Happy Holidays! As the new year approaches, we often reflect on recent changes and resolutions for the future. This time of year can be hectic, but please take some time to consider the effect of life changes on your estate plan. Planning ahead is essentially a gift to your family, and as we all know, time flies when you’re having fun. I offer all new clients a free 30-minute initial consultation. For all of Heather Reynolds’ returning clients, I offer a free 30-minute consultation to review and assess whether your estate plan needs updating.
Generally, I recommend reviewing your estate plan every few years or so, to confirm that your trustees/executors/agents and beneficiaries remain the same. If there have been any major life changes, such as marriage, divorce, new members of the family, and change of major assets, I strongly recommend that you take a closer look at your estate plan. You should assess and confirm that your designations and wishes are current, if your estate plan is affected by laws that were unrelated before, and for those with trusts, that your funding (or transfer of all assets to your trust) is complete.
Federal Tax Exemption for Estate and Gift Tax
The federal tax exemption for 2017 is $5,490,000 per individual, representing a $40,000 increase over 2016’s exemption of $5,450,000. This means that if a person dies in 2017, their estate will only be subject to federal estate tax if their total estate assets are over $5,490,000. The excess will be taxed at a flat rate of 40%. For married couples, the exemption is $10,980,000 in 2017. California continues to not have a separate state estate tax.
For 2016, the federal gift tax annual exclusion is $14,000 per person. If you want to take full advantage of your annual tax exclusion for gifts in 2016, these gifts need to be distributed by December 31, 2016. The annual exclusion amount for gifts in 2017 will remain unchanged at $14,000 per person.
New Medi-Cal Recovery Law Effective January 1, 2017
Based on the current law, when a Medi-Cal recipient dies, California has the right to seek repayment for the cost of certain services, including long-term care. After the Medi-Cal recipient dies, the State sends the heirs or survivors an “estate recovery claim.” The right of recovery has historically applied to ALL assets, regardless of whether they are held in a Living Trust, Joint Tenancy or Pay on Death (“POD”) accounts.
Under the new law (SB 833/AB 1605), individuals dying after January 1, 2017 can avoid Medi-Cal recovery by holding assets in a manner which avoids probate. For example, assets transferred via living trusts, joint tenancies, survivorship, and life estates will no longer be subject to recovery. As such, beginning next year, Medi-Cal’s right of recovery will only apply to assets which pass from the beneficiary to others by probate. A will, depending on the value of the estate, is usually subject to probate in California. As assets transferred via living trusts will not be subject to recovery, it is important to ensure that your trust’s Schedule of Assets (or Schedule A) are updated and that all proper assets are transferred to trusts, i.e., your funding is complete.
Three Documents Every Person Over the Age of 18 Needs
Once a person turns 18, they are legally considered an adult. For parents with children in college, you may be paying your child’s college tuition and expenses, and covering him or her on your health insurance, but once your child turns 18, the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) says that you can no longer have access to your child’s medical information without his or her consent.
Under normal circumstances, this may not be a problem. But what happens in case of an emergency, and your child is unable to give formal authorization on their behalf. Will you be able to access information about your child’s condition if your child is seriously ill or injured while away at school? Will you be able to help them handle their financial affairs if they are incapacitated and are unable to make these decisions on their own? Without three important documents, you may not be able to step in when your child needs you.
• Durable Power of Attorney
HIPAA requires health care providers and insurance companies to protect the privacy of patient’s health care information. Those who violate HIPAA are subject to civil and criminal penalties, including jail time, which makes them reluctant to share protected health information without an authorization. By signing a HIPPA release, your child can authorize doctors to share diagnoses and treatment options with you.
A Lesson from Prince
When unrivaled singer and songwriter Prince died in April at the age of 57, he did not have an estate plan. His assets, including his intellectual property, music catalogue, and Paisley Park residence, are estimated to be worth about $200 million. With no living spouse, children or parents, Prince’s complex estate will be divided among his siblings who must sort out his estate through Probate court proceedings. Between the current federal estate tax rate of 40% and an additional 16% from the state of Minnesota, most of Prince’s estate is going to taxes.
Moreover, his siblings are left with the daunting task of managing and dividing Prince’s intellectual property, record label, royalties, and unfinished music. But what exactly will each sibling own? How will the courts determine who gets Paisley Park, who gets which copyrights, and who gets which music contract? Will each sibling receive an equal share of each song, each distribution contract, and each piece of real estate? Perhaps Prince didn’t want his siblings to receive his assets at all. Consider this – Prince’s estate will continue to generate income long after his death. Elvis Presley’s estate earned $55 million in 2015—and he died almost 40 years ago.
Prince’s situation has made headlines because of his celebrity and large estate, but anyone could make the same estate-planning mistakes, regardless of wealth. Proper estate planning can help your estate (and thus your loved ones) avoid the complicated and public Probate court process, which in California, applies to any person with a total estate value of over $150,000. This means if your total assets are $150,000 or more, your estate will most likely be subject to Probate. If estate tax is a potential issue, estate planning can also minimize these taxes. In addition, estate planning can be a means to show a life well lived, and to protect and provide for loved ones.