The Federal Deposit Insurance Corporation, or FDIC, is a Congressionally created agency that insures deposits, supervises financial institutions and manages receiverships in order to maintain stability and public confidence in the nation’s financial institutions. Most people don’t necessarily think about FDIC coverage limits when they choose to deposit their money or open a trust account at a bank. The truth is, the type of account opened, whether it be a single/joint account or revocable trust account, can affect how much of your hard earned money is insured by the FDIC. Choosing the correct account is essential in ensuring that the FDIC properly insures all, not part of your money.
The FDIC will insure up to $250,000 for each unique beneficiary of a revocable trust account, up to five unique beneficiaries.
A revocable trust account is an account owned by one or more people, the settlor(s), that names one or more beneficiaries who will receive the balance of the account upon the death of the owner(s) of the revocable trust account. Such trust accounts include informal revocable trusts like trotten trusts or payable on death trusts and also formal trusts like living or family trusts. Because of the “revocable” nature of the account, the owners may terminate or modify the account at any time and for any reason.
The FDIC will insure the owner(s) of a revocable trust account up to $250,000 for each unique beneficiary, up to five beneficiaries. This means that with each unique beneficiary of the trust account, up to five unique beneficiaries, the insurance coverage increases by $250,000. This formula changes slightly when six or more beneficiaries are named.
Here is an example of how the FDIC insurance coverage works: Mr. X has three revocable trust accounts at Bank B. Each account names two unique beneficiaries, A and C. The balance of all three accounts equals $600,000. Using the formula above, because there are only two unique beneficiaries named to the accounts, the accounts will be insured by the FDIC for a total of $500,000 ($250,000 x 2). This means that the FDIC will not insure the $100,000 balance excess. Conversely, if another beneficiary was named or the account balances totaled less than $500,000, the entire balance would be insured.
The FDIC will only insure up to $250,000 per owner of a non-living trust account (single or joint accounts)
The FDIC will insure up to $250,000 per owner, NOT beneficiary, of a single or joint account. IRAs and other retirement accounts are also eligible for up to $250,000 of insurance coverage per owner. These non-revocable trust accounts are fully insured and fine for those with monetary assets beneath the $250,000 or joint $500,000 threshold. However, if the single or joint account balance surpasses the maximum insurance coverage allowed for the account, then the FDIC will NOT insure the excess.
It is important to take into account FDIC coverage limits when deciding what account to put your money into. If your individual cash assets exceed the $250,000 maximum coverage limit, then you should consider putting your assets into a revocable trust account with named beneficiaries. This option allows for a larger maximum coverage limit dependent on the number of named beneficiaries of the trust. It is also important to consult an attorney, experienced in estate planning, before you move large sums of money to different accounts or create a trust so that he or she can properly advise you on the best course of action to provide the most FDIC coverage for your estate.
As we enter into 2014, it is important to note some changes that have been made to the current estate and gift tax exclusions. Modifications of estate and gift tax exclusions are generally made every year (or whenever Congress deems it prudent) in order to adjust for inflation by using the preceding year’s Consumer Price Index data. The following list provides notable changes that affect estate planning and tax-free gifts.
Unified estate and gift tax exclusion amount has increased to $5,340,000
Good news! The unified estate and gift tax exclusion amount has increased by $90,000. The exclusion amount has increased from $5,250,000 to $5,340,000. This means that estates of those who pass away after January 1, 2014, and that are under the $5,340,000 increased threshold, will not incur an estate tax. The new $3,340,000 figure will also be applied to the generation-skipping transfer tax exemption thereby allowing the transfer of estate assets to skip a generation without incurring an estate tax. However, the bad news is that with the new year, also brings a higher tax rate for those estates that exceed the new exemption limit. In 2014, a 5% increase in the tax rate on estates in excess of the exclusion amount will incur a 40% tax, up from 35% in 2013.
Gift tax annual exclusion will remain at $14,000
The gift tax annual exclusion for gifts made in 2014 will remain at $14,000. The exclusion does not include gifts between spouses, tuition or medical expense payments of another or charitable donations. However, parents may combine gifts to a child for a total exclusion amount of $28,000 to one child per year.
If you are fortunate enough to have an estate that may be affected by the estate and gift tax exclusions, it is important to know how tax exemptions can work to your benefit. Making certain lifetime gifts in order to avoid a federal estate tax down the line can ensure that your beneficiaries get the full enjoyment of your estate. Likewise, making too many sizable gifts can also incur a hefty federal gift tax. The attorneys at Alavi & Broyles are experienced in advising those with sizable estates in the best course of action with the best return for their individual needs.
Why You Should Ask Your Attorney about a HIPAA Authorization when Contemplating a Durable Medical Power of Attorney
The history and creation of HIPAA
Most people would agree that their private health information, including records of diagnoses, medication prescriptions and office visits, are incredibly sensitive material; the exposure of which could be potentially problematic and personally devastating. Leakage of health records could lead to a number of calamitous results like public embarrassment, but could also lead to more catastrophic problems like identify theft. In 1996, the legislature passed what is known as The Health Insurance Portability and Accountability Act of 1996. This important legislation is more commonly known as HIPAA. HIPAA created a much-needed industry-wide security standard for the health care field to protect sensitive health care information by protecting the privacy of individuals’ health and medical information with comprehensive privacy and security laws.
Personal representatives may request and receive protected health care information
Despite an overwhelming need for privacy when it comes to who can view our medical records, there sometimes exists a need for an individual to have a personal representative who can request or receive vital health information regarding the individual. One example is that the parents (or legal guardian) of a child may obtain medical records and health information regarding their minor child. As a child’s representative, he or she is also able to make healthcare decisions affecting the child. A medical power of attorney is another example of a circumstance where the personal representative may request or receive protected medical information.
A durable medical power of attorney may not be enough to allow a personal representative access to vital medical and health information
As discussed in a previous blog entry [http://www.alavibroyles.com/1/post/2013/09/a-durable-power-of-attorney], those with a valid medical power of attorney can make medical decisions on behalf of and for a named individual. This person is also considered the individual’s personal representative, which means that the representative may generally request and receive HIPAA protected health information. The rationale behind this is that the representative making the important health care decisions has all of the information needed in order to make the tough health care decisions in the best interest of the individual he or she is representing.
However, it is important to understand that HIPAA does allow health care providers to deny personal representatives access to an individual’s medical records or health information in certain circumstances. These circumstances include when the health provider has reason to believe the personal representative is abusive or may endanger the health of the individual or when a health care provider has a policy allowing dissemination of protected medical information only to the insured individual or those with a HIPAA Authorization.
Importance of obtaining a HIPAA Authorization in addition to a medical power of attorney
A HIPAA Authorization is a separate legal document that allows a personal representative to obtain protected medical information of an individual where a medical power of attorney may not be sufficient to grant access. Because a medical power of attorney may not be sufficient on its, it is essential to execute a HIPAA Authorization in addition to a medical power of attorney when planning for future incapacity.
Many people overlook the importance of executing a HIPAA Authorization because they are under the belief that a medical power of attorney will allow the representative access to their medical records and health information in the case of incapacity. While this belief may be true in some cases, there is still a looming risk that the lack of a HIPAA Authorization could cause major problems down the road for the personal representative when he or she tries to make health care decisions for the individual.
When planning for future incapacity, it is important to not only discuss a durable medical power of attorney but also a HIPAA Authorization with your attorney. The attorneys at Alavi & Broyles have experience in executing all necessary instruments in order to ensure that the client’s personal representative is in the best position he or she can be in when making the tough but necessary medical decision.
A Charitable Remainder Trust Can Be a Highly Effective Tool in Minimizing Burdensome Capital Gains Taxes While Still Providing Income for Beneficiaries
Many people are concerned with tax implications when they begin to plan their estates. Most people would agree that their ultimate goal in planning their estate is to provide for their loved ones in the most efficient and economic manner. This generally includes alleviating the often-burdensome taxes that can be imposed on estates. For those with highly appreciated assets, the tax burden can be quite high when assets are not properly provided for in an estate plan. A Charitable Remainder Trust (“CRT”) is one device can that alleviate these burdensome taxes and produce the best overall return on an asset where the settlor (person creating the trust), beneficiaries and a charity win in the end.
A CRT is appropriate in limited circumstances where assets are highly valued and subject to a capital gains tax if sold.
A CRT, while not appropriate in every circumstance, can provide significant tax benefits when a highly valued and appreciated asset is subject to a capital gains tax if sold. A CRT may also be appropriate when a person’s income is relatively low in comparison to their valued assets. We can help you prevent a high capital gains or estate tax on these assets, by employing a CRT.
A CRT is a tax-exempt irrevocable trust carefully designed to reduce taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time (generally, during the life of the trust settlor) and then, when the stated period of time lapses (this usually occurs at the death of the settlor), donating the remainder of the trust to an IRS-approved designated charity. When the charity sells the asset after it obtains ownership, no capital gains tax is imposed. The IRS allows for a large deduction during the year the asset is donated to charity. This deduction allows for savings in taxes that can be used to buy an insurance policy on the life of the settlor in what is known as “wealth replacement.” A CRT can thus provide income to named beneficiaries, provide for a charitable donation and the settlor can make a sizable return on his appreciated asset(s).
While a CRT does provide many incentives to those with sizable assets, it does have some pitfalls. A CRT may not provide a worthwhile return on an asset if the asset is not large enough in value. Generally, the asset’s value must outweigh the tax burden imposed on the estate if the asset was to be passed to a beneficiary rather than a charity. A CRT is also irrevocable. This means that assets poured into the CRT will be permanently and irrevocably committed to the trust. Because of the permanent nature of a CRT, it is important to discuss all benefits and disadvantages of a CRT with an experienced attorney before committing any assets to a CRT. The attorneys at Alavi & Broyles are experienced in advising clients as to whether a CRT is right for them and assisting them in the creation of a trust that is most beneficial for their estate planning needs.
It is difficult to contemplate the scenario of what would happen to your children if you and your spouse died while your children are still minors. Of course, all parents would want what is best for their children including having someone trusted and selfless assume Guardianship over the children. However, what if a Guardianship contest broke out among family members over who received Guardianship because the parents failed to designate a Guardian? And what if this contest was based on financial gain, because with Guardianship of the children, comes the money associated with the children? Most parents would say that that is the opposite of what they would want should they pass before their children reach the age of maturity. The failure to designate a Guardian of minor children could result in such a contest.
The promise of an inheritance, life insurance pay out or litigation settlement can entice family members to pursue Guardianship over orphaned minor children thus leading to drawn-out legal battles among family members for Guardianship rights.
When most couples have a baby, the last thing they may think about is a potential Guardianship fight. Couples with minor children may have the belief that it’s too early to start planning for a time when they may not be around anymore. Couples may also have the belief that if something were to happen to them, their children would be taken care of by family members who love their children just as they do, so it is unnecessary to put anything in writing. However, the reality is that Guardianship contests break out among families more often than one would think.
Oftentimes life insurance benefits or litigation settlements due to children of deceased parents are conditioned upon a Guardianship determination. Also, a child’s inheritance is directly related to a Guardianship determination because the Guardian will likely be in control of the minor child’s inheritance in order to provide for the child’s health, education, maintenance and support. If a Guardian is not designated, under California law a court must designate a Guardian to take care of any minor children. When the promise of a sizeable inheritance or life insurance pay out to the children is dangled in front of a proposed Guardian, assuming a Guardianship role over a child is much more appealing and can lead to self-interest. This can lead to drawn-out legal battles to establish Guardianship rights before a court of law.
Younger and older parents should plan, as early as possible, for the possibility that they could leave behind minor children.
Possible Guardianship contests highlight the importance of planning for the untimely scenario that a couple may leave behind minor children. Whether the couple is younger or older, it is essential for them to select a trusted family member or loved one to assume the role as a Guardian for any children left behind if both parents die before the children reach 18. This should be done as early as possible in the children’s’ life and should involve a conversation with the designated Guardian in order to ensure that the Guardian will assume the role and understands the importance of such designation. This designation virtually eliminates the possibility of Guardianship contests based on financial gain and should put parents at ease knowing that someone trusted would provide for their children.
The attorneys at Alavi & Broyles understand that choosing a Guardian for minor children is an important decision. The decision should be well thought out and properly memorialized as to reduce the possibility for contests down the line. The attorneys can assists clients plan for potential Guardianship and put parents’ minds at ease knowing that their children will be taken care of, no matter the circumstances.
Most people understand that it is important to draft and execute a trust or some type of estate planning instrument. However, some are not sure about the how to go about selecting the right Trustee to manage trust assets. Unlike an executor of a will, a Trustee’s duties to the trust can run for many generations rather than simply ending when the estate is closed. Choosing the wrong person as Trustee can result in a mismanaged trust where assets are squandered and the creator’s intent is not carried out. The right person will ensure that the trust is properly managed in accordance with the wishes of the trust creator.
Duties of Trustee
Primary responsibilities of a Trustee include: collecting trust assets and property, investing the trust assets and money, paying bills and taxes of the trust, navigating and filing annual or quarterly accountings and managing money for the trust beneficiaries. The Trustee is also responsible for regular communication among the beneficiaries in order to issue checks and authorize withdrawals against the principal.
Powers granted to the Trustee are limited to the terms of the trust. This means that it is essential for the creator of the trust to describe the type of powers he or she wants the Trustee to have. These powers can be limited or broad depending on the nature and purpose of the trust. However, it is generally a good idea to give the Trustee some latitude when it comes to investment options because of the unstable and ever-changing nature of the economy.
Choosing a family member as a Trustee versus a professional Trustee
Choosing the right person, or people, to be the Trustee of your trust can be a daunting task. Most people tend to choose a family member or loved one as a Trustee because the option is safe and comfortable. While there are no formal requirements a Trustee must meet to be designated, a Trustee should be competent and possess at least some basic financial knowledge. This family Trustee option is popular because family members generally do not require compensation and can be expected to act in the years to come. However, family conflicts and a lack of financial expertise can hinder the designated Trustee’s ability to carry out the trust as specified. While a professional Trustee, such as a bank or trust company, will charge a management fee and can tend to be impersonal in nature, this option eliminates any family conflict issue and can be beneficial to the overall trust because of financial and investment expertise.
The designated Trustee should also be someone with whom the beneficiaries are comfortable because the Trustee will ultimately be responsible for the disbursement of trust assets to the beneficiaries. It is also a prudent decision to choose a successor Trustee. Multiple successors can be chosen based upon preference and circumstances. Because no one Trustee can live forever, a bank or trust company should be designated as the final successor Trustee in order to ensure a smooth transition into the years ahead.
Finally, a trust protector can be designated in the trust to allow the relatively simple path to the removal and replacement of an ineffectual or unworthy trustee
The attorneys at Alavi & Broyles understand that choosing a Trustee is an important decision that individuals should decide for themself. Alavi & Broyles has expertise in helping those planning their estates choose the best Trustee for their trusts.
A Durable Power of Attorney Provides Security in Knowing that Someone Trusted Will Be Able to Make the Important and Difficult Decisions that Affect Property and Health Care Should Incapacity Occur
Planning for the potential that you will not be able to make decisions regarding your own property or health care is a scary prospect. A power of attorney provides assurance that someone you trust is legally able to make those hard and important decisions on your behalf when you no longer can.
Power of Attorney Defined
A power of attorney is a document in which a person, the principal, grants another person, the attorney-in-fact or agent the power to act on behalf of the principal. A principal may grant as much or as little authority to an attorney-in-fact with regards to any lawful purpose. Typically, people choose to execute a power of attorney in order to grant authority to make decisions regarding the principal’s property or health care. A power of attorney is generally considered an essential part of an estate planning package because it gives the principal the freedom and security to designate a person of their choosing to make the necessary and important decisions regarding their property or health care in the immediate future or in the unfortunate event that the principal becomes incapacitated.
Durable Vs. Nondurable Power of Attorney
A power of attorney can be either durable or nondurable. A nondurable power of attorney grants authority to the attorney-in-fact that terminates immediately upon the incapacity of the principal. It may also be revoked at any time by the principal. A power of attorney becomes durable when specific language is inserted into the document that continues the authority after the principal becomes incapacitated. Specific language in the document is also needed if the principal wishes to make the durable power of attorney effective only in the event that the principal becomes incapacitated. When planning an estate, most people consider a durable power of attorney in order to plan for the possibility that they may not be able to make their own decisions regarding property or health care in the future.
Why most people choose a durable power of attorney
1. Maintain continuity in asset/property management
Most people choose a durable power of attorney when planning their estate in order to ensure that property and assets are continuously managed in the event that the principal becomes no longer able to manage them. A power of attorney allows the attorney-in-fact to make decisions regarding the property owned or subsequently acquired by the principal including the acquisition of property on behalf of the principal. Most married couples assign their spouse as their agent and other family or friends can be designated as successor agents in the event the agent is not available. A power of attorney executed in California may also extend to property that is not located in California, making it easier to control all property with one document.
California also statutorily provides for what is called a special power of attorney, also known as a limited power of attorney. A special power of attorney restricts authority to a specific time period or to a specific transaction. A principal who may be unavailable to handle a purchase/sale transaction generally utilizes a special power of attorney. Because of the limited nature of a special power of attorney, incidental authority necessary to carry out the property authority is granted in the document.
2. To appoint a person to make important health care decisions
In 2000, California passed what is known as the Health Care Decisions Law. This law recognizes that adults have the fundamental right to control decisions relating to their own health care. This law applies to durable powers of attorney for health care as well as advanced health care directives. In an advanced health care directive, a principal may authorize consent to certain procedures or elect not to receive certain treatments in an incapacitated state. It is important to note that an advanced health care directive is different than a durable power of attorney for health care that authorizes another to act on behalf of the principal. Advanced health care directives will be discussed in a later blog post.
A power of attorney for health care designates a person to make health care decisions for the principal. An attorney-in-fact under this instrument is authorized to make only health care decisions. According to California law, a health care decision includes selecting health care providers and facilities, approving and disapproving of tests, procedures and medications and directing any other provision, treatment, or service to maintain the principal’s physical or mental health.
A power of attorney for health care is advantageous to those seeking a cost-effective tool to plan for potential incapacity. It allows a client to choose a trusted individual to manage health care decisions while offering the security that their health care preferences will be honored. Some drawbacks to a power of attorney for health care decisions include possible exceeding of authority, tedious court supervision and failure to act. A power of attorney for healthcare does not provide for the more sophisticated planning that may become necessary for long-term incapacity requiring coordination of assets and benefits.
Clients should discuss all preferences, concerns and options available under a power of attorney with a lawyer in order to achieve their desired goals.
Max Alavi focuses on assisting clients establish effective and secure vehicles for passing their assets to their loved ones and protecting their families from the uncertainty and expense associated with probate and testamentary guardianship matters. He is also dedicates a significant portion of his practice to complex probate matters, trust administration and litigation of contested trusts.
Max Alavi, Attorney at Law, APC has 6 locations in Orange County and Los Angeles County, California