The Internal Revenue Service has released the Applicable Federal Rates (AFRs) for February 2017, reflecting increases over January’s rates. AFRs, which are published monthly, represent the minimum interest rates that should be charged for family loans to avoid tax complications.

Here are the rates for February 2017:

The Section 7520 interest rate for February 2017 has increased to 2.6 percent. The Section 7520 interest rate is the interest used in a common estate tax planning technique called a “grantor retained annuity trust” or “GRAT.” In general, the lower the interest rate, the more effective the transaction is for reducing estate taxes.

For more information, see the IRS’ full listing here.

Maybe you just recently signed your estate planning documents. Maybe your documents have been sitting in a drawer or firebox, sight unseen, for five or more years. Either way, a common question is: When do I need to update my estate plan?

Estate documents generally are written to provide some flexibility in case you do not have an opportunity to make changes. This is why you typically name multiple successor trustees, indicate who should inherit your assets if your original beneficiary predeceases you, or name who you want to take care of you and your affairs if you are incapacitated.

Still, while there are some changes contemplated by your estate documents, and some things you may be comfortable with even if not your primary intention, redrafting, amending or revising your documents and plan is usually preferable to relying on stale provisions when circumstances change.

If one of the following events occurs, it may be time to reconsider your estate plan:

Family reasons:

• Become engaged, married or divorced
• Add or lose a family member
• Child reaches majority
• Child or spouse develops addiction
• Family discord
• Family member needs special care or treatment

Life changes:

• Become disabled or are diagnosed with a serious or terminal illness
• Move to a new state (and, if married, move to or from a community property state)
• Plan significant travel
• Buy a home

Financial reasons:

• Receive a large inheritance or win the lottery
• Get promoted or fired
• Retire
• Start or close a business
• Decide to make a significant donation to charity

Legal reasons:

• Income tax rules change for the better or worse
• Estate, gift and GST tax rules change for the better or worse
• Government adds new restrictions or privileges

Trustee/personal representative issues:

• Meet someone new or better suited
• Trustee or representative dies or moves
• Have a falling out

The most important thing is being comfortable with your estate plan. If life events have made you question if your plan still works, please contact one of the attorneys in our Trusts & Estates group to see if changes are needed.

Retirement accounts such as IRAs, 401(k) and 403(b) plans and other qualified plans or profit-sharing plan accounts may provide an opportunity for charitable giving by offering a variety of tax benefits, depending upon the structure.

Generally, retirement assets may cause an estate tax liability for the account owner as well as income tax consequences for the estate of the owner and/or the beneficiary recipients of the account. However, when a charity is designated as the beneficiary of a retirement account, at the death of the owner there is an estate tax deduction for the value of the amount given to charity, and income tax is avoided on the distributions from the retirement account(s) to the charities.

As a result, the charities are able to fully utilize the assets unreduced by income tax or estate tax. In contrast, if the retirement account is left to an individual, the amounts received are reduced by income tax as well as possibly the estate tax. Thus, there is some incentive to name charities as the beneficiaries of retirement accounts and designate family to receive other (non-retirement-related) assets, which would not be subject to income tax when received by the individuals.

If you have questions about possibly leaving retirement account benefits to a charity, please contact a member of our Trusts and Estates Department.

An updated version of this post can be found here.

How many times have you prepared your income tax returns for the previous year, only wishing you knew then what you know now so you could go back and make more advantageous tax decisions? In most cases, you are stuck with the decisions you made before the new tax year began, even though you may not have all of the relevant tax information available to assist with those decisions until several months into the new tax year. Too bad for you, says the IRS, unless you are an estate or trust.

Under Section 663(b) of the Internal Revenue Code, any distribution by an estate or trust within the first 65 days of the tax year can be treated as having been made on the last day of the preceding tax year. For example, a distribution of $500 of trust income by the trustee to a beneficiary on Jan. 20, 2017, can be treated as having been made in either the 2017 tax year or the 2016 tax year.

In most years, the last day to make a distribution count toward the previous tax year is March 6; but in leap years like 2016, the last day is March 5. The date will also change if the 65^th day falls on a weekend, in which case it will be the next business day. The 65^th day in 2017 will be March 6.

The election to treat the distribution as being made in the previous tax year must be made by the fiduciary on a timely filed income tax return (including extensions) for the tax year to which the distribution is meant to apply. A fiduciary may make the election for only a partial amount of the distributions within the 65-day period, but once the election is made, it is irrevocable.

The main advantage of this tax rule is it may provide an opportunity for tax savings. An estate or trust pays income taxes at graduated rates similar to individuals, but under current laws the top federal income tax rate (39.6 percent) applies to income in excess of $12,400. By comparison, married couples filing jointly pay the top rate when income exceeds $466,950 (or $415,050 for single filers). In some cases, an additional 3.8 percent Medicare surtax on the net investment income of the estate or trust may apply, resulting in a total marginal tax of 43.4 percent.

To avoid paying a higher tax rate, income from the estate or trust may be distributed to a beneficiary, and the beneficiary will then pay any income tax associated with the distribution, rather than the estate or trust, at the beneficiary’s individual tax rate. For example, a beneficiary who pays income taxes at a rate of 25 percent would pay less income tax on the distribution amount than a trust already paying at the top rate of 39.6 percent (or even 43.4 percent — see our previous post regarding application of the Net Investment Income Tax). In cases of estates or trusts with large taxable income and beneficiaries in lower tax brackets, the tax savings can be significant.

State income tax consequences may also apply to distributions made from a trust or estate, and there may be limitations on the amounts of distributions a fiduciary can apply using the 65-day rule. It is recommended that you discuss all possible consequences with your tax advisor before trying to apply the rules discussed above. 

For additional information on how these rules may affect you, please contact any of the attorneys in our Trusts & Estates group.

If you are like most people, you have a clear idea about who should receive your assets upon your death. However, selecting who will be responsible for ensuring your estate plan is faithfully carried out may be more challenging. When your estate plan includes a trust that directs the distribution of your assets, the person (or entity) you choose for this important job is called a trustee. Your trustee will have the obligation to act in the best interests of your beneficiaries and to manage and protect the trust assets on their behalf.

When selecting a trustee, the complexity of your estate plan, the identity and special circumstances, if any, of your beneficiaries, the duration of your trust, and the nature and value of your assets should all be considered. You should also ask yourself a few key questions before you select your trustee:

• Does the proposed trustee have sufficient expertise and experience to do the job?

A family member might be your first thought, but think carefully about that individual’s financial knowledge and ability to commit the time and attention needed to successfully administer your trust. A trustee must be able to handle the complexities (and stress) of trust administration, whether making investment decisions or navigating family dynamics. Although a trustee can delegate certain duties (e.g. investments) to an agent, the trustee must be prudent in selecting the agent and periodically review the agent’s actions. Serving as a trustee is not a hands-off job, so make sure you choose someone who is willing and able to be actively engaged in the trust’s administration.

• Does the proposed trustee have the appropriate demeanor to do the job?

Trustees must often make difficult choices. Choosing someone with good judgment and the resolve to make and defend decisions in the face of potential opposition from beneficiaries is extremely important. By the same token, trustees are often called upon to exercise discretion in making distributions or other decisions, so selecting a trustee who will thoughtfully carry out your intent and act impartially concerning your beneficiaries is crucial.

• Would it be more prudent to select a corporate trustee to do the job?

If your estate plan involves complex assets or your beneficiaries are prone to squabbles, a corporate trustee might be a smart choice. Corporate trustees offer professional services concerning investments, accounting and tax matters and are considered experts in trust administration. A corporate trustee is also a neutral party who can minimize or eliminate disputes among beneficiaries or serve as a liaison between fighting family members should a dispute develop.

Taking the time to think objectively about the characteristics of your estate plan, your beneficiaries and your proposed trustee should help you select the right person (or entity) for the trustee’s job. If you would like to discuss selecting or changing a trustee as part of your estate planning, please contact one of the attorneys in our Trusts & Estates Practice Group.

Listen, I get this. Time permitting, I like to do things myself, and in the information age, you can learn how to do almost anything on the internet. But should you try to draft your own estate plan or use a website to do it for you? I asked myself that question and gave it a whirl. Based on my experience, here are four key reasons I don’t recommend it.

1. You are not talking to an attorney

In a typical estate planning engagement with my law firm, the first time you meet with us, we talk about your personal situation, your family, your finances and your goals. While some of that conversation may seem irrelevant to you, the attorney is listening for issues, some of which you may not even realize are issues that can be addressed in an estate plan. Our education, and even more importantly, our experience in seeing how certain estate plans have been implemented enables us to recommend the best estate plan for you and your family.

If you choose to do your estate plan on the internet, you are not going to talk to an attorney or get any legal advice, at least for the base price. Even if you do decide to pay more to talk to an attorney connected to you by the website, you will likely not be talking to someone with the same level of experience you can get at a law firm.

2. You will end up with a very basic will

The form I completed to do a will on the internet asked for only very basic information so that it could provide a very basic output. The program could not handle even the slightest complexity. For example, I wanted to create a lifetime trust for my beneficiaries in order to provide for asset and divorce protection. In Missouri and many other states, you can even name the beneficiary as the sole trustee of such a trust and maintain those benefits. Unfortunately, using the online form to create my will, I was unable to designate a beneficiary to become a trustee of his or her trust at a certain age. This inability to handle a slight complexity was a deal-killer for me.

This is just one example, but I can imagine many others. No two well-designed estate plans are exactly the same, but the internet programs are not designed to handle nuances or complexities.

3. You won’t get personalized service

While this point ties into not being able to talk to an attorney, it’s not just that. You don’t really get to talk to anyone that can explain your document or, for example, how you are supposed to validly sign it. The requirements for signing a valid will are fairly antiquated, and they are not necessarily straightforward. Without some specific instructions and advice, the chances of your will being invalid simply because it was signed incorrectly increase.

4. You get (no more than) what you pay for

Even a basic estate plan should include a will, a durable power of attorney for financial matters, and medical directive and durable power of attorney for health care. On the internet, you are going to pay for each document separately. Further, since you are probably not going to get any legal advice or explanation as to what your documents do, you may not even know about a document you need but don’t get.

If you are considering preparing or updating your estate plan, please contact one of our estate planning attorneys to discuss the options available for you so you get what you want and expect, not what the internet wants you to have.

After months of emotional and financial turmoil, a finalized divorce can be a welcome end to a stressful time. Now what? Before you move on with your life, make sure you truly sever all financial ties to your former spouse by updating, or even creating, your estate plan. Failure to do so can lead to unintended beneficiaries such as your former spouse claiming your assets at your death, resulting in costly litigation that can drag on for years after you die.

Any good estate plan involves either a will alone, or a will and trust that work together, to dispose of assets, as well as durable powers of attorney that name someone to make financial and medical decisions in the event of your incapacity or disability. Because most married couples name each other to receive and manage their estates at death, each of these documents should be reviewed and updated after a divorce. Removal of a former spouse as a beneficiary and fiduciary (personal representative, trustee or agent to act for you) will make your wishes absolutely clear and ensure your former spouse will not benefit from your estate after your death at the expense of your intended beneficiaries.

Reviewing and updating your beneficiary designations is also extremely important. All life insurance policies, retirement accounts, annuities, pension benefits and any other assets that involve an automatic transfer to a beneficiary at your death, including “transfer on death” or “pay on death” designations, should be revisited and updated accordingly. These “non-probate” transfers are not governed by your will or trust. Rather, the beneficiary forms on file with the insurance company or financial institution, in most states, dictate who will receive the assets at your death.

This is especially true if your insurance, retirement or pension benefits are provided through your employer. These employer-based plan benefits are governed by federal law, which generally states that the documents on file with the plan administrator at death must be followed. In other words, if you get divorced and do not update your beneficiary designations to remove your former spouse as your beneficiary, your former spouse may very likely be paid your benefits at your death. This is a result most divorced couples would rather avoid.

If you are considering, are in the midst of or have already gone through a divorce, the attorneys in our Trusts & Estates group can assist with questions regarding your estate planning. A comprehensive review and update of your estate plan, including your beneficiary designations, will give you peace of mind and help ensure your intended beneficiaries are not pulled into expensive litigation by your ex-spouse after you die.

People often ask whether a revocable trust — one that can be revoked or amended — can help save taxes. Sometimes people even tell me directly they need a revocable trust to help them save taxes. While this is not entirely off-base, it is a common misconception.

A revocable trust can incorporate planning that saves estate taxes and income taxes, but a revocable trust, in general, cannot really save an individual any more taxes than a will that incorporates the same types of estate and income tax planning.

So what does a revocable trust do that a will does not? The primary advantage to using a revocable trust rather than a will as your primary estate planning document — i.e., the document that says to whom you want your property to pass at your death — is that you can avoid probate at your death by using a revocable trust. On the other hand, a will is designed specifically for probate (probate means “to prove” in reference to a will’s validity).

When someone dies owning property in his or her name, without a joint tenancy, and without a beneficiary designation, the only way that property can be passed on to the heirs or chosen beneficiaries is through the probate administration process in the proper court. If the person has a valid will, the will controls how the property in the individual’s name (“probate estate”) is administered and to whom it passes. If the individual does not have a will, his or her probate estate passes by intestacy statute — in other words, the state legislature has written his or her will for them.

Property that is titled in the name of a revocable trust, however, is not considered individual property for probate purposes and thus does not have to be reported or administered in a probate court. A key to avoiding probate with a revocable trust, then, is to make sure that you not only create and sign your revocable trust, but that you properly transfer your individually owned assets into it prior to your death (See more on trust funding here).

Property that is titled in an individual’s revocable trust at the individual’s death is administered by the trustee of the revocable trust (chosen by the individual creating the revocable trust) without court oversight.

Another advantage to a revocable trust rather than a will is that a revocable trust can control how an individual’s property held in the revocable trust is administered during the individual’s life. This is critically important if the individual becomes mentally incompetent or disabled and needs his or her successor trustee to step in and manage the property for the benefit of the individual. A will only applies at an individual’s death, and therefore it does not accomplish any type of disability planning.

A revocable trust also provides for privacy with respect to the terms of disposition of assets, among other things. Unlike a will, the trust document will not necessarily become part of the court record. On the other hand, a will and its terms will be available to all who access the court record. For more information on privacy concerns, see our previous blog post.

For more information about revocable trusts and whether one would be appropriate as part of your estate plan, please contact our Trusts & Estates group.