Probate, Wills

When to File a Washington State Estate Tax Return

For a decedent whose “gross estate” exceeds two million dollars, a Washington State estate tax return must be filed with the Department of Revenue (RCW 83.100.50).

The term “gross estate” is essentially the value of the decedent’s property wherever situated, before any deductions, defined under IRC Section 2031.

While filing a return at the two million dollar threshold is required, there may be no tax imposed:

First, each Washington State resident decedent is entitled to an annually adjusted applicable exclusion amount.  The Washington State estate tax will only be assessed on the value of assets in excess of the exclusion amount.  The 2016 applicable exclusion amount is $2,079,000.  Thus, for a decedent dying in 2016, the assets in excess of $2,079,000 will be taxed at a graduated rate of between 10% to 20% (RCW 83.100.040).  If the estate value falls between $2,000,000 and $2,079,000, a tax return must be filed, but no tax is imposed.

Second, an unlimited marital deduction allows a decedent to transfer assets of unlimited value to a surviving spouse, completely free of estate tax (RCW 11.108.020 and IRC 2056).  If the estate value exceeds $2,000,000, but the assets are transferred to the surviving spouse, a tax return must be filed, but no tax is imposed.

Third, transfers at death to entities with qualified public, charitable and/or religious purposes allow a decedent to pass assets of unlimited value free of estate tax (IRC 2055). Thus, if the estate value exceeds $2,000,000, but the assets are transferred to an entity with a qualified public, charitable and/or religious purpose, a tax return must be filed, but no tax is imposed (WAC 458-57-015(3)(b)).

When an individual passes away in Washington State, it is important to consult with your attorney to determine if a Washington State estate tax return must be filed, if any tax will be due, and perhaps most importantly, to determine what steps are possible to reduce the estate tax at the death of a surviving spouse.

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Probate

Time to Start a Probate?

When someone close to you passes away and you are named as the Personal Representative (or Executor) of their Will, you may be uncertain about how quickly to act regarding the decedent’s estate.  You will likely need to open a probate with the court to get access to the assets, but several factors can determine the urgency with which you should act:

(1) The Value of the decedent’s estate: If a person dies a Washington State resident and their estate is valued at $2,000,000 or greater, an estate tax return must be filed within 9 months from the date of death.  Tax returns are complex and require time to prepare.  Opening a probate quickly is a good idea for larger estates to allow time for the preparation of the estate tax returns.

(2) Creditors of the decedent: If a person dies with many creditors, large medical bills, or if you are uncertain about the individual’s debts, opening a probate quickly is a good idea.  In Washington State, the probate process allows for unsecured creditor claims to be limited to a four month period if notice is published in a local newspaper. It is a good idea to start the clock ticking on this four month window.

(3) Access to Accounts: Lastly, opening a probate quickly may be necessary to pay ongoing expenses.  If the estate is incurring expenses like mortgage payments and condo dues,  the financial institutions holding the decedent’s assets may require a probate for you to access the assets to pay expenses.

Generally, a loved one can take the time they need to grieve before starting the probate process.  However, to avoid missed filing deadlines, limit late fees and potentially avoid  creditors, it is best to consult with your attorney to determine how quickly after death to start the probate process.

 

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Life in General

Friends ‘Like Family’

I recently lost a very dear friend to cancer. I happened upon this lovely article in the New York Times by  Deborah Tannen, a Georgetown University linguistics professor who studies how the language of everyday conversation affects relationships.  Her article beautifully sums up how close friends are ‘like family’ and how significant losing them can be.

 

 

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Wills

What’s the rush?

Polls consistently show that roughly half of American adults do not have estate planning documents.  For young families, this number is even greater. Why do more young families not have Wills or Durable Powers of Attorneys (DPOA) appointing surrogate decision makers?  While the young are far from old age and do not see sickness or death on the horizon, careful planning is important because the risk to your children and loved ones is significantly greater if you pass away without proper planning.

There are many factors that inhibit young parents from preparing their Wills and DPOAs.  To name a few: (a) exhaustion from raising children and a never ending parade of pick up and drop offs to activities and school; (b) fear that hiring a lawyer will be too costly; (c) uncertainty about whom to appoint as executor, guardian or trustee; and (d) fear of discussing death.

(a) Exhaustion: While it may seem counter intuitive, a great time to have your planning documents prepared or updated is after the birth of a child.  Habits are most easily changed when you have a change in routine. (http://www.npr.org/2012/03/05/147192599/habits-how-they-form-and-how-to-break-them)   Introducing a new member to the family is a good time to reevaluate your monthly finances, financial goals, life insurance and estate planning documents.  Also counter intuitive, a good time to call your estate planning attorney is the day after you return from a vacation. The two most important reasons for young parents to have their estate planning documents prepared are to protect against your children receiving assets outright at 18 and to nominate guardians.

(b) Too Costly: Most estate planning attorneys bill hourly, while a handful offer flat fee packages.   For hourly billing , you should be able to request a fairly accurate estimate of cost.  It can be unsettling not knowing the exact cost.   However, attorneys that bill hourly count all the time spent meeting with the client and working on document preparation.  That means the less time they spend, the lower your bill will be.  If you are able to come to your meeting prepared, knowing what you want in your estate plan and having already selected your executors, guardians, trustees and attorneys-in-fact, you will keep your bill down.  If you are cost sensitive, as many young families are, when visiting your lawyer it is best to keep your bequests simple and revisions to a minimum.

(c) Uncertainty: The three most common roadblocks to picking an estate executor, guardian and trustee are (1) fear that someone will feel left out.  The job of executor is not a gift, it is hard work that is time consuming and often thankless.  You are best to pick someone up to the task.  (2) Not knowing anyone who is financially savvy; a way around this is to appoint a professional fiduciary.  While a professional does charge a fee, there are strategies to make their involvement as cost effective as possible;  (3) Not knowing who to pick as a backup guardian.  This is a real problem for our highly educated and mobile work force. Particularly those involved in tech who move from all over the country to choice jobs in techie cities like Seattle.  Their family members often live far away, but their children have become enmeshed in the local community.  This is not an easy question to answer, but proper estate planning is critical to allow provisions for guardians to relocate so that minor children can be kept in their current locale.

(d) Fear: Talking about death is always a difficult and uncomfortable topic. But we must push aside our fears and discomfort and have the hard conversations to protect those we care about most.

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Special Needs Trusts

COPES Caregiver Payments and Federal Income Tax Exclusion

The IRS will now consider payments to certain individual care providers under the COPES Medicaid waiver program as “difficulty of care” payments excluded from federal income tax.  The exclusion applies when a care recipient resides in an individual care provider’s home, regardless of whether the care provider is related or unrelated to the eligible individual. Income is excluded for providers caring for as many as 10 eligible individuals under age 19 or five eligible individuals who are age 19 or over.

Medicaid waiver services include personal care services, habilitation services, and other services that are “cost effective and necessary to avoid institutionalization.”    It is important to note that personal care services do not include skilled services that only a health professional can perform.

The IRS has broadly interpreted the definition of “foster home” and “difficulty of care” payments under § 131(c) of the I.R.C.   A “foster home” will now include a “family home” setting where an eligible individual gets care under a Medicaid waiver program and resides in the caregiver’s home.  “Difficulty of care payments” now include Medicaid waiver payments because, like foster care payments, the waivers provide the additional care needed for a qualified individual with physical, mental, or emotional handicaps to stay in a home setting.  The policy behind this expanded interpretation is that both Medicaid waiver and foster care programs share the objective of enabling individuals who would otherwise be institutionalized to live in a family home setting by paying resident caregivers for the additional care requirements.

The scope of this IRS notice is limited and does not address whether qualified Medicaid waiver payments are subject to tax under the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA).  Taxpayers may apply this notice for a claim for credit or refund for returns predating January 3, 2014 up to the later of 3 years from the date of filing or 2 years from the date of payment of the tax.

See: Internal Revenue Bulletin 2014-4; Notice 2014-7

 

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Public Policy

Family Leave Insurance

In October 2013, I wrote an article for NW Lawyers Magazine on the importance of family leave insurance in Washington State. http://nwlawyer.wsba.org/nwlawyer/october_2013#pg28
This is critical issue facing women today, as is the need for affordable daycare.   In December 2013, a national paid family leave bill was introduced to congress as Senate Bill 1810.  We will hopefully see more movement on this topic in 2014.
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