San Diego Estate Planning Lawyer Blog

As we approach the holidays, estate planning is probably the last thing on your mind. The end of the year is actually a great time to think about your estate plan. Here are some tips for year end planning.

1. Consider making gifts before year end. Gifting to your children or grandchildren is a basic and powerful estate planning tool. The annual gift tax exclusion is the amount an individual can gift to any number of donees without a gift tax consequence. In 2010, you can gift $13,000 ($26,000 for married couples) per donee and there will be no gift tax. A married couple could for example, give $26,000 to their 3 children and $26,000 to their 3 grandchildren for a total of $156,000 . Gifting takes those assets of $156,000 out of their estate, thus potentially reducing any estate tax due if they should die in 2011. The gift tax exemption does not carry over into the next year so if you do not use it before the end of the year, you lose it.

2. Pay education tuition and medical expenses. Payments for education and medical expenses are not considered taxable gifts and are not included in the annual exclusion of $13,000 or the lifetime exclusion limits of $1,000,000. The payments have to be made directly to the school or the medical provider to qualify for exemption.

Since the recent election, there is speculation that the Republicans may try to address the estate tax issue with the lame duck Congress. It was a Republican controlled Congress that enacted the law in 2001. The law called for an increase in the estate tax exemption until 2010 when the tax would disappear altogether, only to reappear in 2011 at the lower exemption level of $1 million at a tax rate of .

There are two aspects to the estate tax law. One is the amount of an estate that will be subject to estate tax. The second is the rate at which an estate is taxed. Back in 2001, if a single person had an estate in excess of $675,000, estate tax would be due. For a married couple, the exemption was twice that, or $1,350,000. The tax rate was 55%. The exemption gradually increased over the years so that in 2009, the exemption for a couple was $7 million for a married couple at a tax rate of 45%. This year we have had no tax at all, a year in which several billionaires died, leaving their estates tax free.

Congress has a number of options:

A very special theme park opened in San Antonio, Texas this past spring. It is called Morgan’s Wonderland and is a 25 acre theme park designed for kids and adults with special needs. Gordon and Maggie Hartrman found out 13 years ago that their only child Morgan had severe cognitive delays and this park was their dream. The park is free to visitors with special needs and features wheelchair accessible rides including a carousel and off-road jeep as well as sensory-stimulating activies and an interactive garden.

Children and adults with special needs also need “special” estate planning. If you have a child or other beneficiary that is developmentally disabled, they usually will be receiving public benefits at some point in their life. This could be SSI (supplemental security income) or Medi-Cal. If you leave such beneficiaries a distribution from your estate outright, it can affect their eligibility for these benefits. When you create your estate plan, you can provide for distributions to go instead to a Special Needs Trust, a trust designed to keep the beneficiary eligible for public benefits. Such trusts can be part of your own trust or they can be a stand alone special needs trust.

A properly drafted Special Needs Trust will hold the cash or other assets in trust, not under the control of the disabled individual, and thereby allow the beneficiary to continue to receive government benefits. In addition, the trust may pay for some special needs of the beneficiary at the discretion of the trustee. Such items as medical, dental, personal services, and handicapped-equipped vehicles may be paid for by the trust without jeopardizing benefits. It is important that the trustee adhere to certain standards for maintaining the trust and investing the trust assets. The trustee needs to be aware that the assets of the trust can only be used to purchase supplemental items or services which are not provided by public benefits.

Frequently we have clients who come in after the death of a spouse and have learned that their spouse failed to update a beneficiary designation of a life insurance or an IRA or some other retirement account after a divorce. They want to know if there is anyway to prove that their spouse simply forgot to change the designation and would have wanted their current spouse or their children to be the beneficiaries. The short answer sadly is no.

A recent case in the U.S. Supreme Court, Kennedy v. Plan Administrator for DuPont Savings Plan, shows how important it is to update your beneficiary designations after a divorce. Kennedy was an employee of Du Pont and invested in the company’s Savings & Investment Plan (SIP). After his marriage he designated his wife as the beneficiary of the SIP account. When the couple divorced a few years later, the divorce decree divested his wife of all interest in the SIP account, however Mr. Kennedy did not sign a new beneficiary designation removing his ex-wife and designating his children. When Mr. Kennedy died, Du Pont paid the proceeds of the SIP, which was about $400,000 to his ex-wife.

The case went all the way to the U.S. Supreme Court which held that the payment to the ex-wife was proper. The Court based its decision on ERISA (Employee Retirement Income Security Act of 1974) which requires that plan administrators follow the beneficiary designation. Even though the divorce decree had divested the wife of her interest in the account, the husband had to change the beneficiary by signing a new designation.

Since 2007, California gives certain legal rights to same sex partners and opposite sex seniors (where one partner is at least 62 years old) who are not married but are registered domestic partners. In some cases, these rights may be very similar to married couples.

In order to become a domestic partner, the following are the criteria:

1. Both individuals must live in a common residence.

A prenuptial agreement is a written contract that is created by two people before marriage. Prenuptial agreements are on the rise according to divorce attorneys. 73% of divorce attorneys report that in the last 5 years, there has been a steady rise in prenuptial agreements. 52% of such attorneys founnd that there is a noticeable increase in women requesting a prenuptial agreement, not because of the woman wanting to protect her assets but because the woman wants to avoid her husband’s debt. With the recession leaving many people in debt, potential spouses want to avoid any possible financial obligation. There is also the issue of one of the spouses inheriting a large sum of money.

Trying to avoid a partner’s debt was not the case for actress Hilary Duff and her hockey player fiance Mike Comrie who signed a prenuptial agreement. Mike makes about $500,000 a year; Hilary is said to have a net worth of $25 million however Mike’s father, Bill Comrie, founder of The Brick, apparently is worth $500 million. Other celebrities who have prenuptial agreements are Nicole Kidman and Keith Urban whose agreement says Keith doesn’t get a penny if he uses illegal drugs. Michael Douglas and Catherine Zeta Jones and Martin Sheen and Denise Richard’s pre-nups both have provisions in case the husbands cheated.

Many financial planners advise that couples who have significant assets going into the marriage consider a prenuptial agreement as part of their estate plan. Such an agreement usually specifes the assets each person has coming into the marriage as well as what debt each are bringing into the marriage. In California everything that is earned or bought after marriage is presumed to be community property. A prenuptial agreement can provide for a different outcome. Other reasons to consider a prenuptial agreement can be to pass separate property to children from a prior marriage, to specify how debt should be handled, or to clarify what will occur in case of a divorce.