Planning for life’s end is unpleasant, but we must do it nevertheless. What is needed is just a little time, a little guidance, and some thinking memorialized in a few documents. Death, for most, will be preceded by an unwelcome terminal illness with a loss of personal autonomy and incapacity, which may prevent us from thinking, talking, listening, walking, or driving as we can now.1 This unwelcome condition means that we will be placed in the hands of others to care for us. Care givers have innumerable decisions to make on our behalf. It would be helpful if you told them, “Look, here is what is important to me. Your decisions should be guided by my fundamental values and beliefs.” So start now to identify those values and beliefs, even if you already have a Will and Trust. Start by completing a Values Worksheet such as the one below. It will help in preparing Advance Directives, and help guide family, friends and health-care providers. VALUES WORKSHEET: You should consider your healthcare preferences listed in this table, and the questions which follow. Note your answers and give copies to your family and healthcare providers, or simply use the questions as “food for thought” and discussion. ¹ There are numerous legal devices for handling incapacity, including but not limited to conservatorships, revocable and irrevocable living trusts, joint tenancy, durable powers of attorney for financial management, and advance health care directives.

	Very Important			Not Important
Letting nature take its course	4	3	2	1	0
Preserving quality of life	4	3	2	1	0
Staying true to my spiritual beliefs/traditions	4	3	2	1	0
Living as long as possible, regardless of quality of life	4	3	2	1	0
Being independent	4	3	2	1	0
Being comfortable, and as pain free as possible	4	3	2	1	0
Leaving good memories for my family and friends	4	3	2	1	0
Making a contribution to medical research or teaching	4	3	2	1	0
Being able to relate to family and friends	4	3	2	1	0
Being free of physical limitations	4	3	2	1	0
Being mentally alert and competent	4	3	2	1	0
Being able to leave money to family, friends, or charity	4	3	2	1	0
Dying in a short while rather than lingering	4	3	2	1	0
Avoiding expensive care	4	3	2	1	0

What will be important to you when you are dying (e.g., physical comfort, no pain, family members present, etc.)? How do you feel about the use of life-sustaining measures in the face of terminal illness? Permanent coma? Irreversible chronic illness, such as Alzheimer’s disease? Do you have strong feelings about particular medical procedures? Some procedures to thing about include: mechanical breathing (respirator), cardiopulmonary resuscitation (CPR), artificial nutrition and hydration, hospital intensive care, pain relief medication, chemo or radiation therapy, and surgery. What limitations to your physical and mental health would affect the health care decisions you would make? Would you want to have financial matters taken into account when treatment decisions are made? Would you want to be placed in a nursing home if your condition warranted? Would you prefer Hospice care, with the goal of keeping you comfortable in your home during the final period of your life, as an alternative to hospitalization? In general, do you wish to participate or share in making decisions about your health care and treatment? Would you always want to know the truth about your condition, treatment options, and the chance of success of treatments?

ADVANCE HEALTH CARE DIRECTIVES:

Advance Health Care Directives (“AHCD”), California Probate Code §4270, et seq., are the primary legal tools for controlling end of life decisions and making your fundamental values and concerns known to family and healthcare providers. Advance Health Care Directives, which are also known as “Durable Powers of Attorney for Health Care” (“PAHC”), must be honored by all healthcare professionals, and under federal law must be kept with your hospital records. The Directive or Power of Attorney designates an “Agent,” or “Attorney-in-Fact,” or an alternate agent or attorney-in-fact, and names a “Conservator” or alternate conservator. It directs professional healthcare providers regarding your wishes if you are severely impaired, in a coma, or unable to make healthcare decisions whether temporarily or permanently. It should be prepared to reflect your values, religious preferences, and other life-long believes which would affect your care at life’s end.

ESTATE PLANNING:

Unfortunately, this mortal life will end, and most of us will have accumulated some wealth, large or small. Distribution of this life’s rewards should be as we wish to family, friends, or charity with a minimum of death taxes. Wills and trusts are the two basic instruments used in estate planning. Other documents include: 1) powers of attorney, 2) lifetime gifts, 3) living wills, 4) durable powers of attorney for health care, 5) guardianships and conservatorships, 6) Family Limited Partnerships, and 7) various forms of insurance. First, let’s look at several types of wills and trusts:

Type	Uses
Simple Will	Small estates with no minor children
Trust Will (Testamentary Trust)	Small estates with children, large estates
Living Trusts (Inter Vivos)	Larger estates
Pourover Wills	Larger estates
Durable Powers of Attorney for Property Management	Size of estates is irrelevant
Durable Powers of Attorney for Health Care	Size of estates is irrelevant
Living Wills (not to be confused with Living Trusts)	All sizes of estates
AB Trusts	Middle-sized estates
ABC Trust	Larger estates
Charitable Remainder Trusts	Larger estates
Assignment of non-recorded or registered assets	Middle-sized and larger estates

For medium to large estates, the decision must be made whether to utilize a living trust or a testamentary trust. These instruments contain basically the same estate tax planning provisions. However, a living trust requires that assets be transferred into the trust. If the trust has separate income it may need to file a fiduciary tax return. Whereas a testamentary trust does not require that anything be done until you die. A living trust avoids probate, whereas a testamentary trust requires some probate (community property set-aside order) upon the death of the first spouse and usually no probate on the death of the second spouse, depending upon the survivor's elections at the time.

 

  POUR-OVER WILL:

Cash or stocks in the decedent’s individual name which are not included in the Living Trust can be added without probate to the Living Trust through a pour-over will if the amount is less than $100,000. If it is more than $100,000, then those items must be probated. You should not conclude from these technical illustrations and examples showing how taxes are minimized that this is the most important element of estate planning. Although it is technical and can save lots of tax dollars, it is secondary to properly providing for disposal of your assets now or when you die. Who gets what, and how much? Who will take care of you affairs – your children, your wife (or husband), and/or a third party? How will they manage your things? Recognize your immortality? Where will you be buried or cremated? What will happen if you cannot make decisions about yourself or the last few years of your life? Talk to an attorney, discuss and answer these questions, and then have your attorney document your considerations. Do it now, even if you cannot arrange everything. You can amend the documents later. POWER OF ATTORNEY FOR PROPERTY MANAGEMENT: A Durable Power of Attorney for Property Management permits the decedent’s agent to act in his or her behalf, often without the need for probate. However, there are a number of unknown risks and liabilities for the agent in acting under a Power of Attorney. Accordingly, these instruments should be used with caution.

 

NEW TAX LAWS

The American Taxpayer Relief Act of 2012 was signed by President Obama on January 2, 2013.  This Act amends income, estate, and gift tax provisions.  The Health Care and Reconciliation Act of 2010 ("Health Care Law") imposes a new 3.8% tax on net investment income beginning in 2013, which includes net long-term capital gains.  California income taxes also increased, starting with the 2012 tax year, under Proposition 30.

1. Estate and Gift Tax Law Changes.

The estate and gift tax rules are now permanent.  The lifetime combined estate and gift tax exemption, the generation-skipping tax exemption amount, and the estate, gift, and generation-skipping tax rates are now fixed.  The estate and gift tax exemption amount and the generation-skipping tax exemption amount permanently remain at $5,000,000.00, increased by an inflation adjustment.  This means that these exemption amounts in 2013 is $5,250,000.00 per person.  For an husband and wfie, the exemption is $10,500,000.00.  After 2013, the amount will increase by an inflation adjustment.

Spousal portability, which allows spouses to transfer their unused estate tax exemption to a surviving spouse, remains applicable.

The annual gift tax exclusion increased in 2013 to $14,000.00 per donee.  A husband and wife together can give $28,000.00 per year to each child and to each  grandchild free of tax.

a. The Estate and Gift Tax Rate.

The top estate and gift tax rate is 40%, and applies to decedents dying on or after January 1, 2013.  The rate applies to gifts made after January 1, 2013.  The graduated rate tables apply a $54,200.00 tax on the first $1,000,000.00 of a decedent’s estate or lifetime gifts, and thereafter a flat 40% tax rate applies.

b. Plan for the Increase in Income Tax Basis.

With the increased exemption to $5,250,000.00 per person (or $10,500,000.00 combined for an husband and wife), assets can be held until death and receive a step-up income tax basis.  Upon the death of the decedent, the decedent’s share of appreciated assets receives a step-up in basis and the decedent’s spouse’s community share also receives a step-up in basis.

c. Portability.

The advantage of utilizing portability is that it simplifies the estate plan.  The entire estate of the first-to-die spouse can be left outright to the surviving spouse or in a revocable living trust under the surviving spouse’s control.  However, on the death of the first-to-die spouse, an estate tax return must be filed to utilize the deceased spouse’s unused estate ("DSUE") amount.

A surviving spouse can also receive an income tax basis increase (on the surviving spouse’s death) with respect to the assets received from the first-to-die spouse, which assets are then included in the second-to-die spouse’s estate.

The amount of the DSUE which the surviving spouse may utilize will be the lesser of (i) the exclusion amount; or, (ii) the excess of the applicable exclusion amount of the last such deceased spouse of such surviving spouse, over the amount to which the tentative estate tax is determined on the estate of such first-to-die spouse.

d. Reversing Out Gifts.

Taxpayers who made late gifts and sales at the end of 2012 to try and take advantage of what they thought was an expiring $5,120,000.00 gift tax exemption may want to reverse those transactions.

2. Increased Income Tax Rates.

Income above $400,000.00 for individuals and $450,000.00 for married couples will be subject to a 39.6% tax rate.  These dollar threshold amounts are adjusted for inflation beginning after 2013.

The New Tax Act does not enact the prior 2% payroll tax reduction (thus, payroll taxes increased as of January 1, 2013).  Also starting in 2013, an additional 0.9% MediCare surtax applies to wages under the new Health Care Tax.  This additional surtax applies to married individuals with modified adjusted gross income ("MAGI") over $250,000.00 and for single persons over $200,000.00.

3. Capital Gains and Qualified Dividend Tax Rates.

Those with income less than the $400,000.00/$450,000.00 threshold will continue to have long-term capital gains and qualified dividend income taxed at the lower 15% tax rate.  However, long-term gains and qualified dividends will be subject to a 20% rate for incomes in excess of these threshold amounts.  Capital gains are subject to regular California income tax rates and the 3.8% Health Care Tax.

4. Other Income Tax Provisions.

a. Alternative Minimum Tax.

For tax years commencing after 2011, the alternative minimum tax has been permanently fixed by retroactively increasing the Alternative Minimum Tax Exemption amount to $50,600.00 for unmarried persons and $78,750 for an husband and wife.  These exemption amounts will increase by an inflation adjustment.  However these tax exemptions are phased out for high earning taxpayers.

b. Phase-Out of Personal and Itemized Deductions.

Importantly, commencing in 2013, personal exemption phase-outs and limitations on personal itemized deductions apply to individuals with income greater than $250,000.00 and married couples filing jointly with income greater than $300,000.00.  Itemized deductions are phased out under these limitations by reducing a taxpayer’s itemized deduction by 3% of the amount by which that taxpayer’s adjusted gross income is greater than these threshold amounts (with the reduction not to exceed 80% of allowable itemized deductions).  These threshold amounts are adjusted in the future for inflation.  This phase-out of itemized deductions applies to all itemized deductions except for medical expenses, investment interest, and casualty and theft losses.