Preserving Family Wealth

Earlier this month, the Wall Street Journal published its first edition of a new magazine called: WSJ.Money. The magazine is a helpful resource that addresses wealth planning for families. I read some of the articles with much interest, because my practice is heavily involved in advising families regarding the transfer of wealth and the retention of wealth from one generation to the next. The new magazine included a short article regarding perpetual trusts or dynasty trusts, which I have drafted for numerous families to help preserve and control wealth after death. While the idea of a trust lasting into perpetuity is a bit difficult to grasp, the same format can be used for long-term trusts, and if the trust is drafted appropriately, it can provide each generation with flexible options regarding possible termination of the trust.

What was most interesting to me was the magazine’s focus on the inability of many wealthy families to preserve wealth from one generation to the next. Recently, I have seen two figures regarding the total wealth of American families. One figure estimates the total wealth at $64.8 trillion. Another source represented the total wealth at just over $63 trillion. Unfortunately, when this wealth transfers down from one generation to the next, the younger generation has a very difficult time preserving the wealth. Often, the wealth is wasted on lavish living and child-like pursuits or hobbies. It is my goal as a planner to help families preserve the wealth and not have it slip through the fingers of their descendants.

It is estimated that $7.6 trillion will be inherited by the Baby Boomers during their lifetimes. This is a significant amount of wealth, and many Baby Boomers will inherit wealth that is simply added to existing wealth which they generated during their lifetimes. It is critical that appropriate estate planning and financial planning be used to preserve this wealth so that it is not wasted through prodigality. The greatest means of preserving and controlling wealth is done through family instruction and the use of effectively drafted trusts. Families must have open dialogue between the older generations and the younger generations. If there are relationship problems or lack of communication, the added wealth will only increase the problems. Families need to prepare their descendants for the receipt of inheritance. Americans need to take the time now to adequately plan and inform their descendants of the transfer of this wealth. Time is of the essence, and your descendants’ livelihood may depend upon it. Leave a legacy—not a mess.

Long-Term Care Changes

The long-term care industry is becoming increasingly disrupted. Last weekend in the Wall Street Journal, an article appeared addressing the affordability of long-term care. As many have learned, the cost of long-term care insurance has skyrocketed, and many insurance companies that previously offered the product have exited from the market place.

Recently, Genworth Financial, which is the largest seller of long-term care insurance in the United States, declared that it would stop writing new individual long-term care policies in the State of California. The company’s withdrawal from the State of California may portend Genworth’s future action in other states. It is becoming increasingly difficult for families to address the cost of skilled-nursing care or other long-term care facilities. In Wisconsin, cost of a skilled-nursing home can exceed $300.00 per day. In fact, at one of the nursing homes in Janesville, Wisconsin, the cost does exceed $300.00 per day, depending upon the needs of the patient. In addition, the Medicaid system in the United States is becoming excessively drawn upon to cover the long-term care costs of millions of aging Americans. While the idea of government support is useful, the extent of the support is beginning to drain the federal budget. As the Baby Boomers increase in age, we will only see an even larger scope of Medicaid applicants.

It is never too early to consider how you will address the cost of long-term care. While my firm does not sell the insurance product, I can provide you information on long-term care insurance alternatives and options. The State of Wisconsin has also published a comprehensive report, which can be found at oci.wi.gov/pub_list/pi-047.pdf. The report provides detailed information on long-term care insurance policies and other aspects of the long-term care industry.

Permanent Tax Law. Are you serious?

Obviously, President Obama still needs to sign the fiscal cliff bill that passed the Senate and House, but assuming he does so, our country’s tax law just became much more predictable. Sometimes, even legislators surprise me. As everyone knows, congress passed legislation to permanently extend the majority of provisions originally enacted under the Bush Administration by virtue of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Amazingly, these are “permanent” extensions. In 2010, congress extended the tax provisions for two years by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Now, congress has nearly done the unthinkable. We now have fixed tax law. We can plan. We can forecast. We can sleep.

As the fiscal cliff drew closer, estate planning attorneys from around the country were scurrying with their clients to move money out of clients’ estates. The fear of being subject to a $1 million estate tax exemption was unthinkable to many, especially older clients with assets between $1 million and $5 million. I tend to believe that more money was transferred from one generation to the next in 2012 than in any other year in history. In fact, if we could see numbers, I suspect the month of December may have surpassed any other single month in history.

Fortunately, the new legislation provides us with permanent gift tax, estate tax, and generation-skipping transfer tax law. This is a tremendous relief from a planning perspective. The new law repeals the sunset provisions of Title IX of EGTRRA and section 304 of the Job Creation Act of 2010. The federal estate tax applicable exclusion amount and generation-skipping transfer tax exemption will remain $5.12 million per person in 2013. In addition, the current index for inflation will remain in place moving forward. Due to the inflationary index, the exemption will grow each year. It is possible that the 2013 amount of $5.12 may be increased slightly, but I have not seen any figures yet. The only change relates to the actual estate tax rate. In 2012, if a decedent’s estate exceeded $5.12 million, his or her estate was subject to tax at 35% on all amounts above $5.12 million. Beginning in 2013, the tax rate will be 40%. This is the result of a compromise between Republicans and Democrats. The Republicans retained the higher exemption amounts, but the Democrats gained a higher tax rate.

The lifetime gift tax exemption of $5.12 million will remain in place subject to the same inflationary index. This is also pleasant news, because the estate tax, gift tax, and generation-skipping transfer tax exemptions will remain unified. This unification creates simpler planning. For 2013, the federal gift tax annual exclusion has been increased to $14,000 per donee. Last year, the exclusion amount was $13,000, but the inflationary index made the amount increase to $14,000 for 2013.

Serving as a Personal Representative or Executor

Recently, I was interviewed by an author regarding the obligations and responsibilities imposed upon a personal representative, administrator, or executor of an estate.  The article was published by the Credit Union National Association, Inc.  You may read the article by clicking on this link:  http://hffo.cuna.org/download/3161_turningpoint.pdf

New Tax Proposed for Inherited IRAs

Senator Max Baucus, who is the chairman of the Senate Finance Committee, has proposed a new tax law provision that would require all persons inheriting assets held in an Individual Retirement Account, such as a 401(k) or a traditional IRA, to remove all assets from the accounts within five years and pay the income tax on the accounts. Currently, the Internal Revenue Code permits beneficiaries to stretch out the distribution of the retirement account assets over the life expectancy of the designated beneficiary. For example, a ten-year-old beneficiary could stretch out the required minimum distributions over a period of seventy-three years.

The logic of Senator Baucus is that Individual Retirement Accounts are designed for retirement and not inheritance. Senator Baucus’ proposal was attached to the Highway Investment, Job Creation and Economic Growth Act of 2012. However, it was removed in Committee. Even though the proposal was removed from the Act, Senator Baucus has indicated strongly that he does want to attach it to a future bill.

The impact of this legislation would be significant on estate planning for several families. In addition, the tax impact on beneficiaries inheriting IRAs would be significant. The proposed rule would not apply to surviving spouses and other specific classes of beneficiaries, including, children with special needs.

While recently, this legislative proposal appears dead for the time being, the idea could easily come up again as Congress seeks diligently for revenue increases to address the daunting federal deficit.

Long-Term Industry Continues to Change

The Long-Term Care Insurance market has experienced numerous changes over the last couple years. A few major companies have announced that they will discontinue selling long-term care policies. Among this group of insurers are Prudential Financial, Unum Group and Met Life. According to information that I follow, 10 out of the top 20 insurance companies have exited the long-term care market in the last five years.

Over the past several months, I have followed the changes to the long-term care industry. During this time, I kept thinking about John Hancock and wondering what this company would do to handle the rising out-flow of long-term care benefits. For the companies that have remained in the long-term care business, rate increases are becoming the norm and this now includes John Hancock. According to Roy Anderson, John Hancock’s Vice President of Corporate Communications, “The long-term care industry is still young, and only now is seeing actual usage data which indicate the need for rate increases.” Corresponding with this announcement, the Chicago Sun Times recently published a story about a couple in Illinois facing a 90% increase to their long-term care premium. Click on link to view full article: http://www.suntimes.com/business/savage/11378009-452/how-is-a-90-long-term-care-rate-hike-ok.html. The Star-Tribune in Minnesota recently reported a similar story.  Click on the following link: http://www.startribune.com/business/yourmoney/143267316.html?source=error.

Hopefully, this information helps you assist your clients with long-term care decisions and gives you insight into this volatile piece of the insurance market. I question whether any company can really make money in the long-term care market. With costs rising significantly, the option of long-term care insurance may become too difficult for people to stomach.

Steve Jobs Died

As nearly the entire world knows by now, Steve Jobs, the founder of Apple died on Wednesday evening. He and Steve Wozniak were the founders of Apple. Essentially, rising from the ashes as an adopted child, Steve Jobs was responsible for establishing one of, if not the most, iconic brands ever. After hearing of Steve Job’s death, my mind shifts to estate planning.

His worth is estimated to be $7 billion. Quite likely, a vast majority of his wealth is a heavy concentration of Apple common stock. This morning I contemplated the following:

1. His estate will receive a step-up in basis under section 1014 of the Internal Revenue Code based upon the Hi/Low average of the trading price for Apple common stock on October 5, 2011. This is a tremendous benefit because Apple stock is very near an all-time high. The stock closed at $378.25. His new basis per share is $378.68. I also thought about the fact that he died in the evening. Perhaps, if he had died while the market was still open, the stock may have dropped in price causing his estate to obtain a lesser step-up in cost basis.

2. I then considered Steve Job’s family. He left a wife and four children. What type of estate plan did he create, if any? If he did extensive planning, who was his attorney. How does a multi-billionaire go about choosing an estate planning attorney? What types of trusts did he create? Does he have a family foundation? Will monies be contributed to the family foundation upon Steve Job’s death, or did he simply leave all assets to his wife in various trusts? If he did leave assets to his wife, is a motivation his partial reliance upon Congress ultimately eliminating the estate tax, which would result in his children inheriting his wealth transfer tax free?

3. Then I thought about the preparation of his estate tax return. Some professional tax attorney or CPA has the utmost privilege of preparing his estate tax return. Who is it? How is this person selected? Also, has he been aggressively gifting through use of GRATs and other freeze techniques since learning of his cancer diagnosis?

The above are just a few of my thoughts. Like any other family facing the death of a loved one, the family of Steve Jobs must now cope with a variety of financial, legal and tax matters. Hopefully, Steve Jobs was amply prepared.