Estate Planning Concerns for Blended Families

Posted on April 10, 2018

Article by Beth Ann R. Lawson, Esq.

Estate Planning for blended families is and should be of the utmost importance to couples in a marriage where either they or their new partner, or both of them, have been in a prior marriage. A blended family is defined as a family consisting of a couple and their children from the current and all previous relationships. How do we plan for our spouse while still protecting our children from a prior relationship(s)?

A blended family in America is not a unique occurrence. Statistics indicate that over 50% of American marriages end in divorce, showing that up to 41% of first marriages, 60% of second marriages, and 73% of third marriages end in divorce. Wow! What this means is that your estate planning for a blended family will be very different from first marriage estate planning. In a first marriage, many individuals leave assets first to their spouse and secondly to their joint children. In a blended family, we often want to protect our existing spouse while still protecting our own children, all at the same time.

For blended families, estate planning best begins prior to marriage. A pre-nuptial marital agreement is the gold medal for creating a more organized division of assets in a divorce in blended families. Both parties agree to asset division if necessary while the parties still want the best for everyone. That agreement is memorialized in a formal pre-marital agreement. Hopefully, the parties have discussed the issues and both families understand where everyone stands in the estate plans for the newly blended family.

In Virginia, it is important to have clearly stated estate plans in a blended family which coordinate with laws on an augmented estate/elective share. If you are not careful coordinating your document (or lack of any document if you are intestate) with Virginia law on an augmented estate/elective share, your estate may well be contested in court by your descendants or the new spouse. How can you protect all the different family members at the same time and prevent this?

Be sure to consult with your Carrell Blanton Ferris and Associates, PLLC attorney who will be well versed in estate planning for blended families.

Beneficiary designations on retirement accounts, insurance, financial accounts, real estate and cars are critical in blended family estate planning. You must correctly align your payable on death or transfer on death assets with the best legal protection possible for your beneficiaries. These are assets where you have named a direct beneficiary who will receive a designated portion of a particular asset without court intervention.

Unfortunately, a payable on death or transfer on death designation does not care if your beneficiary is a minor or an incapacitated individual with government benefits which is why many people use Revocable Living trusts as a named beneficiary of these payable or transfer on death accounts.

Revocable Living Trusts can provide great piece of mind in blended family estate planning. Not only can you create married separate trusts to provide for your surviving spouse while they are living and still protect your children, but you can use independent third party trustees to manage the assets in the best interests of all parties. Keep the piece even when you are not there to be the immediate referee.

What is the outcome of carefully crafted Estate Planning for Blended Families? PEACE OF MIND for you, your new spouse and all sets of children. We look forward to meeting all of you to help create legal protection for your blended family.

Posted in Estate Planning, Prenuptial Agreements

Wealth Transfer Taxes: Gift, Estate, Inheritance, and Generation Skipping Transfer Taxes

Posted on March 20, 2018

Article written by Bennie A. Wall, Esq.

“In this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin


It seems that one of the most common questions I get from clients is how will their estate be taxed when they pass. I anticipate that these questions will only increase with the attention brought by the most recent tax reform under the Trump administration.

This article will serve as a primer on the most common Wealth Transfer Taxes with updated information from the Tax and Jobs Act of 2017.[1]

Types of Wealth Transfer Taxes

There are four types of wealth transfer taxes: the Gift Tax, the Estate Tax (sometimes referred to as the “Death Tax”), the Inheritance Tax, and the Generation Skipping Transfers Tax.

The Gift Tax

Gift Tax—Gift taxes are imposed on certain transfers made to any individual for less than full and adequate consideration (measured in money or monetary value)—more simply, when you do not get the full fair market value for an item.[2] There are some exclusions from this general rule. Generally, the following gifts are not taxable gifts:

  • Gifts that are not more than the “annual exclusion” for the calendar year.
  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  • Gifts to your spouse.
  • Gifts to a political organization for its use.[3]
  • Gifts made to qualifying charities without receipt of goods or services in return.

Any gifts made that are not excludable or deductible, will first draw upon your “basic exclusion amount,” which is treated as a credit for gift tax purposes.[4] For example, if you have an 11.2-million-dollar basic exclusion amount in 2018 and you make a gift to your sister of $100,000, you have made a taxable gift of $85,000 ($100,000 given to your sister less your $15,000 “annual exclusion” for 2018). Your tax liability on the gift would be $0.00 because your “basic exclusion amount” would be applied. You are now left with 11.115 million dollars of exclusion (11.2 million less 85,000).

The Estate Tax

Estate Tax—Sometimes referred to as the “death tax,” estate taxes are charged against the estate of a deceased taxpayer. The federal government imposes an estate tax on America’s wealthiest individuals—some estimates citing that less than .2% of Americans are affected; however, some states will impose their own estate tax and will be much less forgiving than the federal government. Virginia, however, is for lovers and does not impose an estate tax.

The Inheritance Tax

Inheritance Tax—not to be confused with the estate tax—is a tax on the inheritance and charged against the beneficiary of an estate and not against the estate itself. The federal government does not impose any form of inheritance tax—the Revenue Code is clear that any receipt of property from a deceased person is not considered income.[5] The inheritance tax is only at the state level, so it is important to consider where your potential beneficiaries may reside when determining the best method for leaving an asset to them. Again, Virginia does not impose an inheritance tax.

The Generation Skipping Transfer Tax

Generation Skipping Transfer Tax – This is a more complicated tax that comes into play when you make lifetime gifts or testamentary bequests to a generation below your children. It was designed to keep the ultra wealthy from passing down money for several generations while escaping taxation. Essentially, it is a way to ensure that when you skip a generation, you are taxed similarly as you would have been had you left it to the generation directly ahead.

Some other important terms to know:

American Tax Relief Act of 2012, or “ATRA”: This Act was signed into law by President Obama in 2013. The main take-aways about this act for estate and gift taxation are: (1) it made permanent many of the tax reduction or deduction provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001; (2) it set the “basic exclusion amount” at $5,000,000 to be adjusted for inflation; and (3) it allowed married taxpayers to “port” their basic exclusion amounts.[6]

Annual Exclusion: The annual exclusion is the amount that a taxpayer may gift to any individual in a tax year without incurring any gift tax liability. For 2018, this amount is $15,000. So, if you give your brother $15,000, there is no need to worry with a gift tax return; however, if you give your sister $16,000 you will need to speak with your accountant about filling a gift tax return this year.

Basic Exclusion Amount: The basic exclusion amount[7] (or applicable exclusion amount[8]) is the amount that we may pass either during life or upon death without having to pay any tax liability. In the 1990’s this amount was moving between $600,000 and $1,000,000. The ATRA raised this amount to $5,000,000 to be adjusted for inflation. In 2017, this meant that every taxpayer had a 5.49 million dollar exclusion that they could pass on without paying a dime in estate taxes. The Tax and Jobs Act of 2017 has provided for a $10,000,000 exclusion to be adjusted for inflation, giving each individual 11.2 million dollars in 2018. It is important to note, however, that this rise in the basic exclusion amount is temporary and is set to drop back down to the $5,000,000 (adjusted for inflation) rate in 2025 if Congress does not renew the plan.[9]

Portability: Portability solved a very complicated issue many married couples faced. Before the ATRA was enacted, it was very important to use estate planning to preserve a deceased taxpayer’s basic exclusion amount. Otherwise it was lost forever upon death and the taxpayer’s estate was subjected to more taxation. This often led to complicated trust planning that was designed to shield the credit amount form estate taxation. Unfortunately this led to assets being locked down in an irrevocable trust for the surviving spouse and children. Also, any assets appreciating over the lifetime of the surviving spouse were building up capital gains to be passed on to the ultimate beneficiaries of the trust. The ATRA allows married couples who make a timely election to port their unused basic exclusion over to the surviving spouse. This will ensure that the amount is preserved and can now be passed on by the surviving spouse to the next generation. Since the surviving spouse has full control over the assets until she passes, the assets will receive a step up (or down) in basis to the fair market value of the assets as of her date of death. This has allowed many to have much simpler estate plans and administration.

In Sum

The Federal Estate and Gift Taxes work together. Each taxpayer has a basic exclusion amount. Married couples may, through portability, draw on each other’s basic exclusion amount. A surviving spouse may elect to add the deceased spouses unused exclusion amount, but a timely election must be made. Every gift a taxpayer makes above the annual exclusion is credited against the taxpayer’s basic exclusion amount (or applicable exclusion amount). When a taxpayer passes away, the executor will use the remaining basic exclusion amount (or applicable exclusion amount) to pass the rest of the assets in the estate to its beneficiaries. If after accounting for lifetime gifts there remains an exemption amount, then the taxpayer will not owe any estate taxes. However, if the exemption amount is not sufficient to cover the full bequests, there will be some tax levied against the estate.

If you are concerned about potential tax consequences of your estate plan or lifetime gifting plans, I encourage you to reach out to an experienced estate planner and a trusted tax professional today. Together we can create a plan that best meets your goals and minimizes or eliminates adverse gift and estate tax consequences.

[1] See H.R.1 — 115th Congress (2017-2018)

[2] See 26 U.S. Code § 2512

[3] See 26 U.S. Code § 2503

[4] See 26 U.S. Code § 2505

[5] See 26 U.S. Code § 102

[6] See H.R.8 — 112th Congress (2011-2012)

[7] See 26 U.S. Code § 2010(c)(3)

[8] See 26 U.S. Code § 2010(c)(2)

[9] See H.R.1 — 115th Congress (2017-2018)

Posted in Estate Planning

Estate Planning for Health Care During Incapacity: Organ Donation & Advance Medical Directives

Posted on March 7, 2018

Blog post written by Jeremy L. Pryor, Esq.

Occasionally when we meet with clients to sign an advance directive and we discuss the section of the document authorizing anatomical gifts (organ donation), they say something like, “I don’t want the doctors to take any halfway measures when my life is on the line, and so I’m not going to include this part.” While there are a number of good reasons to decide against being an organ donor, this really is not one of them. Doctors have the highest ethical duty of care to their patients, and risk serious civil liability if they fail to provide it. Thus this type of imagined response from medical professionals is mostly an urban legend.

What’s not an urban legend is the length of the organ donor waiting list in the United States and around the world. Over 100,000 people in the US are waiting for a transplant, and there are not nearly enough organ donors registered to meet the demand.  Unfortunately this does make the black market for organ donation a very real phenomenon, as illustrated in the movie Dirty Pretty Things.  The movie portrays this black market at work in the lives of illegal immigrants and would be legal immigrants who trade kidneys for cash and passports.  While undoubtedly dramatized for cinematic effect, the black market for organ donation has been verified by journalist research, and is a very real consequence of the shortage of registered organ donors.  Given that an overwhelming majority of Americans support organ donation, it’s also a situation that can be easily remedied by executing an advance directive.

In Virginia, an advance directive is typically a combination of three things: a healthcare power of attorney, a living will, and an anatomical gift authorization. It must be witnessed by two adults, and generally must be in writing and signed by the declarant.  Virginia has authorized a statutory form for advance directives and, while any document that meets the requirements is legally valid, departing to a significant degree from the statutory form can make it more difficult for medical providers to easily read and understand your wishes.  The Virginia form also includes a number of optional sections and opportunities for providing specific custom instructions that can be utilized to ensure a personalized document.

Estate planning for incapacity generally requires that you plan for two types of decisions that may need to be made if you were to become incapacitated: financial decisions and medical decisions.  An advance medical directive is an essential requirement for planning to address the medical side, and is something that every complete estate plan includes.  We discuss the details of these documents and how to effectively draft them in more detail at our regular monthly seminars. We hope you’ll join us the next time we’re near you!

Posted in Estate Planning

Estate Planning for Health Care During Incapacity: Health Care Powers of Attorney

Posted on February 28, 2018

Blog post written by Jeremy L. Pryor, Esq. 

Last week we looked at living wills and their effects on estate planning for incapacity as demonstrated in the movie The Descendants. But a living will by itself is usually poor planning. No matter how elegantly drafted, it is impossible to use a living will to address every particular medical decision that may arise prospectively.  So to ensure that medical decisions can be made for someone who is incapacitated in those areas where a living will is silent, estate planning attorneys advise that clients also execute health care powers of attorney, sometimes called health care proxies.

Now I’d pick George Clooney for a leading role almost every day, but occasionally you need to cast a suave lawyer or successful business executive for a 90s romantic comedy, so you go with Richard Gere.  In Autumn in New York he plays Will, the boyfriend (in an all-too serious, not very good but hang with me for the sake of this illustration romantic drama) to Winona Ryder’s character, Charlotte. Charlotte has a life-threatening condition, and at the beginning of the movie she has a living will that instructs that no heroic measures are to be taken to save her life if she becomes incapacitated. But later (after falling in love with Will) she decides that she wants the doctors to do whatever Will wants. She signs a legal document, and a few scenes later Will is the person that speaks with her doctor when she is unable to speak for herself.

While not expressly stated, what Charlotte signed could only have been a health care power attorney—essentially a legally enforceable delegation of authority to make medical decisions to another person (called a “health care agent”) during any period of incapacity. Where a living will directs that certain actions be taken by health care professionals  (and any other interested persons) when caring for the individual, a health care power of attorney requires that the professionals follow the directions given to them by another on behalf of the incapacitated person. It “fills in the gaps” left by a living will by granting authority over any other medical decisions to the chosen agent.  And if the person has no living will, it gives all medical decision-making authority to the health care agent during incapacity.  This is essentially what Charlotte did in the movie—she removed the living will from her estate plan and replaced it with a health care power of attorney, and that then gave Will the authority to make all medical decisions for her during incapacity, both with regard to attempting life-saving measures and with regard to anything else that might have come up.

Virginia has recognized the legal authority of health care powers of attorney for over twenty years, but in 2009 Virginia broadened its laws to specifically allow health care powers of attorney to address new subjects, including visitation rights, hospitalization for mental health treatment, and enrollment in health care studies. Virginia health care powers of attorney drafted prior to 2009 typically do not mention any of these concerns, and can be significantly improved by an update of them. We talk about these Virginia-specific nuances in more detail at our regular seminars, which you are welcome to attend when we are in your area; you are also welcome to come ask your questions about how these health care powers of attorney are used practically in health care settings day to day, which is sometimes surprising.

We’ll conclude this short series on estate planning for health care during incapacity with a post next week on organ donation and advance medical directives.  Stay tuned.

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Posted in Estate Planning

Estate Planning for Health Care During Incapacity: Living Wills

Posted on February 21, 2018

Blog post written by Jeremy L. Pryor, Esq.

A few years ago I saw the movie The Descendants with my family. A tragic story told with a light touch, it features George Clooney, beautiful Hawaiian scenery, and estate planning. (Seriously—a major plot conceit depends on the rule against perpetuities.) It’s very well done, and while it’d be more fun to discuss the first or second of those two features, my colleagues kindly request that I limit my remarks to the third subject when writing for the firm’s website.

The movie begins by depicting a tranquil yet discomforting scene. A woman is lying in a hospital bed surrounded by medical equipment, machines, and monitors. She is unconscious—the victim of a major traumatic injury—and her life is being sustained through the use of those machines and monitors. Fast forward about ten more minutes into the film and her husband is having a heart-breaking conversation with his wife’s doctor about her condition:

“There is just nothing more that we can do,” he says. The husband responds,
“So if we do go ahead and take her off the machines…” But he is abruptly cut off by the doctor saying something really striking:
“There is no if—it’s when. I have a legal obligation. You know that.”

Prior to 1967, this story, this scene, and particularly this conversation with a family member’s doctor would have been mostly unimaginable. But then a lawyer named Luis Kutner proposed legal recognition for what he termed a “living will”—just as a last will and testament allows someone to direct actions regarding her property after death, so a living will would allow someone to direct actions regarding her body while incapacitated, including actions regarding the use of life sustaining machines. Following a decade of discussion and debate on the ethics of these actions (most notably publicized in the case of Karen Ann Quinlan), all fifty states eventually recognized some form of a living will, including Virginia.

Today a living will is most commonly used to provide direction on whether to turn off life-supporting machines when someone is in a terminal condition, like the scene in the movie demonstrates. But it can be used to provide directions regarding other medical decisions during incapacity too, and all of those directions will matter. If validly executed, the living will has the force of law if you become incapacitated. (Hence the doctor’s rigid conclusion in the dialogue above.) So even though it’s easy to sign one when sitting in your doctor’s office waiting for your appointment, you may want to wait and review the options and consequences with an experienced estate planning attorney. We’ve helped clients ensure that they don’t receive blood transfusions, are able to reside in medical environments consistent with their values and preferences, and even to avoid pet therapy. But drafting these directions in a legal document requires careful thought and execution—too much precision and you may end up not getting treatment you would really want, too little and your instructions may be rendered meaningless.

While a living will is an essential part of an estate plan, a living will by itself is not enough to plan for incapacity and medical decision-making. Next week we’ll look at health care powers of attorney, and then we’ll conclude this series on estate planning for health care during incapacity by reviewing organ donation elections, and a discussion of how Virginia allows all three of these issues to be addressed in one legal document called an advance medical directive. In the meantime, you could watch the movie, or you could attend one of our seminars where we discuss these concerns in greater depth and can answer your questions about them. We don’t have George or beautiful Hawaiian scenery, but we do our best to entertain.


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Posted in Estate Planning