San Diego Estate Planning Lawyer Blog

A Power of Attorney is a document that lets you appoint someone to either handle a specific task or act with general powers to handle your finances if you become incapacitated. Here are the answers to some frequently asked questions about the second type of power of attorney:

1. What things can my agent do under a power of attorney? Some of the things your agent can do acting under a power of attorney are make deposits and withdrawals from your bank accounts, pay your bills, buy or sell property, enter into contracts on your behalf, file your tax returns, and re-arrange your assets. If you want to limit the kinds of tasks your agent can do, you can place such limitations in the document.

2. How do I choose an agent under a power of attorney? The primary trait your agent should have is trustworthiness. An agent has broad powers so you want to be sure the individual you choose will act with the utmost of honesty and integrity. Choose a trusted family member or friend or in some cases, perhaps a private professional fiduciary may be your choice.

The new federal estate tax system signed into law by President Obama last December has an interesting and advantageous break for married couples. Starting this year, widows and widowers can add to their own estate tax exemption the unused exemption of their spouse. This “portability”provision together with an increase in the exemption to $5 million per person allows married couples together to transfer as much as $10 million tax free to their children or other heirs either through gifts or their estate plan.

As an example, suppose a couple named Ann and John have an estate worth $6 million with all of their assets titled jointly in their name, with right of survivorship. When John dies first, Ann owns the entire estate of $6 million. Under the old tax law, John’s exemption is wasted, since the outright bequest to Ann is not taxed regardless of what the federal estate tax is. With the new tax law, Ann can use her husband’s entire exemption if her executor makes the appropriate election and unless her assets exceed $10 million, there will be no federal estate tax due. In essence the “portability” aspect of the estate tax exemption between spouses allows a couple to do what an A/B trust will do, without the trust.

Interestingly, there are some states that continue to impose state estate taxes. New York and New Jersey are two states which have the estate tax. California and Florida do not.

The new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by President Obama on December 17, 2010. Part of this new law sets the federal estate exemption amount at $5 million. This change is set to stay in effect until the end of 2012 unless an extension is enacted by Congress to continue such changes.

What are some of the estate planning issues we face under this new Act? The new law imposes a federal estate, gift, and generation skipping tax at a rate of 35% with a $5 million exemption ($10 million for a married couple under the “portability rule” which we will discuss in Part II of this blog. It also increases the exemption for lifetime gifts from, $1 million to $5 million. This increases the ability to pass substantial assets, its income and appreciation, to others free of federal estate and gift taxes. If you are considering making non-charitable gifts this year, consult us about how to structure your gifts to maximize tax savings.

The new law may also affect the type of trust that married couples need. In the past, A/B trusts, also called marital deduction trusts, or bypass trusts were estate planning tools that were necessary in order to maximize a federal estate tax exemption for each spouse. For couples with estates under $10 million, this may no longer be necessary. The new law is only in effect for two years however, so that may be a reason to still utilize these trusts. In addition there may be other reasons to use these types of trusts, depending on your net worth, family structure, and investment outlook.

At Scott C. Soady, A Professional Corporation, we frequently see clients who have made estate planning mistakes. Sometimes we are able to correct those and sometimes, unfortunately, it is too late. Here are some of the most common estate planning mistakes:

1. Not having an estate plan at all. Probably the biggest mistake you can make is not creating either a will or a trust. Not having a will, or preferably a trust, causes your heirs to have to probate your estate and distribute your assets according to the laws of intestacy set forth in the California Probate Code. This means that if you were intending to leave something to someone not your heir such as a friend, charity, or domestic partner, that will not occur. Also the process of probate is time consuming and can be expensive as attorneys fees are statutory.

2. Creating a revocable living trust but failing to put all your assets in the name of the trust. Another common mistake is not titling all your trust assets in the name of the trust. People go to the trouble to create a trust but then open a new bank account, buy a new property, acquire a timeshare, or another new asset and fail to title that asset in the name of the trust.

A Grantor Retained Trust (“GRAT”) is an advanced estate planning technique used by the wealthy to gift rapidly appreciating assets to another individual or charity without having to pay estate or gift tax. It is a special type of irrevocable trust that allows the creator of the trust, the “Trustor”, to put specific assets into the trust while retaining the right to receive an annual annuity payment for a certain number of years. When the term of the GRAT ends, the balance is distributed to the trust beneficiaries, usually children or other beneficiaries chosen by the Trustor. The Trustor is betting on the fact that the assets transferred into the GRAT will increase in value at a rate substantially higher than the interest rate used by the IRS (called the 7520 interest rate.

Recently Nike chairman Phil Knight contributed 2 million shares of Nike stock to the Phillip H. Knight 2010 Annuity Trust. This was the fourth trust that Knight has set up. The Securities and Exchange Commission said the filing by Knight on December 30, 2010 names Pat Kilkenny as trustee. Kilkenny served as the University of Oregon’s top athletic official when Knight donated $100 million to the University of Oregon. As a result of this transfer Knight, the co-founder of Nike, has 67.7 million Class B shares of stock in Nike. Obviously, Knight has faith that stock in the company he founded will continue to appreciate in value.

At Scott C. Soady, A Professional Corporation, we help families and individuals with a wide range of wealth and assets. Our estate planning is tailored to meet your needs. Contact us to schedule a complimentary appointment.