2001 Seminars

November Seminar was held at Peking Palace Restaurant at UTC on November 10, 2001

Host: Victor Kung, Jay Huang and IshinLiu

Speakers:

Julia R. Cheng, MBA, of the Prudential Insurance Company of America

David M. Huang, Ph.D., Attorney at Law,

Summary of the November Seminar on Estate Taxes and Long-Term Care ( Excerpted by Elena Yu )

The seminar drew an extraordinarily large audience. We had planned on having only 60 members and guests for the luncheon. A total of ninety-some people showed up. We had to add two more tables, and in each table we had to squeeze in two more chairs in order to accommodate everybody.  

Julia explained the latest tax bill (the Economic Growth and Tax Relief Reconciliation Act of 2001) and the importance of including long-term-care in estate planning. Dr. David Huang, was invited from Los Angeles to explain the importance of setting up living trusts. Given the high level of interest on their seminar topics, below we present a summary of the presentation and reading materials, as well as the contact information of the speakers.  

Estate Taxes. Estate taxes are being eased gradually starting 2002 through 2009 and then repealed for only one year in 2010, only to return in 2011. Unless one can arrange one’s death in 2010, careful planning is required in order not to burden the survivors with the high cost of probate, which can eliminate at least 5% of the estate, and may take up to two years to be completed. In addition, should the estate be worth more than the allowable exclusion for a given year (see Table below), estate planning will help the survivors to conserve the assets and postpone the payment of inheritance and other taxes till it is passed on to their beneficiaries. 

Table 1. Estate Tax Exclusion Amount and Highest Estate Tax Rate

A simplified way of estimating your exposure to estate taxes is presented in the brochure that Julia Cheng distributed to the audience. It is reproduced below for those who missed the luncheon seminar: 

1. Determine the value of your estate minus any debts.
2. Subtract any assets that pass to charity on your death; these are charitable deduction for your estate.
3. Also subtract any assets that pass to your surviving spouse (assuming he or she is a U.S. citizen); these assets qualify for the marital deduction, deferring estate taxes until the surviving spouse dies.

The net amount represents your taxable estate. In calculating your estate, remember that besides cash, real estate properties, and stocks and bonds, the following also count as part of your estate: automobiles, artwork, jewelry, retirement benefits, life insurance policy, loans to family members. For those who die in 2002, up to $1 million of the estate (which includes money, gifts, properties) may be transferred tax free prior to or at death. Any amount in excess of 1 million dollars become subject to estate taxes. With every passing year, the amount of tax exclusion changes according to that shown in Table 1 until it reaches $3.5 million in 2009—only to revert back in 2011 to the law that was in effect in the first half of 2001, which means $675,000. Chances are good that the Act may be delayed, modified, or repealed by future Congressional action. Hence, estate planning is an important asset-conservation strategy that every family with some means should undertake. 

The Importance of a Trust. A trust is a legal document set up to avoid probate. Assets that go through probate are a matter of public record. A Revocable Living Trust offers privacy, quick transfers of assets to survivors, and often low administrative costs. It is also an excellent vehicle for managing your assets in the event of disability, not just upon your death. After setting up the trust, your assets must be titled in the trust’s name in order to successfully avoid probate.  

Note, however, that in most estates creditors have only six months to make their claims against the probate estate. This is the advantage of going into probate. Therefore, you may NOT want to transfer all of your assets into the Revocable Living Trust.  

Properties listed in the trust retain the character of a community property. The husband and wife each retains a right to amend, alter, or revoke the trust. Any property withdrawn from the trust retains its character as community property. After the death of one spouse, the survivor retains control of the survivor’s community interest. 

If the husband and wife have an irreconcilable dispute after the living trust has been set up, each will need to consult a different lawyer in order to make amendments to the trust. They can no longer use the original lawyer who drew up the trust. 

A Credit Shelter Trust (also referred to as a Family Trust, By-Pass Trust, or B Trust in an A-B plan) allows a married couple to take full advantage of the Applicable Exclusion Amount available to each individual. Through a Credit Shelter Trust, a married couple is also able to reduce their estate taxes and pass more of their estate to their heirs.  

QTIP Protection. In more complicated situations such as second marriages or the presence of children and other beneficiaries from relationships outside of the married couple and their own children, a QTIP (Qualified Terminable Interest Property) trust can be set up as a separate component of the Family Trust (called the A-B-C Trust). The QTIP trust allows an individual to provide a surviving spouse with income from the trust for the remainder of the spouse’s lifetime. Upon the surviving spouse’s death, the remaining assets in the trust pass to the remaining beneficiaries under the will (which is a separate document). Upon the death of the surviving spouse, the entire value of the QTIP trust will be subject to estate tax unless some other legitimate tax shelters are established. 

Long-Term Care. Julia Cheng indicated that there are four major ways of obtaining extended chronic care: (1) Home Health Care; (2) Adult Day Care; (3) Assisted Living; and (4) Nursing Home Care. Long-term care is not just for the elderly. Some 40% of adults between the ages of 18-64 and some 3% of children under the age of 18 years also require long-term care. At today’s prices, hiring a Home Health Aide will cost an average of $110 per 8-hour shift, $50-$60 per visit; assisted living costs about $70 a day; adult day care costs about $45+ a day; and nursing home care costs about $129 a day. Over a year, nursing home care can cost at least $88,000. On average, the time from nursing home entry to death is about 4 years.  

Although MEDICARE offers some nursing home benefits following a 3-day hospitalization, it covers 100% of the cost only for up to 20 days. From day 21 to 100, it covers $96 per day, and after the 100^th day, there is no coverage. One cannot count on the government for long-term care because this generation of baby boomers will age and need long-term care around 2030. By then, there would be only 2 workers for each social security beneficiary, compared to a ratio of 3.3 to 1 in 1995 and 40 to 1 in 1935. The risk for long-term care is 1 in 2 persons.  

Tax incentives are available for individuals and employers for qualified long-term care insurance policies issue on or after January 1, 1997. Persons who are rich (i.e., net worth exceeding $2 million), or extremely poor, or who already have long-term care coverage included in their health insurance, do not need to buy long-term care insurance. Those in the middle-income bracket who have elderly parents and also younger children to care for, may wish to consider taking out a long-term care policy.  

The advantage of having a long-term care policy is that it can keep up with the increasing cost of living, and the policy cannot be cancelled as long as you pay premiums. However, one needs to use companies that have financial strength.  

Julia Cheng may be reached by phone at (619) 543-8140, extension 2311. Her toll-free number is (888) 816-6688. Fax: (619) 688-1344. Her address is: Prudential Insurance Company of America, 7676 Hazard Center Drive, Suite 600, San Diego, CA 92108.  

Dr. David Huang, the lawyer, accepts clients from San Diego even though he lives in Los Angeles. His telephone number is (562) 809-7368. Fax: (562) 809-4289. Address: 18000 Studebaker Road, Suite 665, Cerritos, CA 90703-2682.

Do’s and Don’ts about Setting Up a Trust 

1. Do check that the Estate Planning lawyer whom you have selected to work for you is a member of the American College of Trust and Estate Counsel.

2. To avoid conflict of interest, do not name your Estate Lawyer as an Executor or Trustee of your estate.

3. Do have a clear understanding, preferably a typewritten list, of all your individual and joint belongings (financial accounts, land, real estates, automobiles, furniture, books, paintings, jewelry, computers, clothes, kitchenware, among others), together with account names and numbers, parcel numbers, property addresses, and exact spelling of names of owners, and a separate and/or joint list (as the case may be) of Executors, trustees, beneficiaries, and their successors thereof should these named Executors, trustees, and beneficiaries die before the trust is executed. Remember, lawyers charge by the hour. The hours husband and wife spend in front of the lawyer discussing and disagreeing about ownerships of assets, replacement of Executors, trustees, and beneficiaries in the event of their incapacitation, and other details, are what makes the legal consultation expensive.

4. Do fund the trust. Assuming that the husband and wife are in complete agreement of account and asset ownerships and a trust has been drawn up by their lawyer, another step called “funding the trust” must take place. Think of the trust as simply an agreement. Having drawn up a trust is like having constructed a chest. Unless assets are physically moved into the trust, the trust contains nothing. A probate would still take place upon the death of either or both spouses.

5. Do not procrastinate. All the money paid to the lawyer for drafting the trust is wasted if the trust is not funded. To fund the trust, the lawyer will need a written instruction in the form of a memo or letter from you giving instructions to change the title on various assets into the name of the trust. The bank, the stock broker, the County Assessor’s office, and each relevant financial company must be notified in writing about the intention to transfer assets into the name of the trust together with a two to three-page copy of the generality of the trust with information on the date the trust was created. Details of the trust should not be given out.

6. Do not use one lawyer to draft the trust if the husband and wife cannot come to an agreement of ownerships of assets. If the lawyer is an ethical person, at some future time when the lawyer senses that there is potential conflicts between husband and wife, the lawyer is likely to refuse to continue to represent the couple and will notify the parties to each find an independent counsel. Remember, Estate Planning lawyers sustain considerable malpractice lawsuits. It is therefore in their interest to avoid potential malpractice lawsuits by referring husband and wife to seek other lawyers. Unfortunately, legal fees that have already been paid cannot be refunded.

NOTE: Even though husband and wife decide to each obtain separate counsel, they will still need to communicate and come to an agreement about account and property ownerships because California is a community-property state. By default, husband and wife each owns 50% of the accounts and assets acquired after marriage anywhere in the world even if a spouse’s name is not listed as a co-owner, unless a quitclaim or similar document was signed permitting sole ownership.  

Should the husband and wife not be able to come to an agreement on account and property ownership, lawyers will generally advocate filing a divorce. The adversarial system of legal representation in the U.S. makes divorce an almost inevitable outcome once the couple seeks independent counsel. The legal cost of a divorce can range from $3,000 to more than $20,000 in legal fees for each party, depending on how complicated the case is. What started out as a good intention to avoid probate taxes can end up as a divorce case if there has been an underlying tension in the marital relationship for some time.  

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