Friday, June 26, 2009

Estate Planning for Unmarried Couples

Chances are quite good that you might know of a couple who are living together without the benefit of marriage. The U.S. Census Bureau confirms what you already may suspect. More people are cohabitating in lieu of marriage these days than ever before in our nation’s history. In 1930, married couples accounted for 84 percent of American households. In the year 2000, just 70 years later, married couples were barely in the majority at 52 percent. The trend does not seem to have bottomed-out, either. In 2005, married couples were the minority at 49.7 percent. And, it is not just young couples. In fact, between 2001 and 2006, the number of unmarried cohabitants older than age 55 rose 61 percent, from 340,000 to 549,000. Even though cohabitation is legal in the majority of states, unmarried cohabitants face unique estate planning challenges regarding incapacity, inheritance, and estate taxation.

So who in charge when someone becomes “incapacitated”?

Unlike their married counterparts, unmarried cohabitants may not be able to make fundamental health and financial decisions for one another in the event of incapacity. Absent prior legal planning or specific statutory authority, unmarried couples have no legal relationship to give standing in court over one’s blood relatives. For example Jim and Mary are unmarried cohabitants when a severe automobile accident leaves Mary in a coma. If both Jim and Mary’s parents seek to be appointed as Mary’s legal guardian, then the preference will be for Mary’s parents. In addition, if Mary’s parents do not like Jim, they may legally bar Jim from visiting her. Mary’s parents would even have the authority to make end-of-life decisions without Jim’s input. Similarly, Jim would not be able to manage Mary’s finances. Her parents likely would be appointed as conservator over her financial affairs, paying her bills and filing her taxes, too.

Protecting Your Partner's Inheritance

Absent proper legal planning, state intestate succession laws (i.e., state laws that determine the distribution of assets of a person who dies without a will) may leave the surviving cohabitant on the street. For example, Jane and John reside in a home titled in Jane’s name alone. If Jane dies, then her parents inherit the home and may force John to leave as a trespasser. If Jane and John had children together, then the children would inherit the home, not Jane’s parents. But what if the children were minors? As the surviving parent, John would be responsible for maintaining the home for the children, or selling it on behalf of the children. When the children reach the age of majority (i.e., age 18 in most states), John will be required to turn the home or the proceeds from its sale over to the children without any further guidance or control.

Unmarried Couples Lose the Unlimited Marital Deduction for Estate Taxes

The unlimited marital deduction is an unlimited deduction for estate (and gift) tax purposes, but only for transfers between married spouses of the opposite sex. For example, Jane’s estate is worth $7 million, chiefly consisting of an IRA and a life insurance policy designating John as the beneficiary. Upon her death, only $3.5 million of the IRA and life insurance proceeds will be sheltered from federal estate taxes. What about the remaining $3.5 million? Jane’s estate will have to shell out more than $1.5 million in federal estate taxes (plus income taxes on any IRA funds withdrawn to pay these federal estate taxes) to the Internal Revenue Service within nine months of Jane’s death.
Contrast this result with Pete and Barbara who are married and who live next door in the cul-de-sac. Assume they present the same facts. Pete will inherit Barbara’s full $7 million of assets without any reduction due to federal estate taxes. The Federal Tax Code laws grant to Pete an unlimited marital deduction. This allows married spouses of the opposite sex to gift during life or leave to one another upon death an unlimited amount of assets free of gift or estate taxation.
Couples who elect to cohabitate should consider seeking qualified legal counsel to minimize or eliminate these adverse results.

Wednesday, June 24, 2009

What are "Charitable Gift Annuities"?

As its name suggests, a charitable gift annuity consists of two elements:
  1. an outright charitable gift; and,
  2. the purchase of a fixed income annuity contract. Payments can begin immediately or can be deferred for a period determined by the donor and set forth in annuity contract.

The payment period can be measured by one annuitant's life (who is in most cases is the donor) or by the lives of two joint and survivor annuitants (often a husband and wife). Charitable gift annuities are not issued for a fixed term of years. As will be discussed, however, it is possible to terminate the annuity payments in advance of the life measuring term.

Unlike charitable remainder trusts or pooled income funds, whereby the obligation to make payments is limited solely to the contributed assets or segregated fund, a charitable gift annuity is considered a general obligation of the issuing charitable organization. Charitable gift annuities, therefore, take on much of same characteristics as commercial annuities with the issuing charity acting as the insurer. Many states require issuing organizations to be licensed and to maintain investment reserves.

In order to provide for a gift component, the rates offered by organizations in connection with charitable gift annuities are lower than those available from commercial insurance carriers.
Most organizations offer annuity rates as suggested by The American Council on Gift Annuities -- a qualified 501(c)(3) organization formed in 1927 as the Committee on Gift Annuities for the purpose of providing educational and other services to American charities regarding gift annuities and other forms of planned gifts. The Council deals with all matters pertaining to charitable gift annuities and meets periodically to establish suggested annuity rates that will result in issuing charities realizing a 50% actuarial residuum from the annuity agreements they issue. The rates are based on current mortality studies, prevailing and projected investment returns on invested reserves, and projected administrative costs.

The annuity rate is based on the age and number of annuitants. The most recently published rates apply to gift annuities issued on or after July 1, 2008. Rates begin at 3.3% for single-life annuitants age 0 - 5 and increase to 10.5% for single-life annuitants age 90 and older. Rates for joint-and-survivor life annuities are less to reflect longer combined actuarial life expectancies. Charitable gift annuities are limited to one or two annuitants.

The purpose of using standardized rates is to discourage competitive rate setting among charities and thereby ensure that a significant portion of the transfer will be available for charitable purposes. In 1995, however, a lawsuit was filed by a donor who charged that charities that issued gift annuities had conspired to fix the rates they offered donors and that such practices violated both antitrust and securities laws. Congress, recognizing the primacy of charitable gift annuities as fundraising tools, enacted two laws designed to specifically exempt charitable gift annuities from antitrust laws. As an alternative to using the suggested ACGA rates, some organizations choose to develop their own rates based on their own investment experience, charitable residuum goals, and the investment/reserve requirements under state law.

Determining the Annuity Amount
The annuity rate is stated as a percentage that, when multiplied by the net fair market value of the amount transferred, determines the annual amount payable to the annuitant. The annual amount can then be paid annually, semi-annually, quarterly, monthly or as otherwise set forth in the annuity agreement.
EXAMPLE 1 : Mr. Pleasant, age 70, transfers $100,000 on January 1, 2008 to a charitable organization in exchange for a single life immediate charitable gift annuity. The suggested ACGA annuity rate corresponding to his age is 6.5%. Mr. Pleasant will receive $6,500.00 per year.
EXAMPLE 2: Mr. and Mrs. Jones, both age 70, transfer $100,000 on January 1, 2008 to a charitable organization in exchange of a joint and survivor life immediate payment charitable gift annuity. The annuity rate corresponding their ages is 5.9%. Mr. and Mrs. Jones will receive $5,900.00 per year as long as at least one of them survives.

With a Deferred Payment Gift Annuity (DPGA), the annuitant(s) start receiving payments at a future time, the date chosen by the donor, which must be MORE than one year after the date of the contribution. As with Immediate Gift Annuities, payments can be made monthly, quarterly, semi-annually or annually.

Monday, June 8, 2009

What is Estate Planning?

Estate planning is simply giving what you have, when you want, the way you want, how you want, to whom you want, at the lowest possible cost. It is not a bunch of legal mumbo jumbo. The truth is that we come into this world with nothing, and we leave this life with nothing. All of our physical assets remain behind. I am always amazed how we know that death and taxes are a certainty....but, 7 out 10 people die with no estate planning in place. How is that possible? Well, think about it. People are always so busy taking care of the affairs of life on the "urgent" basis that they never take time to think about what would happen if they check out permanently? We spend a lifetime accumulating assets; but, most people spend very little time planning for one's exit strategy.

Estate planning can be a loving act for the benefit of one's beneficiaries. If one fails to make any provision for his or her estate, the state in which you live at the time of your death has a plan of disposition ready for you. However, it may not be the plan that you would necessarily want? When someone dies without a will or a living trust in place, the laws of intestate succession take over. What is that you ask? The state has a set of rules in place to govern where someones property will go if that person dies without an estate plan in place.

Any person over the age of 18 who is of sound and disposing mind has the ability to condition how one's property will be disposed of at the time of one's death; but, it is utterly amazing how often people die without any plan in place. The probate court is the only institution on earth that can change the name of a deceased person's property after one dies. Probate is great for lawyers; but, it is not so good for people. Anytime one can avoid probate, the heirs will come out way ahead. Most probate administration will eat up on average about 7% of the assets passing through probate. A good estate plan will allow one to avoid probate.

Thursday, June 4, 2009

Trustworthiness of a Child

Here is a recent Wall Street article that is good food for thought on how to choose a successor Trustee.