What is Shedding Light ?

Shedding Light is the Virginia Wills, Trusts & Estates weblog. I will post here regularly, focusing on those areas of the law that I address every day in my law practice, namely estate planning, probate and the settling of estates, the federal estate and gift tax rules, and adoptions. My goal is to shed light into murky areas. I’ll also post your comments as they are received.

Your Medical Directive – Emphasizing the Patient Advocate

What’s the most important feature in an Advance Medical Directive?

Most people think it is the written guidance they provide to their loved ones when facing end-of-life issues. After all, in most medical directives, this guidance is the very first thing that appears in the document.

I believe such an emphasis is misplaced. For most people, the most important feature of a medical directive is that it empowers the person you choose as your patient advocate.

Keep in mind that a person’s medical directive is most relevant and useful when the person is in a hospital or similar institutional setting. The typical person in this setting does not have a terminal condition and therefore has no need to express end-of-life wishes. But very often, a person in this setting is unable to advocate for himself or herself in the event he or she is being ignored or mistreated.

That is why it is critical to have a medical directive that appoints a trusted person who can be your patient advocate and gives that person the authority needed to serve you in that capacity, including the right to access your medical information. Health care providers are legitimately concerned about breaches of medical privacy. Under the Health Insurance Portability and Accountability Act of 1996, known as HIPAA, they could face significant penalties for unauthorized releases of medical information. Understandably, they are reluctant to release private medical information to a third party without having first an explicit HIPAA authorization.

In my firm’s medical directive template, I emphasize granting the health care agent or patient advocate the powers he or she will need to protect the patient who is being ignored or medically mistreated. I think it is important to specifically reference HIPAA, which most pre-printed hospital-supplied medical directives do not do mention by name.

I do not ignore end-of-life instructions in my medical directive template, but I do not exalt them over the patient advocate provisions. Most clients select from one these two templates for expressing their end-of-life wishes, and tweak the language accordingly:

Option 1: If at any time my attending physician should determine that I have a terminal condition where the application of life-prolonging procedures – including artificial respiration, cardiopulmonary resuscitation, artificially administered hydration, and artificially administered nutrition – would serve only to artificially prolong the dying process, I direct that such procedures be withheld or withdrawn, and that I be permitted to die naturally with only the administration of medication or the performance of any medical procedure deemed necessary to provide me with comfort care or to alleviate pain. I understand that applicable law interprets “life-prolonging procedures” to include artificially administered hydration and nutrition.

Option 2: In exercising the power to make health care decisions on my behalf, my agent shall follow my desires and preferences as stated in this document or as otherwise known to my agent. My agent shall be guided by my medical diagnosis and prognosis and any information provided by my physicians as to the intrusiveness, pain, risks, and side effects associated with treatment or nontreatment. My agent shall not make any decision regarding my health care which he knows, or upon reasonable inquiry ought to know, is contrary to my religious beliefs or my basic values, whether expressed orally or in writing. If my agent cannot determine what health care choice I would have made on my own behalf, then my agent shall make a choice for me based upon what he believes to be in my best interests.

For those clients who wish to provide highly detailed guidance, I recommend they complete Five Wishes, a popular document that helps you express how you would want to be treated – physically, emotionally, and spiritually – if you were seriously ill and unable to speak for yourself. The Five Wishes document is a nice supplement to a medical directive that emphasizes the appointment of a patient advocate.

Those Annoying Disclaimers on Emails

If you have ever received an email from an attorney or other professional person, you are well aware of the disclaimers that often appear at the end of such emails. Here is a link to a few samples.  I personally have resisted using them.  I never (well, hardly ever) give legal advice via email, and find most blanket disclaimers tedious.

In 2005 the U.S. Treasury Department adopted revisions to what is called Circular 230, a publication which governs ethical standards of conduct for tax attorneys, CPA’s and other professionals who interact with the Internal Revenue Service.  In 2005, the IRS wanted to curb reliance by taxpayers on informal or off-the-cuff opinions from tax attorneys. In the event of a successful challenge to a taxpayer position by the IRS, a taxpayer might cite reliance on the informal opinion to abate a negligence penalty. The IRS wanted to take this excuse away where the opinion provided was not carefully considered by the provider.

Instead, in order for a taxpayer to have “penalty protection,” the tax attorney had to provide a “covered opinion,” which was highly detailed and costly to the taxpayer. There were severe sanctions authorized for a tax attorney who ran afoul of the covered opinion requirement. Many tax attorneys complained that the new Circular 230 rules brought a tax practice to the point where the complexity for following Circular 230′s ethical rules exceeded the complexity of the Internal Revenue Code itself.

This led to a proliferation by tax attorneys in the use of Circular 230 disclaimers on emails, faxes, and other written communications with clients, such as -

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

The IRS recently decided that its 2005 revisions to Circular 230 were perhaps not such a great idea after all. In June 2014 it adopted these revisions to Circular 230, scaling back on the requirements regarding covered opinions. Reading between the lines, it appears the IRS also wants to discourage the indiscriminate use of disclaimers by tax attorneys that proliferated with its 2005 amendments to Circular 230. Apparently, the IRS does not appreciate being implicitly criticized on the millions of emails sent out by tax professionals each year.

I suspect it will be years before we see the Circular 230 disclaimer appear from most attorney emails. But one practitioner on the ACTEC listserv suggested (tongue-in-cheek) that he would replace his existing disclaimer with the following -

The IRS has made me remove the Circular 230 notice it formally made me put here.  Under  penalty of law you may not rely on, and no inference may be drawn from, the fact that I have deleted the Circular 230 notice the IRS used to make me put here but has now told me not to put here. Further explanation of this notice of non-notice is available at my usual hourly rate.

Happy Father’s Day

In one of my Walter Mitty daydreams, I imagine having an essay broadcast on NPR or appearing on the Op-Ed pages of the Wall Street Journal. Here’s a piece I wrote for a local fiction writing group that sometimes has me as a member. Funnily enough, neither All Things Considered nor the Journal were interested. It’s not about estate planning or estate administration. I hope you’ll enjoy it.

My father died of cancer in 1978. He was just 60. I was only 21, with a man’s body but still a child’s mind. I so wish he could have known the adult me.

I wonder sometimes what would most surprise my Dad about America in 2014. So Dad, if this webpage is accessible on your side of the great divide, here are ten things you might not have seen coming.

First, the internet and cell phones are to this generation what the electrification of homes must have been for Nana and Grampa. I use this technology every day, yet don’t understand how even half of it works. Arthur C. Clarke’s Third Law remains true – any sufficiently advanced technology is indistinguishable from magic.

Second, cars are markedly more reliable and long lasting than in your day. My minivan has 332,000 miles and still has its original engine.  The next new car I buy might be the last one I ever buy.

Next, the Red Sox. They waited until the 21st century to win the World Series, but they’ve done it not once, not twice, but three times now. I am not making this up.

Fourth, we’ve never been back to the moon. We’ve never even tried. We built this glorious space station in the 1990′s that orbits the earth, but we can only get there now if the Russians agree to take us on one of their space rockets.

And speaking of the Russians, we won the Cold War. Containment worked. The Soviet Union collapsed of its own sclerosis in the ten years after your earthly death. But that doesn’t mean peace reigneth. There’s a real sense in 2014 of a world spinning out of control.

Sixth, we have a black President. No, really. Well, to be precise, he’s our first mixed-race President. His mother was white, but his father was a black Marxist from Kenya. Yeah, it’s a long story.

Next, handwriting and penmanship are lost arts. About as important as Morse code or scrimshaw carving in your day. We type everything. The only thing I can write in script any more is my signature.

Eighth, gay marriage is now legal in many places and it looks like it will soon be legal in every state. It all happened with the speed of summer lightning through unelected judges.

Ninth, we’ve basically achieved energy independence. Another one of those things that happened practically overnight. Some new technology called fracking. We’re awash in oil and gas after decades of thinking we were running out.

You’d probably be surprised at how I’ve turned out. I own a small business and I married a woman who inherited a house on Nantucket. I know, unbelievable. You would love her. We have two great kids. One named after you. I would give anything if you could meet them.

But, sometimes, when I look in the mirror, I could swear it’s you looking back at me. So, maybe you have met them. I’m not sure of many things, but I am sure of this – there is an eternity and it is both stranger and more glorious than I can imagine.

Happy Father’s Day Dad.  God bless. I sure miss you.

Wendall Winn Joins Virginia Wills, Trusts & Estates

Wendall L. Winn, Jr., Attorney Charlottesville

Wendall L. Winn, Jr., Attorney

I am pleased to announce that on June 1, 2014 my good friend Wendall L. Winn, Jr. joined Virginia Wills, Trusts & Estates in an “of counsel” capacity.

I have known and admired Wendall since 1980, when he came to Charlottesville to practice law and I was a law student. He was an important professional mentor early in my career and has remained a trusted friend and confidant.

Like me, Wendall practices in the area of wills, trusts, probate, and trust administration. Unlike me, he is a lifelong Virginian, having degrees from Norfolk Academy, Washington & Lee University, and the University of Virginia School of Law. Wendall has been recognized in the publication Best Lawyers in America in the area of Trusts & Estates.

Non-lawyers might wonder what “of counsel” means. Strictly speaking, it is more defined by what it is not. An attorney who is “of counsel” is neither a partner, an owner, nor an employee in a law firm.  More information is available here.

Ten Years

January 1, 2014 will mark ten years since I took the bold step (for me) of starting my own law firm.  To paraphrase Daniel Webster, it is a small law firm, but there are those who love it.  I am grateful to many many people who have helped me not only stay in business, but prosper.

Clients - the men, women and families in Central Virginia who have entrusted sensitive matters to our care. Without your confidence in me and my staff, my law firm would not have lasted even one year.  Serving you – and serving you well – is foremost in our minds every day.

Co-WorkersCarolyn, Bernadette, Liz, and especially Nancy, who has been with me from the very first day.  I appreciate each one of you and your commitment to excellence.  The esteem with which we are held by our clients and by other professionals in our community speaks as much to your competence and standards as to my own. And Elizabeth, who designed my letterhead and my website, who places my advertising, and so much more.

Financial Professionals - the investment advisors, accountants, and other financial professionals who recommend me to those in need of our services. It is a risk to recommend an estate planning attorney to a trusted friend or client.  I appreciate the implicit compliment that comes with any such recommendation. I never take it for granted. So thanks Michael, David, Yvonne, Mike, Jerry, Wade, Kimberlee, Chris, Jeff, and many others.

Other Attorneys - C.S. Lewis once wrote that “if in your working hours you make the work your end, you will presently find yourself all unawares inside the only circle in your profession that really matters. You will be one of the sound craftsmen, and other sound craftsmen will know it.” I’ve longed to be such a craftsman. There are several attorneys who have befriended and encouraged me, shared their forms and their practice tips, helping a sole practitioner like me to become a sound craftsmen. Thanks to Mark, Jim, Barbara, Jay, John, Wendall, David, Frank, and Derek.

Thank you Jane for your faith in me … and a million other things. And God in Heaven, may I always be your servant first. Except the Lord keep the city, your estate planning attorney waketh but in vain.

Bush Tax Cuts Live On

The Dustbin of History?  When President Obama was re-elected on November 6, 2012 I assumed the Bush Tax Cuts would soon land in the dustbin of history. The President and the Democratic Party blame the Bush Tax Cuts for  many of the things that have gone wrong in the American economy since 2008. All that was required to end the Bush Tax Cuts and reinstate the Clinton era tax increases was to hold fast until January 1, 2013 and it would happen automatically. But a funny thing happened as Americans prepared to skid off the fiscal cliff – most of the Bush Tax Cuts were made permanent.

Does anyone down there know how to cut a deal? If the Wall Street Journal can be believed, Kentucky Senator Mitch McConnell and Vice President Joe Biden were the authors of the legislation. McConnell reportedly called the Vice President on December 30, after talks with Democratic Leader Harry Reid had broken down. From that point forward, Biden and McConnell cobbled out the deal that ultimately became law. On New Year’s Day, the Senate approved the deal 89 to 8 and the House followed up with its own vote of 257 to 167 in favor. Two days later President Obama, from Hawaii, by “autopen” signed into law the bill that averted the automatic imposition of the Clinton era tax rate increases.

Here is a sample of what was enacted.

A permanent per-person estate tax exemption of $5.25 million, adjusted periodically for inflation. That means a married couple can pass more than $10.5 million to the next generation free of estate tax. Unless a future President and a future Congress can agree on a change, I could practice law for 20 more years, with a reasonably wealthy clientele, and never see another decedent’s estate pay estate tax.

A permanent per-person gift tax exemption of $5.25 million, adjusted periodically for inflation. The estate tax exemption and gift tax exemption are now “unified.” You can use your entire $5.25 million exemption either during your life or at your death.

Portability is now permanent.  First introduced in 2011, it is a technique available to married couples to reduce estate taxes. It allows the surviving spouse to add the unused estate tax exemption of a deceased spouse to the surviving spouse’s exemption. This is accomplished by filing a federal estate tax return on IRS Form 706 for the estate of the deceased spouse and making the election provided on that return. This means the end of the use of by-pass trust planning for most married couples of modest weath. 

Marginal income tax rates for those above the $450,000 (married) or $400,000 (single) threshold will shoot up to the Clinton era 39.6% rate. For everyone else, the Bush rates apply.

Capital gains and dividends will be taxed at 20 percent for those with income above the $450,000/$400,000 threshold. The Bush tax rates will remain at 15 percent for everyone else.

Permanent?  I’m reminded of Inigo Montoya. “You keep using that word. I do not think it means what you think it means.”  While the new legislation brings a measure of certainty to estate planning that has not existed for several years, it is permanent only in the sense it will not automatically expire. There is nothing to prevent a future Congress and a future President from changes in the federal tax laws. In fact, few things are more certain.

Federal Estate Tax Awakens From Lengthy Coma

Mr. Federal Estate Tax, who had slipped into a coma on New Years’ Day 2010, came out of his year-long stupor on December 17, 2010, much to the surprise of his friends and adversaries. “The reports of my death have been greatly exaggerated,” he declared in a prepared statement released shortly after his awakening. His medical team cautioned that he would remain in a weakened state for a considerable period of time.

His many admirers hailed his recovery and predicted he would regain his old vigor by the end of 2012. His many detractors expressed confidence that he would never again have the strength to strike terror into the hearts of American taxpayers.

His twin brother Mr. Income Tax, and his much younger sibling Mr. Gift Tax, left their brother’s bedside without issuing any statements. They seemed relieved that their year long vigil had ended. Members of the Tax Family have long been viewed as immortal. Many speculated that if Federal Estate Tax could die, the lives of other family members could also be at risk.

So much for my attempt at Explanation-through-Anthropomorphism. Here’s a more straightforward description of the estate tax and gift tax legislation that passed in mid-December.

Background. Prior to Election Day, Democrats who wanted to raise income tax rates and reinstate the estate tax seemed to hold a winning hand. If Congress did nothing, the Bush Tax Cuts would expire on the last day of 2010, and the tax laws that were in effect on January 1, 2001 would be reinstated automatically. In particular, the federal estate tax, which had been repealed for calendar year 2010, would be back with a maximum rate of 55% and a per person exemption of only $1 million.

But elections matter. The Republicans captured the House of Representatives on Election Day, and within 24 hours, President Obama’s key domestic advisor signaled his willingness to accept a temporary across-the-board extension of the Bush Tax Cuts. On December 17, the President did just that, signing into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Paul Gigot, editor of the Wall Street Journal, was one of many conservatives to engage in a moment of triumphalism, crowing how he loved the symbolism of two Democratic presidents endorsing the heretofore hated Bush Tax Cuts.

Key Changes in Estate Tax and Gift Tax Laws. The Temporary Estate Tax Relief provisions found in Title III are of the most interest to me, as an estate planning and estate administration attorney. Here are the most significant changes in the estate and gift tax laws.

1. Federal Estate Tax Reinstated. The federal estate tax has been reinstated. The reinstatement is retroactive to January 1, 2010.

2. Per Person Exemption Increased. The per person exemption from the estate tax is raised to $5.0 million. It was $3.5 million per person in 2009. It was 1.0 million in 2001.

3. Estate Tax Rates. The maximum tax rate on an estate in excess of the exemption is 35%. In 2009, the maximum estate tax rate was 45%. It was 55% in 2001.

4. Stepped Up Basis Rules Reinstated. Carryover basis is repealed for 2010. Click here for an explanation of these rules. Instead, the assets in the estates of decedents who died in 2010 are entitled to a stepped-up tax basis under the rules in effect since the early 1980′s.

5. Executor Can Elect Estate Tax Repeal for Those Dying in 2010. For the estate of decedents who died in 2010, an executor may elect out of the estate tax and instead be governed by the rules that had been in effect throughout 2010, prior to December 17, 2010. In those cases, there will be no estate tax. However, those estates will not be entitled to a stepped-up tax basis for appreciated assets, but instead will be governed by the rules of carryover basis. So, the estates of wealthy men and women who died in 2010 will forever escape estate tax.

6. Changes in Gift Tax Begin in 2011. The gift tax rules for 2010 are not changed. The gift tax exemption remains at $1 million and the gift tax rates on gifts not shielded by the exemption remains at 35%. However, the gift tax rules change dramatically in 2011. The gift tax exemption will increased to $5 million per person. Thus for the first time since 2004, the estate tax exemption and the gift tax exemption will be “unified.” Beginning in 2011, a person can use up all or any portion of his $5 million exemption during his lifetime or at his death.

7. Portability. The new law allows for the “portability” of the unified credit between spouses. Starting in 2011, a widow or widower can add the unused estate tax exemption of his or her deceased spouse to his or her own exemption. I plan to write more on portability in a future post, but my initial thought is that most married couples will still want to create by-pass trusts in their estate plans to preserve the exemption of the first spouse to die. The portability option should only be used as a backstop for spouses who did not do proper planning.

8. These New Rules Are Temporary. One final but important point: all these provisions will expire on December 31, 2012 unless the current Congress passes and the President signs legislation to extend these provisions or make them permanent. And if nothing is done, the tax laws that were in effect on January 1, 2001, would be reinstated automatically. While it would be a travesty for the federal government to allow that to happen, virtually everything that has happened with the estate tax laws in the past few years has caught me by surprise.

So strap yourself in. The next two years promise to be another wild ride.

Will Estate Tax Repeal Survive?

Will the repeal of the estate tax be a one-year-only phenomenon? Or will it be extended into 2011? Nobody knows – yet. But there is one thing we do know. Elections Matter.

Less than 48 hours after Americans went to the polls on November 2, David Axelrod indicated that the Obama administration would accept an across-the-board temporary extension of the Bush Tax Cuts, including those for the wealthiest taxpayers.

While Mr. Axelrod made no specific mention of estate tax repeal, there is more to the Bush Tax Cuts than just income tax rate reductions. They also (i) cut the capital gains tax rates, (ii) cut the tax rates on corporate dividends paid out to shareholders and (iii) increased the amount of a decedent’s estate that was exempt from the estate tax, until this year when the estate tax was repealed altogether for decedent’s dying in 2010.

So, if the Obama Administration will not oppose a temporary one or two year extension of the Bush Tax Cuts, might estate tax repeal be included as part of the extension?

I have been of the firm opinion that estate tax repeal would be a one-year-only phenomenon. But now I am not so sure. I never expected the Obama Administration would agree to extend the Bush income tax cuts for high income taxpayers. But if it is willing to give up on that issue unilaterally, it is not unthinkable that estate tax repeal might be part of a temporary extension.

Well, at least it is less unthinkable than it was the day before the elections.

Almost every prediction I have made about what was likely to happen with the federal estate tax has been wrong. Until the very last week of December 2009, I was convinced the Congress and the President would enact some legislative fix to prevent a one-year-only repeal. So I am wary of predicting what will happen to this feature of the Bush Tax Cuts.

But right now, I think extending estate tax repeal into 2011 is “in play.” Stay tuned. We should know by the end of January.

How to Title Your Investment Accounts

If you are married, and you own a home, I am willing to bet that title to your home is in your joint names as “tenants by the entirety.” But if you are married and you have a brokerage account or other investment account, I am almost equally sure that you own that account as “joint tenants with rights of survivorship.”

Is one form of title preferable to another? Absolutely. If you and your spouse are going to own a financial account in your joint names, “tenants by the entirety” is almost always the way to go. It has to do with asset protection.

Imagine you are sued. It’s not that farfetched. You might be sued because you are negligent in driving your car and you cause damage to someone else. You might be sued because you break a contract and cause harm to the other party. You might be sued because you are a professional – such as a doctor, lawyer, or architect – who makes a mistake and causes injury to a patient or client or customer.

Now, imagine you go through a court trial and you are the losing party. The court then enters a monetary judgment against you. If you do not have insurance, or enough insurance, to cover the amount of the judgment, it is likely that your creditor will seek to collect the remainder of the amount owed by going after assets that you own personally.

The first asset the creditor might try to levy upon will be your residence. If the home is owned by “Tom and Jane, as tenants by the entirety,” and the judgment is against Tom only, your home is judgment-proof. Under Virginia law, and the law of most states, an asset held by a married couple as tenants by the entirety is not viewed as being owned one-half by Tom and one-half by Jane. Rather, it is owned by the mystical union of Tom and Jane as a married couple and one member of that union cannot unilaterally cut the asset into two separate pieces.

And if Tom can’t do that unilaterally, neither can one of Tom’s creditors. If Jane is not a party to the lawsuit, the asset is protected from Tom’s creditors.

But suppose your investment account is jointly held by “Tom and Jane, as joint tenants with rights of survivorship.” Those assets are not judgment proof. Tom’s creditors could, through the courts, separate the assets into two equal shares and then take Tom’s one-half to apply towards the monetary judgment against him.

Why don’t financial institutions routinely title the assets of married couples as tenants by the entirety? Historically, it was unclear whether the law allowed married couples to own financial assets as tenants by the entirety, or whether that privilege was limited to real estate. Va. Code § 55-20.2 was enacted to remove any doubt about Virginia law. Other states have similar statutes.

If you never get sued, consider this a theoretical discussion. But you cannot safely change titling the day after you learn you are being sued. That could be considered a fraud on your creditors. So my advice to most married clients is: if you are going to hold financial accounts in your joint names, be sure to include the phrase “tenants by the entirety” after your names. And if your financial institution tells you they do not offer this as a titling option, find a new financial institution.