One of my clients is an avid stamp collector. He has decided that upon his death, his modest collection will go to his granddaughter who grew up learning about and loving his hobby during their summers together.

Individuals pass more to their heirs than just real estate and money – a significant portion of wealth that is inherited comes in the form of art, jewelry, heirlooms and collections.

The difficulty in determining the value of these items and the fluctuations in tax law between this year and next are proving to be tricky for estate planning and estate settlement.

If an inherited asset that is appreciated in value is sold, the profits likely are subject to the capital gains tax. In previous years, capital gains taxes were measured based on the value of the item at the time of the of the original owner’s death under a step up in cost basis.

But, because the step up in cost basis has been suspended this year along with the estate tax, the capital gains tax against 2010 heirs will be measured based on the original owner’s purchase price – not the item’s current value – unless the estate’s executor includes that item as part of the $1.3 million step up that all estates get.

This could be a valuation and tax nightmare for my client’s granddaughter should my client die in 2010. The capital gains tax for collectibles is 28 percent. And many rare objects will require evidence of provenance and proof that taxes were paid on previous sales.

If you have rare collectibles or heirlooms that you intend to pass on, have the items appraised (every five years is recommended) and keep any papers of provenance and purchase in an accessible file. With the return of the estate tax in 2011, you might also consider donating rare collectibles to a museum or other charity, which would allow you to deduct a portion of their value from your estate leaving more to your heirs.

My client’s collection likely holds more sentimental value for his granddaughter than economic, but her grandfather’s pride in his stamps and meticulous record-keeping will protect her from terrible tax confusion when his collection finally becomes hers.

James D. Perry

There are a number of mistakes one can make in financial gifting and distributing assets among heirs. Being aware of the most common problems and addressing them in creating your estate plan can make for a smoother transition of assets.

Timing your gift to you heirs can be very important. If you leave money to a young person, as I’ve written before, you don’t want to give too soon. Financial maturity does not necessarily coincide with age.

But, if you give too late, or neglect telling your heirs of their forthcoming inheritance, you put them at a financial disadvantage. Inheriting sooner through lifetime gifting, or having knowledge of a planned inheritance might change their financial decisions or present to them opportunities that otherwise might pass by.

When you do give, you also need to consider the amount you’re giving. Giving too much may do your heirs more harm than good. There are tax benefits as well as life lessons you may pass on by sharing the wealth among other beneficiaries or by giving to charity.

If you’re planning to leave unequal amounts to your children, proceed with caution. Unequal inheritances – even where one child is more prosperous than another – can create animosity between siblings that may last through their lifetimes and future generations.

However, in an attempt to prevent these problems, you also don’t want to put in place so many controls that you stifle your heirs and the control they have over their inheritance. A trust can be structured with controls and incentives, though, that can help eliminate many of the previously mentioned problems.

Make sure you’re getting good estate planning advice from an estate planning attorney or financial planner, and avoid these common pitfalls.

James D. Perry

In this digital age, you probably have at least one email account. Perhaps two. And maybe a Facebook page to keep in touch with your grandkids, and a LinkedIn account to stay networked with your professional colleagues. You might even have a blog.

What will happen to all that online information after you die? To the account holder’s benefit, many sites refuse to grant access to anyone other than the account holder. Or, the companies have cumbersome hoops for heirs to jump through to gain control of those accounts, which might include getting a court order. And, the government has very little regulation stipulating how online accounts are to be disposed of upon the account holder’s death.

You will first want to inventory your digital assets: you email accounts, blog, social media and networking accounts (Facebook, Flickr, Twitter, LinkedIn, etc.), and any information stored on employer intranets or computers.

Then, determine the worth, if any, of your digital property. A popular blog or Twitter account with many followers may be worth money. Computer files of your manuscript about the history of railroads, or your ornithological research may have educational value. Photographs and other personal assets may or may not have monetary value, but they almost certainly have significance to your heirs.

Most of us fiercely guard our passwords and account information because of warnings against hackers, viruses, and identity theft. But once you’ve listed all your accounts, you need to decide who will be in charge of each of them (or all of them).

Then, write out your instructions and keep them with your estate planning documents. Otherwise, the decision may end up in the hands of the courts or the website administrators.

James D. Perry

You may be willing to trust your teenage grandchildren to house sit for you while you’re away for the weekend, but would you trust them to properly manage your entire bank account after you die?

Paris and Nicky Hilton, heiresses to the Hilton Hotel fortune, are notorious for their party-girl ways. DUI charges and driving violations landed Paris in jail at the age of 25, and Nicky has a reputation for drifting in and out of relationships with potentially opportunistic suitors. Neither has yet shown the maturity necessary to manage the Hilton’s billions should they take over any substantial part of estate today – much less so had they inherited at the age of 18.

Generally, if you decide to leave an inheritance in trust, the account can provide for the minor’s health, education and maintenance through a custodian (living parent or appointed conservator) until he or she becomes an adult. However, once he or she reaches majority, the remainder of the account is discharged to them outright.

You also have the option to hold a minor beneficiary’s inheritance in a trust to be paid out in stages or based on milestones. For example, you could pay a beneficiary 50 percent of his inheritance when he reaches the age of 25 and the remainder at 30; or, 50 percent when he gets his bachelor’s degree and 50 percent when he gets his master’s degree. Again, though, once the beneficiary receives a lump sum free of trust, that property is vulnerable to bad decisions, lawsuits, and divorcing spouses (only if transformed into community property in California).

There is also the option of leaving the minor’s inheritance in a lifetime trust. The assets are managed indefinitely by a trustee or until a designated time when the beneficiary may take full control. The inheritance is protected from divorcing spouses, lawsuits, and if a third-party trustee is used, from the beneficiary’s own bad decisions. If there is anything left in the trust when the beneficiary dies, you can control who will receive the remainder.

There are added costs that come with the administration of a lifetime trust, including accounting and legal fees. And the trustee may be entitled to receive a fee for services rendered while administering the trust. These costs must be weighed against the amount of inheritance and your own long-term estate planning goals when drawing up your will.

Keep in mind, though that some people will never be able to handle money properly, due to disability or character flaw. Some clients struggle with how much control they can or should have from beyond the grave, but only you can determine how much weight, if any, to give such considerations.

You may not be a Hilton, but careful planning in advance can make for a smooth transfer of property.

James D. Perry

Over their lives, people tend to accumulate a lot of “stuff”: furniture, clothing, knick-knacks, books, personal collections, etc. And when they die, that stuff gets passed on to their loved ones, taking up space in their garages, looking oddly out of place in their dining rooms, or sitting in storage simply because the heirs can’t bear to part with it.

It’s not uncommon as an estate planning and probate lawyer to see how people who inherit furniture and other material wealth tend to unnecessarily cling to those physical items. Even I have been dealing with this in the wake of my father’s death: I just do not want to let some things go.

A recent New York Times article highlights the power we give these material objects over our lives, and points to the problem of hoarding, which has become fodder for reality television shows. Hoarding is a serious compulsion, and most people don’t accumulate stuff to that extreme.

But seeing that extreme can force us to look at how we may be hanging on to unnecessary material things when all we really want is the memory that thing evokes.

The trinkets we’ve been given or that we’ve picked up somewhere special become the physical manifestation of the memory of the giver or the context in which it was gained. But “your mother or grandmother didn’t plan for you to become overwhelmed by them,” says Jamie Novak, a professional organizer and author of “Stop Throwing Money Away.”

Organizing experts suggest that you pass on the memories instead of the goods. And, if you already have Aunt Sally’s armoire taking up space in your living room, take a picture of it before donating it to charity.

You don’t have to hold on to the stuff letting it clutter up you life, when you can more easily hold on to the memories.

James D. Perry

See Jim’s review of Jamie Novak’s book “Stop Throwing Money Away” (John Wiley & Sons) in the Summer edition of the Perry Estate Planning Newsletter.

America’s prison population is nearing 2.5 million – roughly 1 person in every 133 – so it’s not unusual that I’ve had clients who have friends or family who are incarcerated.

Leaving assets to a federal, state, or county inmate comes with some bureaucratic hurdles and must be done with careful assessment.

In California, when an individual dies leaving an inheritance to a prisoner, both the Department of Corrections and Rehabilitation and the Victim Compensation and Government Claims Board must be notified. If a prisoner owes any money as restitution as part of his or her criminal sentence, the VCGCB with the help of the Franchise Tax Board is going to take its chunk first.

For example, I had an elderly client with very little family who willed part of his estate to a friend doing a few years’ time in state prison. His friend did not owe any restitution on his sentence, and all lawyers and state agencies involved were properly notified.

However, it was later discovered that he hadn’t paid child support to his wife in over 15 years. The arrearage was near $100,000, which was roughly equal to the value of the inheritance my client left him.

In some states, the department of corrections may even collect the cost of incarceration from an inmate’s inheritance by filing a lien in probate court. The State of Connecticut’s laws allow the probate court to extract the cost of incarceration or 50 percent of the inheritance, whichever is less.

If you’re thinking of leaving assets to a guest of the State, I urge caution. If you intend to provide a nest egg for a prisoner’s reentry into society, be aware of the debts they may have incurred as a result of their crimes, and recognize that they don’t have the autonomy to make decisions regarding that chunk of change until their release.

James D. Perry

Many grandparents come to me saying they would love to give their grandkids a substantial gift for their college funds and future nest eggs, but they don’t know quite how to do it, and they have fears that their grandchildren will be saddled with the taxes.

The first step is to determine how much you can comfortably give away.

Make an honest assessment of your financial health and your long-term goals. You don’t want to compromise your needs or your retirement by spreading your finances too thin.

Next, know the facts about giving.

In January of this year, the law changed to allow individuals to give up to $13,000, per year, per beneficiary tax-free. This $13,000 is excluded from the giver’s lifetime monetary giving allowance. And, the sooner you put that money to work, the better.

Nearly 85 percent of monetary gifts from grandparents to grandchildren will go towards their college education. Prepaid tuition savings vehicles – like 529s – can help in those efforts. The downside, though, is that capital gains from these accounts not used to pay for education will be subject to taxes and penalties.

Grandparents also have the option of opening a Uniform Gifts to Minors Act account. The first $850 contributed to this account is tax-free. The account is automatically put in the hands of their grandchild upon the state’s age of majority.

However, any money removed from a UGMA account will be taxed as capital gains, and the funds may count against him or her when it comes time to calculate financial aid eligibility for college.

To figure out what kind of plan would work best for you, speak to your financial planner or estate-planning lawyer.

Tis the season for gift giving, so don’t be afraid to share the wealth!

James D. Perry

Family dynamics play an interesting role in drafting an estate plan. 

Every so often I meet with clients who, for whatever reason, just don’t like a son-in-law or daughter-in-law, and want to figure a way to keep their son or daughter’s inheritance in the family in the event of a divorce, death, or other unexpected life event.

Fear of a child’s divorce is a common problem in estate planning. Clients are concerned that the inheritance they leave their adult children will become community property subject to 50/50 division upon divorce. This simply isn’t the law in California.

California is a community property state.  But stocks, bonds, cash, property and other assets that are passed through inheritance to an individual are considered separate property - as long as they remain in the name of the recipient.

If your kids are careful with their inheritance, it won’t get lumped into the marital assets.  But this is where family dynamics come into the equation. They need to somehow resist the request of their wonderful, loving husband or wife to add his or her name to inheritance. This is the hard part.
 
Financial columnist Liz Pulliam Weston gave an excellent explanation of this subject in a recent article in MSN Money. Ms. Weston points out that some couples can’t imagine keeping separate assets, some remain pragmatically enthusiastic about individual accounts, and others incorrectly assume the law requires them to share.  The decision to keep an inheritance separate can take a great toll on the marital relationship causing a great deal of stress.

You can hope that your adult child would respect your wishes under pressure, but estate planning is all about creating peace of mind for now and later.  In such a situation, I might suggest that a trust be set up instead to ensure that whatever assets you leave go solely to those you intend.

Discussing these details with your attorney will better enable him or her to develop a plan that will best suit your life and your estate.

James D. Perry

Yesterday the U.S. Supreme Court ruled the daughter of a DuPont Company worker is out of luck in her effort to collect his retirement benefits.

The justices, in a unanimous decision, said Kari Kennedy can collect nothing from DuPont because companies are bound by what a worker puts down on forms designating who is to receive retirement and other benefits after his death.

In this case, William Kennedy divorced his wife of 22 years and she waived her rights to the retirement money in their divorce decree. Kari Kennedy said her father wanted her to have the money after his death. But Kennedy never changed his beneficiary on the retirement account, after the divorce was final and the Court ruled that DuPont was right to pay $402,000 to Liv Kennedy, his ex-wife.

Divorce and Estate Planning lawyers are trained to advise their clients to check beneficiaries designations after a divorce, and to contact their retirement plan and annuity administrators to request change of beneficiary forms. Unfortunately many like Mr. Kennedy never get around to following the advice.

This is the time of year when most of us are pulling together our income records to take to the tax preparer. As you fumble through those retirement account statements, and search for records relating to taxes and investments - take an extra moment to think about who you might have named as your beneficiaries on retirement accounts, life insurance and annuities. If need be, call your agent or custodian and ask for a copy of the beneficiary designation.

If there has been a major change in the composition of your family due to birth, death, marriage, divorce or just a change of heart, consider making changes to your estate plan documents and beneficiary designations. Don’t just say your going to do it, do it.

James D. Perry

In addition to seemingly endless gift lists to satisfy, the holiday season presents many with the perplexing issue regarding service tipping.

Consumer Reports magazine states in the December issue that gratuities, in general, rose by approximately $5.00 over the previous holiday season. In general, Consumer Reports found that the experts they surveyed recommended a one-week service fee match for the total amount of the tip.

In my own case, the biggest tip will go to the caregivers for my parents. My Dad is 93 and Mom is 91. They are still able to live in their own home with the assistance of caregivers who come in each day to prepare meals, take them to the doctor, and any place else they want to go. They also provide an extra set of eyes and ears to report on how my folks are doing from day to day.

Most caregivers are unpaid family members who volunteer their services, or live in the home of their parent rent free. In these cases, when money is not available to show appreciation, I suggest that you take the time to write a genuine thank you note to the relative providing the care. As Ralph Waldo Emerson said, “the only gift is a portion of thyself”.

Where an elder has a 24-hour caregivers or neighbors who provide care, the decisions on a holiday gratuity are not the issue. Often they have little communication with relatives and family who have moved from the area. These elderly and dependent adults are easy prey to the darker side of care giving…the caregiver or neighbor who talks the elder into making a substantial gifts to the them in a will or trust.

Caregivers are one category of people the State of California would rather you left out of your will. If the person receiving the care is a “dependent adult” (a person who has physical or mental limitations that restrict his or her ability to carry out normal activities, or whose physical or mental abilities have diminished because of age) they will have to jump through a few extra hoops to leave anything substantial to their caregiver. This is because many dependent adults are too weak of body or mind to resist the influence of a caregiver who suggests a trip to the lawyer’s office to make changes to their will. As a general rule in California, gifts to caregivers by a dependent adult in a will or trust are void unless certain conditions are met.

There are legal ways to leave some part of an estate to a caregiver. The law specifically exempts gifts of $3000 and some small estates. For larger gifts, California requires the client meet with a second attorney to explain why they would want to make a gift to the caregiver. The second attorney must then certify that the client is not making the gift as a result of fraud, menace, duress or undue influence.

In a recent interpretation of this law, the California Supreme Court, in Bernard v. Foley, ruled that the definition of a caregiver includes relatives and friends who provide care for a nominal cost or no cost at all, not just professional paid caregivers. By widening this definition, many friends of dependent adults, that provide any ongoing health or social service, will find themselves falling within the definition of “care custodian”, which could in turn bar them from donative transfers intended for them in wills and trust.

When in doubt, any person desiring to gift money from a will or trust to a person who has provided them care giving service, paid or not, should make sure proper legal steps are taken to ensure that the gift will not be voided by failing to follow the proper legal procedures.