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:
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:
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.
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:
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.
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 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.
In a prior post, we discussed how property is classified between "Marital Separate Property" and "Marital Partnership Property" ("MPP") in Hawaii during a divorce. In this post, we will review how MPP is categorized and distributed.
In Hawaii, it is important to note that Hawaii Revised Statutes Section 580-47(a) affords the family court wide discretion when dividing MPP. The Hawaii Supreme Court has espoused using business partnership principles as guidance when divvying up MPP and, therefore, treats a marriage like a business partnership. While the Hawaii Supreme Court has recognized that "there is no fixed rule regarding property division other than what is provided in Hawaii Revised Statutes Section 580-47", the family court may use something called the Marital Partnership Model, which is based on the Hawaii Uniform Partnership Act, as guidance.
As a result, MPP in a divorce is placed into one of five categories and where a piece of property is placed will generally determine how the property is ultimately distributed. Remember, these are only general guidelines and there is no guarantee of a 50/50 split. The court has the discretion and equitable authority to divide MPP as it sees fit. The following are the categories established by case law in Hawaii:
Category 1: The net market value [NMV], plus or minus, of all property separately owned by one spouse on the date of marriage, but excluding the NMV attributable to property that is subsequently legally gifted by the owner to the other spouse, to both spouses, or a third party.
What this means: Hopefully, 100% of premarital property owned by each spouse will be returned to the respective parties. The NMV is determined at the date of marriage.
Category 2: The increase in the NMV of all property whose NMV on the date of marriage is included in Category 1 and that the owner separately owns continuously from the date of marriage to the date of the conclusion of the evidentiary part of the trial [DOCOEPOT].
What this means: Appreciation from all Category 1 property will likely be divided between the two parties with a 50% cap for non-owner spouse. NMV determined at date of divorce.
Category 3: The date of acquisition NMV, plus or minus, of property separately acquired by gift or inheritance during the marriage but excluding the NMV attributable to property that is subsequently legally gifted by the owner to the other spouse, to both spouses, or to a third party.
What this means: Hopefully, 100% of gifts and inheritances acquired during marriage that weren't separated are distributed to back to the owner-spouse. NMV is date of acquisition.
Category 4: The increase in the NMV of all property whose NMV on the date of acquisition during the marriage is included in Category 3 and that the owner separately owns continuously from the date of acquisition to the DOCOEPOT.
What this means: Appreciation of Category 3 property will likely be divided between the two parties with a 50% cap for the non-owner spouse. NMV is determined at the date of divorce.
Category 5: The difference between the NMVs, plus or minus, of all property owned by one or both of the spouses on the DOCOEPOT minus the NMVs, plus or minus, includable in categories 1,2, 3, and 4.
What this means: This is basically the catch-all category where the "leftover" property goes. Usually this includes joint marital property and all jointly and separately owned property purchased with marital funds or resulting from marital efforts.
Categories 1 and 3 are considered the parties' "capital contributions" to the marriage/partnership and according to partnership law, are likely to be returned to the respective parties. Categories 2 and 4 are "during the marriage increase in NMVs of Categories 1 and 3 properties" and are considered "partnership profits" to be generally shared equally.
The Supreme Court of Hawaii has stated that "if there is no agreement between the husband and wife defining the respective property interests, partnership principles dictate equal division of the marital estate where the only facts proved are the marriage itself and the existence of jointly owned property."
Having a valid premarital or post-nuptial agreement can help protect each parties' personal assets (and their appreciation during the marriage) by qualifying them as Marital Separate Property and also provide a framework for how MPP will be divided and distributed in event of a divorce.
Though statistics vary, it is generally thought that around 30-40% of marriages in the U.S. end in divorce. Obviously people don't get married with the goal of legally separating in the future, it is a possibility that should be considered. For those who are already married or couples contemplating marriage, understanding how property is divided and distributed in a divorce in Hawaii is an integral part of estate planning.
In this post, we will review how property is categorized and divided by the court during a divorce. In Hussey v. Hussey (1994), the Hawaii Intermediate Court of Appeals provided three classifications of property, which are as follows:
Premarital Separate Property: This is property owned by each spouse prior to their marriage/cohabitation. When two people marry, this property becomes either "Marital Separate Property" or "Marital Partnership Property".
Marital Separate Property: This property is owned by one or both of the spouses at the time of divorce and can be described as follows.
A. All property that was excluded from the marital partnership by an agreement in conformity with the Hawaii Uniform Premarital Agreement Act.
B. All property that was excluded from the marital partnership by a valid contract, such as a post-nuptial agreement.
C. All property that...
1. Was acquired by the spouse-owner during the marriage by gift or inheritance,
2. Was expressly classified by the donee/heir-spouse-owner as his or her separate property; AND
3. After acquisition, was maintained by itself and/or sources other than one or both of the spouses and funded by sources other than marital partnership income or property.
Marital Partnership Property: All property that is not Marital Separate Property.
These classifications are important to understand because they are the starting point in determining what property is available to be divided between the spouses. Marital Partnership Property is the property is available to be divided and distributed between the spouses at the discretion of the court.
On the other hand, Marital Separate Property cannot be distributed to the non-owner spouse or used to "offset" any award of Marital Partnership Property to the other spouse. It has, in effect, been excluded from the marital partnership. However, the court may take into consideration the amount of Marital Separate Property each spouse has and "alter" the final distribution of the Marital Partnership Property based on the "respective separate conditions of the spouses." This is within the court's discretion and equitable powers.
For soon-to-be wed or married couples, understanding how property is classified in divorce proceedings highlights the importance of having a premarital agreement or post-nuptial agreement so that Marital Separate Property is clearly defined.
For gifts and inheritances to be classified as Marital Separate Property all the above-mentioned conditions must be met. If a spouse does not expressly state the gift or inheritance is separate property or uses marital assets or efforts to maintain the gift or inheritance, that gift or inheritance will be likely be classified as Marital Partnership Property and divided accordingly.
HB 2623 amends Hawaii Revised Statutes Section 509-2 and extends Tenancy by the Entirety Creditor Protection to Trusts in Hawaii
Among the many bills that were considered and passed in the 2012 Hawaii legislative session was a law that would allow spouses and reciprocal beneficiaries (RBs) to place real property in a trust AND be extended the creditor protection afforded by holding property as tenants by the entirety. Thus, spouses and RBs may preserve their creditor protection while taking advantage of the benefits of placing their real property into a trust.
For those unfamiliar with the concept of tenancy by the entirety, it is a form of concurrent property ownership. The other types are tenants in common and joint tenancy. Tenancy by the entirety is a form of ownership that is available only to spouses or reciprocal beneficiaries. The main benefit of holding property as tenants by the entirety is that a creditor of an individual spouse or RB cannot attach and sell the real property interest of the debtor spouse. However, this creditor protection is not available against a couple's joint creditors.
In the 2012 legislative session, HB 2623 added a few new subsections to Hawaii Revised Statutes Section 509-2. Prior to this bill passing and being signed into law, two people who held real property as tenants by the entirety and wanted to create separate trusts would need to break the tenancy by the entirety ownership and convey their interests into their respective trusts as tenants in common, thereby losing the creditor protection. However, HB 2623 now states that real property held by spouses or RBs in equal shares as tenants in common in their respective trusts shall be treated as if the real property (or its proceeds) are held as tenants by the entirety.
These new additions to Hawaii Revised Statutes Section 509-2 states that this creditor protection shall continue even after first of the couple passes away. This is also true if a court in any proper jurisdiction holds a trust to be invalid while the couple is still alive. Of course, if spouses divorce or reciprocal beneficiaries terminate their legal relationship, the tenancy by the entirety is severed and the real property will be held as tenants in common.
To gain the creditor protection for real property held in trust, certain requirements must be met and specific language needs to be inserted into the conveyance deed. In general, holding real property in tenancy by the entirety is preferable, but of course, it depends on the situation and as well as future considerations. Consult with an attorney to explore whether this extension of tenancy by the entirety for Hawaii trusts is right for you.
So you have a new baby on the way or perhaps already have several little ones underfoot. There are a multitude of things that you're likely worrying about as new or recent parents and estate planning is probably not one of them. However, discussing and making a few key decisions on the outset can help protect your family and children's interests in the years to come.
Nominating a guardian and conservator via a Will: A guardian and conservator are necessary for minor children because they cannot legally make decisions for themselves or own property in their individual name. In the event a minor child becomes orphaned and no guardian and conservator has been nominated by the deceased parents, then it is possible that relatives (e.g. the child's maternal and paternal grandparents or uncles and aunties) may engage in a lengthy legal battle to decide who will be legally responsible for the child and control the child's inheritance. This can be avoided by having the parents nominate a guardian and conservator for their minor children through a Will. Hawaii law also allows parents to make a nomination via a "signed writing", but it is safer to nominate a guardian and conservator through a properly drafted and signed Will. However, if the minor child is at least 14 years old, the minor may nominate her own guardian and conservator. The court will strongly consider the minor child's preference and determine whether the child's nomination is the best interests of the child.
Choosing who will be a guardian and conservator for a child is a difficult decisions and can sometimes hurt the feelings of those who weren't selected. However, this isn't a valid reason to not take action. Even if new parents are not completely certain about their choices for a guardian and conservator, it is better to have those selections initially memorialized in a Will. Providing some guidance on the parents' preferences is better than having none at all, which is something that could lead to a Hawaii court making inappropriate appointments. Of course, circumstances change and parents may reconsider their selections, but they can always revise their Wills at a later date to reflect those changes.
Creating a Trust: At the very minimum, new parents should have Wills drafted that nominate a guardian and conservator for their minor children as discussed above. However, creating and funding a Trust will allow parents to exert greater control over how and when property will be distributed to their children. For example, the trust terms may state that the trustee should partial distributions to the child when he reaches 25 years of age, 30 years of age and 35 years of age. This is in contrast to the legal requirement that a custodian under the Hawaii Uniform Transfers to Minors Act or a court-appointed conservator relinquish control of the property when the child reaches either 18 or 21 years of age. And since a child may lack the maturity or money management skills to handle property at 18 or 21, a trust can leave the property in the hands of a capable trustee to be managed and also extend the distribution timeline.
Trusts become an even more important tool if the minor children have special needs or disabilities. A Trust can be used to ensure that a child will continue to receive public assistance and medical benefits and also provide proper management of any property or assets that they may receive.
Life insurance: Life insurance is a powerful estate planning tool that should not be overlooked by new parents. At the most basic level, life insurance proceeds can be used as income replacement in the event a working parent passes away. Stay-at-home parents should also purchase life insurance to help cover childcare costs if they pass away. The insurance proceeds can help sustain a family as everyone recovers and plans for the future. However, in the best case scenario where there isn't a need for a death payout, life insurance can also be a great investment vehicle for a family since whole and universal life insurance policies can build cash value and earn interest over time. Parents of all ages and income levels should strongly consider purchasing life insurance policies that are within their individual budget and a good fit for their current family situations. Furthermore, naming a Trust as a beneficiary of a life insurance policy will allow the proceeds to be managed and distributed to your spouse and children according to your wishes.
Gifting property is a valuable estate planning tool, especially for those who wish to reduce their taxable estate. In this post, we'll review some of the basics of gifting and the federal gift tax. The federal government taxes gifts to prevent people from transferring all their wealth and money tax-free before they die, thereby escaping any estate taxes.
What is a gift? A gift is any transfer of property, made directly or indirectly, from one individual to another where the individual receives nothing or less than full market value in return. Furthermore, a gift must be a "present interest", which is "an unrestricted right to the immediate use, possession, or enjoyment of property or income from property." Examples of gifts may be selling something at less than full market value or making an interest-free/reduced interest loan. Generally speaking, any gift is a taxable gift. However, there are exceptions such as:
Are gifts considered income by the donee? Generally speaking, no. The donee does not report any gifts received on his income tax return. However, any income produced by the gift after it is received by the donee is considered earned income and must be reported.
What is the annual gift tax exclusion? The annual gift tax exclusion is the amount of property a donor can transfer to an individual that will not require the donor to pay tax on the gift. In 2012, the exclusion amount is $13,000. You can apply the exclusion to each donee. For example, if you have five children, you can make separate $13,000 gifts to each of them.
What is gift splitting? For married couples, a gift made by one spouse can by considered made by both spouses equally. To split a gift, each spouse must file separate gift tax returns to show that gift-splitting was elected. For example, if the wife gave $26,000 of her own funds to her niece, the husband can elect to split the gift on his tax return so that the gift is considered to be $13,000 from the wife and $13,000 from the husband.
What is the basis of a gift? If a gift is not cash, generally speaking, the donor's holding period and basis will be assumed by the donee. Therefore, the donor should provide any and all information associated with the non-cash gift (e.g. date property was acquired, adjusted cost basis and fair market value at time of transfer) to the donee so the donee will know what taxes may be due if the property is later sold by the donee.
Does Hawaii impose a state gift tax? Simply put, nope!
What are the benefits of making gifts? First, it reduces your taxable estate. The current federal estate tax exemption is $5.12 million, but may be reduced depending on what Congress does, if anything, in the coming months. Making gifts can be a way to reduce your estate to below the exemption amount so that no estate tax will be incurred. Second, it shifts potential taxable income to an individual who may be in a lower tax bracket then yourself.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
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