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Estate Planning Basics: Asset Protection – Part 1

CunninghamLegal – The Living Trust Lawyers

Estate Planning Basics: The American Academy of Estate Planning Attorneys offers great information on the subject of Estate Planning. This article offers an introduction to the basics of Estate Planning with an initial focus on protecting your assets. When thinking about your assets and how you want them handled in your Estate, working with an experienced lawyer can help put your mind at ease, but more importantly, can help you better understand the different options available to you.

Read the entire article: Asset Protection in Estate Planning

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A Second Chance to Double Your Tax Exemption

CunninghamLegal – The Living Trust Lawyers

The IRS just issued Revenue Procedure 2017-34, which, for a limited time, has extended the deadline to file for portability elections. The American Taxpayer Relief Act of 2012 (enacted in 2013) provided people with the process of “Portability” where a surviving spouse “inherits” the unused Federal Estate Tax Exemption of their predeceased spouse by filing an Estate Tax Return (Portability Form 706) within nine (9) months of the date of death, or within 15 months if a 6-month extension is timely filed. This Portability tool may significantly reduce your estate taxes at your death. Due to the numerous extensions granted to people filing their estate tax return, the IRS has reopened that window for the sake of efficiency.

If you or anyone you know has missed the window to file the estate tax return, the deadline has been extended to January 2, 2018 or by the second anniversary of the decedent’s death (whichever is later). Please note, this process will not apply if the first spouse died before January 1st, 2011.

If you think your estate may benefit from electing “portability” but missed the deadline to file, you can still schedule an appointment with our office before the hard deadline of January 2, 2018, when this opportunity will be lost.

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The 5 Golden Rules Of Lending Money To Your Adult Children

When you think about the price of having kids, the costs that come to mind may include things like child care, camp, braces and college tuition.

What probably doesn’t spring to mind are mortgages, car payments or personal loans.

The reality, however, is that your bank account will likely continue to be tapped long past the day your kids turn 21. According to a 2015 Pew Research Center report, six in 10 Americans with at least one adult child say they’ve provided their kids with some financial support within the past year.

And the dollar amounts they doled out were probably a bit steeper than $100 here or $500 there: A TD Ameritrade survey released in August found that parents supporting adult kids gave them an average of $10,000 over the past 12 months.

When dealing with an amount of that size, it’s very possible that parents expect to be paid back at some point. But entering into parent-child lending territory can be fraught with complications that could lead to big financial burdens and broken family ties.

So we rounded up some financial pros to provide tips on how to loan your adult children money in a way that helps minimize monetary strife and keep family drama at bay.

1. Only lend money you won’t miss.

Your child is just a few thousand dollars shy of a down payment on her dream home, and you’d really like to help her get into that three-bedroom Colonial. Before you reach for your checkbook, however, make sure it’s an amount you can stand to part with, rather than money you need for your own financial stability.

“The question I ask my clients [who are faced with lending to kids] is: ‘Are you willing to lose the money?’ If you can’t answer with a resounding yes, then I suggest you don’t loan the money,” says Tom Till, owner of APPS Financial Group, a financial advisory firm located near Houston.

And that advice doesn’t apply just to funds you use to pay your monthly bills; it’s also applicable to any money you’re setting aside for your future.

“If you don’t have enough in savings or retirement or haven’t reached your personal goals, then tell them you can’t help them at this time,” suggests Debbi King, a personal finance and life coach and author of “The ABC’s of Personal Finance: 26 Essential Keys to Winning With Your Money.” “Don’t mortgage your future and put it at risk.”

If you still get the pleading looks, explain your no in a way that shows why your financial stability can actually be a good thing for them. One client of Till’s used this approach to tell her daughter why she couldn’t lend her money for a home down payment: “She told her child that I had recommended against the loan because it would greatly affect her retirement income—even to the point where she might have to move in with the child at her new home.”

2. Be clear on how your kids will use the funds.

You think you’re lending your child money to help pay off a student loan, but you suddenly notice some sweet electronics and brand-new furniture popping up in his pad.

Coincidence? Perhaps not.

Consider that if your child is asking you for money, it may be a sign that he doesn’t have the firmest grasp on his finances to begin with. So if you’re not completely sure where those dollars are going, think about placing parameters on how you fork over the funds.

For starters, consider paying the lender directly, suggests ReKeithen Miller, a Certified Financial Planner™ with Palisades Hudson Financial Group who is based in Atlanta. “That way, the child can’t divert the funds for other purposes,” he says.

You could choose to disperse the loan in smaller amounts over time to help ensure that your child isn’t tempted to splurge with such a large amount, Miller adds. This also provides the option to refuse to release further funds if your child isn’t using them for their intended purpose.

Finally, if you feel your child needs to learn a serious money lesson, you can require that they get smarter about money management before you fork over any cash. “Parents have the option of making the loan conditional,” Miller says. “For example, if a child has issues with budgeting or credit card debt, you can require them to enroll in credit counseling before you agree to lend them the money.”

3. Set terms for late payments or defaults.

Your child likely has every intention of paying you back—but you can’t deposit good intentions in your bank account. To help keep your child accountable, lay out what happens if she is unable to pay you back in a timely manner.

“Treat [the situation] as if you were the bank giving the loan,” King says. “There have to be consequences, such as interest and fees for late payments and defaults, just like with a ‘real’ loan.”

There’s another potential benefit to charging interest: The IRS may be less likely to view your loan as a gift, says Miller, which means it won’t count toward your annual gift-tax exclusionamount. He suggests choosing an interest rate in line with the Applicable Federal Rate (AFR), an interest rate calculated by the IRS each month. Remember to consult with your tax advisor to be clear on how you report the interest to the IRS.

It’s also important to consider baking in how the payment terms might be adjusted if your family member’s financial circumstances change, either because of job loss or another income hardship. Could you, for example, reduce the payment amount temporarily, but raise the interest rate? Give them quarterly rather than monthly deadlines? Reduce the amount they’ll eventually inherit by the amount of the loan?

It may seem awkward at first, but not agreeing on those types of details up front only stands to heighten the tension later. King recalls one story about a colleague whose mother-in-law loaned her a few thousand dollars to buy a new car. They settled on a monthly repayment amount, but the colleague lost her job and was unable to make the payments. Even after finding a new job, the colleague was making much less and still couldn’t afford to the payments.

“She felt as if she were being judged by every purchase she made. She got the feeling that the mother-in-law was saying, ‘If you can afford that, you can pay me what you owe,’ ” King says. “And every time [her husband] sees his mom, he’s always waiting for her to bring it up—not knowing what to say if she does.”

4. Present a unified front.

Your child probably figured out pretty quickly that when Mom said no to cookies for breakfast, he might get a more favorable response from Dad.

That good-cop, bad-cop dynamic, however, can have much bigger consequences when you’re talking money. So before saying yes to a loan, make sure you and your spouse have agreed uponall of the loan terms. This will not only help avoid an argument later, but could also help protect one spouse in the unfortunate event that the other isn’t around to enforce the agreement.

“A common scenario I’ve seen is where Dad discusses the terms of the loan with the child without involving Mom. Dad dies without communicating the loan terms, and Mom is in a situation where she has to decide if her child is telling the truth—or trying to shirk responsibilities,” Miller says. Plus, “If Mom forgives one child’s debt, she may be obligated to do the same for the other children to avoid tension within the family—and she may not be in a financial position to do so.”

One other piece of advice? Consider getting input from a financial advisor, who may be able to help you and your spouse settle disagreements on loan terms, as well as help play bad cop to the kids, if necessary. “Inserting a third party into the mix may make the children more apt to abide by the terms of the agreement, since they know someone outside of the family is monitoring the situation,” Miller says.

5. Get *everything* in writing.

As with any other bank, the Bank of Mom and Dad should have a promissory note signed by both parties that lays out all of the loan terms, including the principal amount, the interest rate, the payment structure, and any other conditions you’re expecting your child to meet in order to be “approved” for the loan.

“Even though the money transaction is between family, it is best if it is treated like a business transaction. Be as clear as possible on the expectations, and it will cut down on family disputes down the road,” Till says. “[And] it’s important to stay firm to the agreement. This can be a learning opportunity for your adult child—no matter the age.”

Read the original article on LearnVest. Copyright 2016.

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What could happen if you write your own living trust

Readers often ask me about do-it-yourself estate planning. Lawyers want to know how to discourage clients from using books or software and websites that spew out documents for free or for a fraction of what they charge. Meantime, consumers ask, “What’s wrong with that?”

The trouble with do-it-yourself planning is that even if your situation seems simple, there are many oddball things a layman wouldn’t think of that can go wrong, especially with wills and trusts. These mistakes can end up costing you or your heirs a lot more than you saved in legal fees.

Eileen Guerin Swicker, a lawyer with her own practice in Leesburg, VA, recently told me about a really doozy. It involved a client who set up his own living trust.

By way of background, both a will and a living trust can be used to transfer assets, and each has unique uses and features. For example, only a will can name guardians for children who are minors. (For how to choose a guardian, see my post, “Adam Yauch’s Will Reveals His Private Dilemma.”) And unlike a will, a living trust can take effect while you are alive, so it can be used to hold assets for your benefit if you become unable to manage them yourself.

The client who Swicker told me about set up his own trust in 1984, using a 3-page form that he bought at an office supply store. He recorded a deed to transfer his home into the trust, and absentmindedly dated that deed 1983 (in other words, one year before the trust was created).

Flash forward to 2009 when this fellow, who had paid off the mortgage on the house, wanted to borrow against it. He planned to give his adult daughter $300,000 in cash so she, in turn, could pay off the mortgage on her own house. Great strategy (see my posts, “5 Ways To Help Family Pay For Housing,” and “The Best Investment Advice I Ever Received”).

But at this point, his clerical error of 25 years earlier came back to haunt him. Why? Because the title company said he didn’t have a clear chain of title to his home, so the bank wouldn’t give him the loan. The man, who by then was 75, called Swicker’s previous law firm in tears, asking for help.

Fixing the problem was a convoluted process that took two weeks and wound up costing the client $2,000 in legal fees. That’s about twice what he would have had to pay back in 1984 if he had had the firm draw up the trust instead of doing it himself, Swicker says.

After that, Swicker hoped the client would call back and ask lawyers to help bring his estate-planning documents up to date. But by the time Swicker left the firm eight months later, he still hadn’t done that. Says she: “It was one of those classic cases of somebody who dug a hole, and kept digging it deeper.”

Source: Deborah L. Jacobs – Forbes, August, 2012

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Facebook’s Mark Zuckerberg to use CLLC

The Daily Beast, Mark Zuckerberg’s Charity Windfall

In a Securities and Exchange Commission filing on Tuesday, Facebook founder and chief executive officer Mark Zuckerberg announced that he would gift “substantially all of his shares of Facebook stock” to “further the mission of advancing human potential and promoting equality by means of philanthropic, public advocacy and other activities for the public good.” The vehicle for his beneficence will be the Chan Zuckerberg Initiative LLC, a charity that he controls and through which he will maintain control of Facebook for “the foreseeable future.”

Like great capitalists before him, including Bill Gates, Warren Buffett, John D. Rockefeller, and Andrew Carnegie, Zuckerberg is saving a lot of money by intending to do a lot of good. But there’s plenty in it for him.

Back in 2008, David Yermack a professor of finance at the NYU Stern School of Business, published a paper called Deductio Ad Absurdum: CEOs Donating Stock to Their Own Family Foundations. In it, Yermack questions the value of public subsidies for CEO stock gifts. He even points to such gifts as a mechanism for executives with highly appreciated stock to dispose of their holdings without running afoul of insider trading laws. It also allows those CEOs to maintain control of their companies in the future, but through their newfangled organizations.

Maybe the biggest benefit for Zuckerberg, or any CEO who donates stock to a family foundation: He will transfer ownership of his Facebook stock without paying capital gains taxes.

Though not mentioned by Yermack, Zuckerberg will also benefit from the possibility that his foundation will live beyond him, with his heirs and their heirs at the helm, untouched by estate taxes.

There’s an almost overnight financial benefit, too: The Facebook founder will deduct the fair value of his gift to his foundation from his taxable income in the year he makes the donation. A donor like Zuckerberg could realize a tax benefit equal to about one-third of the value of his gift.

In this case, he stands to benefit as much as $333 million, based on the $1 billion he plans as his first transfer.

Of course, all of this favorable tax treatment exists to encourage wealthy stock owners to build humanity-optimizing foundations. But this behavior can invite a dark side: We may be subsidizing more sinister insider trading.

Source: The Daily Beast

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Estate Tax Exemption for 2016

Good News!

Recently, the Internal Revenue Service (IRS) announced the new limits for estate and gift taxation. These are the amounts that you can give tax free during life or at death in your will or living trust. Unfortunately, the annual gift exclusion stays at $14,000 – the amount that you can give (per person, per year) without having to file a Form 709 gift tax return. This means a married couple could give their three children a total of $84,000 and not have to file a gift tax return (two parents x three children x $14,000 = $84,000).

The death tax has gone down, just a bit. In 2015 you can leave $5,430,000 tax free – that amount increases to $5,450,000 in 2016. This means that you and your spouse can leave $10,900,000 tax free (but you have to file an estate tax return Form 706 on the death of the first spouse to die). If you are married and have a taxable estate less than $10,900,000 – no Federal Estate Tax. You can also give, as a married couple, $10,900,000 and not pay gift tax. Remember that a taxable estate includes your equity in real estate, your personal property, your bank accounts, your IRA/401K/TSA, and the death benefit on your life insurance policy.

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Portability – The great estate tax break

You can’t take a tax break with you, but it’s becoming easier to leave to your beneficiaries. The IRS released final rulings detailing an estate and gift-tax break for married couples, known as “portability”. It allows a married spouse to pass nearly $11m in assets to heirs, free of estate tax. Without this, couples would only qualify for one exemption, as opposed to two.

The exemption, indexed for inflation, is $5.43m per individual in 2015. But the rules come with important caveats. Estate tax returns must be filed, usually within nine months of death, to take advantage of portability. Experts worry that executors will overlook this deadline, especially if an estate is smaller than the exemption and there is no reason to file a return.

Since ’81, the laws have allowed spouses to leave assets to one another free of tax. But at the 2nd death, only one exemption is left. Planners devised trusts to deal with this issue, but they can be costly and cumbersome. People should be willing and able to plan for the future.

Portability allows the surviving spouse to pick up the remaining portion of the partner’s gift and estate-tax exemption if the executor makes an election on Form 706, the estate tax return. In addition, portability doesn’t prevent the survivor’s estate from getting a benefit at death, which can cancel or reduce future capital gains tax on assets. If a couple’s combined assets are less that in this example (perhaps below $5m) experts still recommend taking advantage of portability because assets can grow, especially if the 2nd death is decades away.

For most people who aren’t rich, the downside of portability is the cost of estate-tax preparation, which requires professional help. The good news is that if the assets are below the $5.43m limit, expensive appraisals aren’t mandatory. The executor can file a list with reasonable estimates.

These new rules are likely to increase a rise in federal estate-tax filings, which totaled $34,000 in 2015. They also may increase business for accountants, enrolled agents, and lawyers to prepare estate-tax returns.

Source: WSJ- July, 2015