxable, except:
1. Gifts that are not more than the annual exclusion for the calendar year (see below).
2. Tuition or medical expenses you pay for someone.
3. Gifts to your spouse.
4. Gifts to a political organization.
Also, gifts to qualifying charities are deductible from the value of the gift made (see estate tax section above). You cannot otherwise deduct gifts on your tax return. However, you can exclude an amount of gifts to individual donees up to the annual exclusion amount. In 2010, this amount is $13,000 or $26,000 for couples (this amount can only increase by $1,000 increments each year if it does increase).
Providing a letter to trustees of your trust will give them direction in managing your estate assets the way you intend. Such a letter can include anything you deem relevant to your trust, including investment options and values deemed important to you, the trust grantor.
If the trust is a special needs trust, a more personalized letter indicating the social, physical, medical, legal, health, work, educational, and religious preferences of the beneficiary can be helpful. Listing specific professionals who have worked with, diagnosed, or currently are part of the beneficiary’s life, is important in case no other source of this information exists.
Estate tax changes for 2011 have been in the news due to their unusual nature; however, the vast majority of individuals will not have estates impacted by estate taxes because their estates are not large enough.
However, in brief, the estate tax changes for 2011, are as follows:
Heirs will now be able to use the market price on the date of death for an asset when computing their tax liability, instead of the value of the item when purchased, which provides a step-up in tax basis in most cases.
Estates are now subject to an estate tax, which amount includes all gifts made during the lifetime of the deceased, on estates amounting to greater than $5 million. The maximum tax rate on estate taxes and gift taxes is 35%.
There are a number of ways to reduce your tax payments to be made through your estate include: giving away a large portion of wealth during your lifetime. Individuals can give their children, relatives and others up to $5 million during their lifetimes without incurring federal gift taxes. In addition, individuals can give away an annual amount without reducing their exemption for gift or estate taxes. In 2011, the annual gift tax exclusion is $13,000 per recipient and individuals can give away that amount to as many people as they want. Many wealthy families also reduce the size of their taxable estates by giving money and other property to charity.
But those strategies aren’t practical for families who have most of their wealth tied up in their primary residences and retirement savings. In the first case, you won’t want to likely give away the place you live. In the case of retirement savings, taking withdrawals from retirement plans will trigger income taxes anyway, plus a 10% penalty if the plan owner is under 59½.
A benefit to surviving spouses of a deceased spouse passing away in 2011 is that the spouse will be able to combine any of the unused estate tax exemption of the deceased if the surviving spouse timely elects to do so. For example, if the deceased passes away in 2011 and uses only $3 million of his or her $5 million estate tax exemption, the surviving spouse can elect to use the remaining $2 million of the deceased spouse’s election towards his or her own estate tax exemption, in this case increasing it to $7 million (their own $5 million added to the remaining $2 million from the deceased spouse).
Of course, it is difficult and not advisable to plan to die within a certain year in any case, so knowledge of tax laws impacting estate planning is very useful, and advisable, but never determinative in any particular case.
OSPI amended its special education regulations, found in WAC 392-172A, and effective November 2, 2009.
Here are the highlights: 1) parents who reject an initial placement of their child in special education means the school district must give the parents prior written notice prior to withdrawing special education services for the child, and the school district need not remove the receipt of prior special education from the child’s record because of this lack of consent; 2) those with disabilities should be sought out as employees by school districts who receive Part B funding; 3) schools with disproportionate numbers of children who are of a racial or ethnic minority and are: in certain programs; disabled; in special education; or subject to certain types of disciplinary actions, must seek to use the maximum funding available for early intervention services; 4) private schools include secular schools throughout the regulations; and 5) an educational representative, who may be the child’s parent or the child’s spouse, may be appointed to represent the child’s interests where the child is found to be incapable of making their own educational decisions.
Those with disabilities such as diabetes and epilepsy are regularly denied employment and appropriate school accommodations. In the case of employment rights, this is because while their disability is largely controllable with medication, they are deemed unfit to work due to their need for such accommodation. In the case of schooling, the disability is not recognized as worthy of accommodations, which are usually very simple, e.g. provision of trained medical assistance when needed and extra snack time to regulate sugar levels.
Organizations such as the American Diabetes Association (ADA) are working to change this stereotype and lack of provision of basic human rights such as education with accommodations needed and employment where an applicant is otherwise qualified. I am fortunate to have joined a group of attorneys who work for reduced rates and on a pro bono basis through the ADA to reduce this discrimination against those with disabilities like diabetes. You can learn much about this important work at http://www.diabetes.org/living-with-diabetes/know-your-rights/discrimination/.
The non-profit organization Help Abolish Legal Tyranny (www.Halt.org) provides insightful commentary, activism, and how-to guides for many areas of law, focusing on creating accountability for the legal profession. While some of the statements are unfair and general, the guides are professional and informative and the goals worthy.
In the area of estate planning, several guides provide information on how to ensure one’s rights are met in the cheapest and most fair way possible.
For example, a guide on guardianship, easily found on the documents section under estate planning, warns potential wards (those deemed by courts to require a guardian) of dangers inherent in having a guardian represent their interests. Many jurisdictions are cited for failing to track the actions of guardians and require yearly reports by guardians, among other things.
Washington state has a commendable record in the areas cited by Halt as being inadequate in many other states. First, Washington, among a few other states, requires licensure of professional guardians through testing and courses. Second, only Washington and Arizona have offices created specifically for the reporting of abuse. In Washington, this is the Washington State Certified Professional Guardian Board —
This pattern of Washington setting an example of better accountability among legal professionals is demonstrated throughout the halt.org website.
Watch for Part 2: Living Trusts