A Letter From The Intern #4: Asset Allocation

DISCLAIMER: I am not an attorney, and this is not legal advice. Reach out to an attorney for official legal advice.
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The Law Offices of Samantha K. Wolfe Clientele,
       I am excited for my fourth week of my internship with Attorney Wolfe! I have a lot to look forward to, from going on a road trip with Attorney Wolfe and my other coworkers to meet with clients to my birthday this coming weekend! Coming into work is always something that I enjoy, as I have come to love Elder Law and helping people get their affairs in order. It makes me feel fulfilled, so I am looking forward to meeting with you all this week!
       In Estate Planning, one major aspect that many clients come in with questions for is how their assets can be handled. When putting one’s affairs in order, many want to be certain that their property and finances are going to where they intend them to. There are many means by which to do this, such as through a Last Will and Testament or a Living Trust as I have previously mentioned in prior “Letters From The Intern.” However, there are far more aspects of Estate Planning than what I have previously mentioned that I feel are important for clientele to be aware of when working with an attorney.
       Last week, I helped Attorney Wolfe draft a plan and visual for a revocable living trust for one of her clients. In doing so, I ran into many new terms that I was previously unaware of. For someone who is not knowledgeable in law, seeing many words and phrases that you have never seen before can be very intimidating. Sharing with you all what Attorney Wolfe has taught to me will hopefully remedy these negative experiences when organizing your affairs. As such, this blog post will be all about the many different aspects of trust management.
Trust Management
     The term trust management is a general phrase for legal strategies for organizing the handling of one’s finances and property within living trusts. This expands upon previous concepts that I have discussed in prior “Letters From The Intern,” so if you have not read them I recommend reading them first. I will be talking about more terms that apply to living trusts.
       Several terms come to mind that are important to know as someone who is going through the process of Estate Planning. There are two types of taxation which apply to this process: inheritance tax and capital gains tax. Inheritance tax is owed to the state government whenever inheritance is given to the beneficiaries and is currently at 4.5% of the assets.
                                                                      Fair Market Value x 4.5% = Inheritance Tax
       Capital gains tax is owed to the federal government only whenever a capital asset is sold. It is currently anywhere from 0%, 15%, or 20% of the assets based on your income. These two terms are important to know whenever assets are given to beneficiaries whenever their value has increased since the initial purchase by the grantors. The fair market value is the current worth of the asset in the market. The cost basis is the worth of the asset whenever it was initially purchased. You can get a stepped-up basis for these assets if the assets were owned by the decedent, or the individual who passed away, and included in the decedent’s gross estate for federal estate tax purposes. If the inheritance tax is paid, then in most situations a stepped-up basis is utilized when charging capital gains tax. The cost basis is utilized otherwise. Alternatively, a carryover basis is utilized by the beneficiary whereas the cost basis is utilized by the decedent who purchased the asset. Each circumstance is different, and a carryover basis can actually be more expensive than a stepped-up basis depending on factors. As such, which route to take in giving your assets to beneficiaries is up to the value of the particular assets and your preference on how much in taxes you would like to pay.
                                                                                   (If Inheritance Tax Not Paid)
                                  Fair Market Value – Cost Basis / Carryover Basis = Amount Subject to Capital Gains Tax
                                                                                       (If Inheritance Tax Paid)
                                         Fair Market Value – Stepped-Up Basis = Amount Subject to Capital Gains Tax
In discussing how assets are to be distributed amongst beneficiaries, there are two important terms that one ought to be aware of: per stirpes and per capita. The phrase per stirpes translates from Latin to “down the line,” and states that the assets given to a child of a grantor will then be given equally to their children. The phrase per capita translates from Latin to “by head,” and states that the assets will are to be distributed equally amongst the surviving beneficiaries. Within a revocable living trust, there are terms in which you may not recognize that can potentially benefit you in being knowledgeable in. One such term is Qualified Terminable Interest Property, which is often abbreviated as QTIP. As listed in IRC 2044, this allows for a marital deduction in which a surviving spouse does not have to pay any taxes whenever the assets of their deceased spouse are transferred to them. Another term is a Limited Power of Appointment, often abbreviated as LPOA. This gives descendants the ability to allocate assets with specified restrictions. If the client choses so, the assets can only be utilized for Health, Education, Maintenance, and Support, which is often abbreviated as HEMS. Oftentimes, the trustee has the ability to determine what qualifies as HEMS. This means that one cannot utilize the assets for personal spending, spending on their estate, or to pay off creditors. Within this there is another term called the 5 x 5 Power, which means that one can only use a maximum of five-thousand dollars ($5,000) or 5% of the assets in addition to HEMS for any reason. There are various other trust types which may be incorporated into a living trust. A Family Trust is a unique kind of trust which applies to the children of the grantors. This lists the children of the grantors as the beneficiaries of the trust, which results in inheritance tax being owed rather than capital gains tax. A Special Needs Trust, which is often abbreviated as SNT, is specifically designed to benefit those with special needs or chronic illness, where they will receive financial help specifically for the purpose of funding their care. An Asset Protection Trust, known at The Law Offices of Samantha K. Wolfe as a Protector’s Trust, is protected from creditors after a five-year lookback period. A Survivor’s Trust is a revocable living trust used specifically for a surviving spouse. At The Law Offices of Samantha K. Wolfe, clients will be given a visual representation of their unique trust plan. Each of the previously mentioned aspects of documents are recommended 07/28/21 Letter From The Intern #4 Blog Post Noah Hazlett to clients of The Law Offices of Samantha K. Wolfe based on their specific set of circumstances. If you feel that any of the terms outlined in this letter may help you in organizing your financial affairs, you can reach out to our office for a free consultation at 717-655-2676 or at https://www.skwlawoffice.com/contact-us.html. Be on the lookout for next week’s letter from me. I hope that you all have a great weekend and stay cool despite the summer heat! As always, I hope to see your faces in the offices soon! Sincerely, Noah Hazlett, The Intern