I came across this informative, but heart-wrenching article by ProPublica reporter Charles Ornstein titled "A Mother's Death Tested Reporter's Thinking About End-Of Life Care". We've discussed the importance of having an advance health care directive that memorializes your end-of-life decisions in the event you aren't able to communicate them yourself. But even though your instructions are clear, your healthcare agent still has to make the decision of when to cease life support. As Mr. Ornstein attests, the correct timing can sometimes be difficult to determine. The agent will likely be relying on physician's opinions about the state of the patient and the chances of recuperation. But doctors are not infallible. There are countless stories of people making improbable recoveries that fly in the face of a doctor's prognosis. Still, additional procedures must be weighed against the likelihood of success and the patient's wishes. So what is the agent and family members to do? In my opinion, Mr. Ornstein took the right approach. He, his sister and father decided to be thorough and take their time. They sought medical opinions from additional professionals and had other tests done. After all options were explored and discussed, they made their decision. Having an advance health care directive is half the battle. The other half is relying on your healthcare agent to gather and digest as much information as possible to make levelheaded, thoughtful decisions in a situation fraught with emotion. Therefore, choose your healthcare agent wisely and do not be afraid to discuss your end-of-life desires with your agent and successor agents.
So the fiscal cliff disaster has been averted and all is well...until the potential calamity brought about by the sequestration scheduled in March. But until we reach the next cliff, let's review several of the important estate planning developments brought to us by the American Taxpayer Relief Act of 2012.
Estate tax exemption. From 2001 to 2012, the estate tax exemption steadily increased from $675,000 to $5.12 million (with the aberration of no estate tax in 2010). However, without a last minute deal, the estate tax exemption would have reverted to the Clinton-era exemption amount of $1 million. Not even the Democrats, who were proposing a $3.5 million exemption, would have wanted that. Chalk up a minor victory for the Republicans who got the estate tax exemption to remain at $5 million. After adjusting for inflation, the amount increases to $5.25 million for 2013. This amount is "permanent", meaning there is no sunset date and the exemption is good for the foreseeable future...until Congress changes it again.
Estate tax rate. No fiscal deal would've resulted in the top estate tax rate going from 35% to 55%. Congress met in the middle and agreed to a 40% top tax rate for amounts in excess of the estate tax exemption.
Portability. Under the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, portability was created to give the surviving spouse the ability to use the deceased spouse's unused estate tax exclusion amount. For example, if a husband dies and uses only $1 million of his $5 million exemption, the surviving spouse can elect to take the deceased spouse's remaining $4 million unused exemption and tack it on to her own $5 million exemption for a $9 million estate tax exemption. The fiscal cliff deal makes portability "permanent". In order to make this portability election, the personal representative of the deceased spouse's estate must file an estate tax return, even if no estate tax is due.
Investment income tax. For individuals earning $200,000 or more or couples making $250,000 or more, an additional 3.8% tax on net investment income will be levied. Net investment income includes a) interest, dividends, annuities, royalties and rents, b) gains attributable to the disposition of property and c) income and gains from a trade or business, but only if such trade or business is a passive activity with respect to the taxpayer or involves trading in financial instruments or commodities.
Individuals have to pay the tax on the lesser of the net investment income or the excess of their modified adjusted gross income. For estates and trusts, the tax applies to the lesser of undistributed net investment income or the the excess of adjusted gross income over the highest income tax bracket for estates and trust, which is $11,950 in 2013.
We’ve previously discussed the types of property ownership, but in this post I’d like to talk about how the value of joint property is included (or not) in a person’s estate at death.
Generally speaking, if a decedent owned property as joint tenants, the entire value of the property is included in his estate. There are a couple exceptions to this rule.
Contribution. The amount included is limited by the contribution made by the deceased joint tenant. Thus, if it can be shown that a joint tenant made a contribution to the principal of the property, then only that percentage of the property’s value will be included in the decedent’s estate. For example, if Abel and Cain each contributed $1,000 to buy some property to buy $2,000 worth of stock. The stock appreciates and is worth $5,000 at Abel’s untimely death. Only 50% of the value of that property ($2,500) will be included in Abel’s estate. This concept may be better understood with this equation:
Contribution by decedent/Total contribution by all tenants x value of joint property = Amount included in decedent’s estate
Any consideration by the surviving co-tenant does not include amounts that were originally gifted to the surviving co-tenant by the decedent. For example, Abel gave Cain $5,000 and Cain deposited it into an account and added Abel as a joint tenant. If Abel dies before Cain, the entire $5,000 would be included in Abel’s estate.
Tenancy by the Entirety (husband and wife as joint tenants): When two people are married and hold property either as joint tenants or as tenants by the entirety, exactly one-half of the value of the property is included in the decedent’s estate. The amount contributed by either spouse does not matter.
It's difficult to accurately capture the scope of financial abuse suffered by the elderly because it's often underreported. However, it's estimated that every year over 7 million people over the age of 65 fall victim to financial scams. And the amount pilfered? Nearly $3 billion annually. Simply staggering. But what makes the elderly more susceptible to scams that, to a reasonable person, are obviously fraudulent? An NPR article titled "Why It's Easier to Scam the Elderly", explains that research has recently suggested that a reason may be that senior citizens may have a harder time reading facial cues that are associated with untrustworthiness. The elderly study subjects also underwent brain scans that revealed they had less activity in the region of the brain that processes risk and danger. Another theory is that the elderly had a "positivity bias", meaning that they make a greater effort to look on the bright side of life and, therefore, may believe that outlandish claims could be true. Whatever the reason, the question remains: How do we help prevent our parents and grandparents from falling victim to unscrupulous people? Unfortunately, there is no magic answer. We can't control a person's actions and it'd be unreasonable to have our loved ones under 24/7 surveillance. Protection lies in being vigilant, remaining involved in our loved one's life, and minimizing risk. A recent AARP survey found that elderly victims of financial scams put themselves in sales situations or open physical junk mail more often than the general population. In other words, they are their own worse enemies. Therefore, we can, as caretakers, do the following to help reduce the opportunities for scams:
Strangers are not the only perpetrators of elder financial abuse. Sadly, exploitation from friends and family members were the second most reported incidents. If you suspect a senior citizen is or has been a victim of financial abuse, call 911 to report the crime to police, call the prosecutor's office (phone number 768-6452) and call Adult Protective Services at the following numbers: Oahu................................................832-5115 Kauai................................................241-3337 Maui/Lanai......................................243-5151 Molokai............................................553-1763 Kau/Kona/Kohala/Kamuela............327-6280 Hilo/Hamakua/Puna........................933-8820 Make the case known to the police, prosecutor's and Adult Protective Services. Getting a record of the abuse into the system is the first step. Though they're at the back end of the process, the prosecutor's office will help guide the case along and coordinate with the police and Adult Protective Services. You can learn more about financial elder abuse and elder abuse in general at the Honolulu Prosecuting Attorney's Elder Abuse Unit webpage. We all need to make an effort and take responsibility to help protect our kupuna.
- Register our loved one's phone number with the Do No Call Registry. Remind them not to answer calls from unknown numbers.
- Sign up with the Direct Marketing Association to decrease the amount of junk mail. Throw out the junk mail that does make it through.
- Sort through incoming mail to spot any suspicious looking mail.
- Check their credit report. Everyone is entitled to one free annual credit report.
- Don't allow your loved one to attend "free lunch/dinner" seminars that promise great investment returns. They will often be subject to high-pressure sales tactics.
Administering a decedent's estate can be a confusing and convoluted process. There are the funeral arrangements, various bills that may need to be paid, and the transferring of property to the decedent's heirs or devisees. A critical part of trust and estate administration in Hawaii is knowing the priority of claims. In other words, which bills need to be paid first? How should the decedent's assets be allocated? This post briefly summarizes the priority of claims against a decedent's estate.
- Surviving spouse's elective share.
- Homestead allowance of $15,000 paid to family.
- Family allowance not to exceed the lump sum of $18,000 or month installments of $1,500 for a period of one year.
- Exempt property of up to $10,000 paid to family.
- Cost and expenses of estate administration (personal representative fees, attorneys' fees, court costs, etc.).
- Reasonable funeral expenses including any claim by the Department of Human Services under Hawaii Revised Statutes Section 346-15.
- Debt and taxes with preference under federal law.
- Reasonable and necessary medical and hospital expenses of the last illness of the decedent, including compensation of persons attending the decedent and any claim by the Department of Human Services for expenses of the last illness of the decedent.
- Debt and taxes with preference under state law.
- Any other claim against the estate pursuant to Hawaii Revised Statutes Section 346-37.
- All other claims.
We've previously discussed the concepts of Marital Separate Property and Marital Partnership Property. In this post, we'll review the basics of a prenuptial or premarital agreement and how it affects estate planning. For the purposes of this post, "prenupital" and "premarital" are used interchangeably. In Hawaii, premarital agreements are governed by the Hawaii Uniform Premarital Agreement Act, which was enacted in 1987 and codified under Hawaii Revised Statutes Chapter 572D. The following are some important points to keep in mind for prenuptial agreements:
At its most basic level, a prenuptial agreement is a contract. Therefore, a prenuptial agreement can substantively alter the rights and obligations of a party if a marriage is dissolved and when a spouse dies. Effect upon property. A prenuptial agreement can define the rights and obligations of the parties with respect to property whenever and wherever located and acquired. This usually means that the parties will designate their individual property as separate property and any joint property as martial property so that "Marital Separate Property" and "Marital Partnership Property" is clearly defined. As discussed in an earlier post, this can drastically alter property distribution in the event of a divorce, depending on the parties' financial positions prior to and after the divorce. Effect upon spousal support. A premarital agreement can modify or eliminate payment of spousal support and alimony upon divorce. Effect upon death. In Hawaii, a surviving spouse has a statutory right to claim an "elective share" of her deceased spouse's estate, which is basically a right to a percentage of the deceased spouse's estate. The "elective share" is meant to prevent a spouse from disowning the other spouse and leaving her destitute if there is an imbalance of wealth between them. A premarital agreement can eliminate a spouse's right to an "elective share". This means that the surviving spouse has no right to the deceased spouse's estate, except for what is provided in the deceased spouse's will or trust or transferred via intestate succession. Spouses will often provide for each other in their testamentary instruments, but a premarital agreement gives them the latitude to dispose of their assets without being constrained by the statutory obligations imposed by the Hawaii probate code.
- Agreement must be in writing and signed by both parties;
- Both parties should fully disclose all assets;
- Both parties should have an opportunity to consult separate and independent counsel;
- It is enforceable without consideration;
- Becomes effective upon marriage; and
- Agreement may be amended or revoked by written agreement signed by both parties.
In Hawaii, under the Uniform Probate Code, a surviving spouse has a right of election against the decedent spouse's estate. This will be explained in greater detail below, but for historical background, we will briefly discuss the related concepts of Dower and Curtesy. Up until 1977, a surviving spouse was given an automatic life estate equal to 1/3 interest in any real property owned by the decedent spouse. For men, this was known as Curtesy and for women it was referred to as Dower. Dower affected the husband's real property in that he could not convey his interest in real property without his wife signing off. The wife, on the other hand, could convey her real property without needing her husband's signature. Dower and Curtesy was replaced in 1977 by the Hawaii Uniform Probate Code. Under the UPC, the surviving spouse has the right to take an "elective share" of the augmented estate, which consists of both the decedent spouse and surviving spouse's estates. The amount of the "elective share" is determined by the length of the marriage and is set out under Hawaii Revised Statutes Section 560:2-202. Generally speaking, the augmented estate consists of the following:
a. Property owned in substance by the decedent (i.e. joint tenancy, revocable trust, etc.)
- Decedent’s probate estate;
- Value of the surviving spouse’s assets at decedent’s date of death, plus any property that would have been in the surviving spouse’s nonprobate transfers to others under Hawaii Revised Statute Section 560:2-205, had the surviving spouse been the decedent; and
- Decedent’s nonprobate transfers to others, including
b. Property in which the decedent retained the right to possession or enjoyment during his lifetime (i.e. life estates, retained income interest, etc; or
c. Property over which the decedent retained a general power of appointment. The surviving spouse's elective share is in addition to the homestead allowance, exempt property and family allowance, as were discussed in a previous post.
The rules for taking a Required Minimum Distribution ("RMD") from a traditional Individual Retirement Account ("IRA") are vast and complicated, but in this post, we'll review the basics. As a side note, Roth IRAs are not subject to lifetime RMDs.
What is a RMD? A RMD is the minimum amount of money that needs to be withdrawn from an IRA account when a person turns 70 1/2 years old. This is true even if the account holder is still working. For the first RMD, the latest it may be taken is April 1 of the year following when the person turned 70 1/2. For example, if you turned 70 1/2 in March 2013, you may delay taking your first RMD until April 2014. All subsequent RMDs must be taken by December 31, including the year the first RMD is taken. You can take more than the RMD, but consult with your financial advisor to ensure it fits your overall financial strategy. You can also take multiple distributions throughout the year, but the total must be equal to or more than the RMD by December 31.
How is it calculated? A RMD is calculated by dividing the prior December 31 balance by a life expectancy period that the IRS publishes in various tables (i.e. Joint and Last Survivor Table, Uniform Lifetime Table, and Single Life Expectancy Table). The table used depends on who the beneficiary of the account is. The IRA custodian or retirement plan administrator usually does the calculations, but the individual is ultimately responsible for the correct amount. If the amount taken is more than the RMD, the excess may not be applied to future years.
Do I pay taxes? If a RMD is subject to taxation, it is taxed at the person's ordinary income rate in the year the RMD is received. A RMD from a Roth IRA is tax-free. RMD that includes basis that was taxed previously is also not taxed upon distribution.
What if I forget or take too little? The IRA owner is responsible for taking the correct RMD every year. If he neglects to do so, the amount not withdrawn is taxed at a whopping 50% rate. The good news is that this penalty may be waived if it can be shown that the missed RMD was due to reasonable error and that reasonable steps are being taken to rectify the situation.
What if I have more than one IRA account? If a person has more than one IRA account, she must calculate the RMD for each account separately, but may withdraw the total amount from one (or more) account.
What happens to the RMDs when a person dies? In the year the IRA owner died, the RMD is the amount the decedent would have taken. The RMD for subsequent years is be based on the life of the designated beneficiary. If an IRA owner dies before she reaches 70 1/2 years old, a different set of RMD rules come into play. Generally speaking though, the entire IRA must be distributed 1) within 5 years of the IRA owner's death or 2) over the life of the beneficiary starting no later than one year after the owner's death.
The probate process in Hawaii can be onerous, time-consuming and costly. However, if the decedent's estate meets certain conditions, initiating a probate with the courts is sometimes not necessary. Hawaii law, namely Haw. Rev. Stat Section 560:3-1201, allows a decedent's next-of-kin to collect the decedent's property by affidavit. The following are the conditions that must be met for a decedent's property to be marshaled by a Collection by Affidavit:
Furthermore, Haw. Rev. Stat. Section 531-20 mandates that "every banking house, fiduciary company, agent, or trustee" must disclose the nature and kind of property being held when presented with the Collection by Affidavit. A drawback to the Collection by Affidavit method is that any next-of-kin could potentially sign an affidavit and collect the assets unbeknownst to the decedent's other relatives. Obviously, this could lead to discord and friction between the decedent's relatives. If the decedent desired the property to be given to a certain person(s), then leaving the assets to be collected by affidavit is not recommended. The Collection by Affidavit method is simple, but can also be easily abused. Banks and other financial institutions usually have their own Collection by Affidavit forms or an attorney can draft an affidavit that could encompass the assets generally. Either way, the Collection by Affidavit can be a cost-effective method to marshal a decedent's assets and a simple alternative to having to file for probate.
- The gross value of a decedent's estate is valued at $100,000 or less;
- The estate does not contain any real property interests;
- A probate has not been initiated in Hawaii;
- The person presenting the affidavit is the decedent's next-of-kin; and
- The affidavit must be notarized.
The method by which a person holds title to property in Hawaii affects how that property is distributed and taxed upon a person’s passing. Therefore, for estate planning purposes, it is important to know the differences between tenancies and understand the ramifications they may have on an estate plan. The following is a brief explanation of how title to property may be held in Hawaii.
Tenancy in Severalty: This how a single party owns property. The party’s interest is “severed” from others.
Tenancy in Common: Tenancy in Common exists where two or more parties each hold an undivided, specific interest in a property. In addition to natural persons, corporations, partnerships, trusts and estates may hold property as a tenant in common. Each party’s interest is equal to the other tenants unless otherwise specified. Furthermore, every party is entitled to possession of the entire property with the co-tenants. If no tenancy is specified, tenancy in common is the default method of holding title unless otherwise provided by law.
A tenant in common may sell or encumber her interest at any time. The new owner then becomes a tenant in common with the other existing tenants. Also, a party’s interest in the property is subject to the claims of that party’s creditors. Finally, since there is no right of survivorship between tenants in common, each party’s interest will pass to his heirs/devisees as part of his estate.
Joint Tenancy with Rights of Survivorship: Two or more natural persons may hold property as joint tenants with rights of survivorship. This means corporations, partnerships, trusts and estates may not be joint tenants. Each joint tenant holds an equal undivided interest in the property. "Right of survivorship" means that when a joint tenant dies, his interest automatically passes to and is divided equally among the remaining joint tenants. The intent to create a joint tenancy must be specified, otherwise it is assumed that the property is held as tenants in common. A joint tenant may transfer her interest without the consent of the other joint tenants, but this will sever the joint tenancy with the other joint tenants. Therefore, the holdover joint tenants will continue to hold the property jointly, while the new owner will own the property as tenant in common with the holdover joint tenants. A creditor of a joint tenant may generally satisfy his claim against the joint tenant's interest in the property.
Tenancy by the entirety: Tenancy by the entirety is only available to married couples, civil union partners and reciprocal beneficiaries. While alive, each person is considered to be the owner of the entire property. This means one party may not unilaterally convey his interest without the consent of the other. In other words, any conveyance document must be signed by both persons. As with joint tenancy, upon the death of one of the parties, the decedent’s interest passes automatically to the surviving party. Another benefit of holding property as tenants by the entirety is that a person’s creditor individually cannot use the property to satisfy individual debts. However, creditors of both parties may do so. As explained in a previous post, Hawaii law now allows a couple’s trusts to own property (as tenants in common) while retaining the tenancy by the entirety creditor protection.
As you can see, how property is held can affect the way it is transferred, distributed and controlled in the future. Therefore, careful thought should be given to the method of ownership of property in Hawaii, especially for estate planning purposes.