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

With wills and trusts, people tend to “set it and forget it.” But it’s important to revisit your will and trust documents at least every five years, or whenever there is a major life event – new children, new son or daughter in law, new grandchildren, divorce, remarriage, new property, etc.

Guardianship appointments should be current if you have minor children so that you can designate who will care for them if you die.

Your beneficiary designation forms determines who will get your insurance and retirement accounts. This too, should be updated periodically. If you named a sibling or your parents as your beneficiary when you were younger on these forms, you might now want to make sure they go to your spouse or children instead. Many people aren’t aware that these forms override stated wishes in your will so you should consider these documents in tandem to prevent confusion.

Keep all these documents in a safe place – a fire-proof safe, a clearly marked file in your file cabinet, a shared folder on your home computer, or ask your lawyer to hold on to them – and make sure your loved ones know where they can find them if and when they need them.

In a medical emergency, or in moments of mourning, you will not want your family and friends to be in a frenzy when all they want is to honor your wishes and your memory.

If you haven’t started any of these documents, you should immediately create a balance sheet that lists the basic information about your assets and schedule an appointment with your estate-planning attorney as soon as possible.

James D. Perry

At the end of May, parties claiming deceptive business practices by LegalZoom filed a class action lawsuit in California against the online legal document preparation service. They argue that LegalZoom’s advertisements give consumers “a false sense of security that people do not need hire a traditional attorney.”

In July 2007, Anthony Ferrentino asked his niece, Katherine Webster, to help him use LegalZoom to prepare a will and living trust. But, when Katherine went to transfer her uncle’s assets into the trust, she found that the financial institutions that held his money refused to recognize the LegalZoom documents as valid. Katherine tried to get help from LegalZoom’s customer service representatives to no avail, and the trust was still not funded when Anthony died in November 2007.

Katherine is now one of the plaintiffs in the suit against LegalZoom suing on behalf of herself and on behalf of anyone in California who paid LegalZoom for a living trust, will, advance directive for health care, or power of attorney.

The internet has brought a lot of convenience to our lives with its wealth of information, online shopping, and the ease of staying connected to our loved ones. But sometimes convenience means cutting corners, and the one area you don’t want to cut corners is in protecting your loved ones and your property.

These legal document preparation services are not the same as going to an actual attorney, but they do not clarify that in their user agreements. And, customer service representatives may look over your documents, but they cannot dispense legal advice, identifying problem areas or correcting mistakes. The documents are customized with your personal information, but they are not tailored to your needs.

After her uncle’s death, Katherine hired an estate planning attorney to petition the court to allow the post-death funding of the trust and to convince the banks to transfer the funds. The attorney also discovered that Anthony’s will was never properly witnessed.

Correcting the mistakes ended up costing Anthony’s estate thousands of dollars. Doing it right the first time would have saved time and money, and a lot of emotional stress. In the end, the “convenience” simply wasn’t worth it.

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

My profession is estate planning. Clients come to me for help on how to preserve their life’s accumulations of wealth and how to pass it on to their loved ones.

What I do for a grandfather and grandmother through legal documents will hopefully convey through transfer of financial assets, a lasting memory of their love and appreciation in the eyes of their children and grandchildren.

But the greatest material wealth my clients possess is not nearly as vast as the richness of knowledge, morals, and wisdom that they hold in their hearts for their families.

A person’s legacy is not solely in the assets they leave behind, and one tradition dating back to biblical times – the ethical will – lives on to provide a vehicle for an individual’s intangible fortune.

An ethical will, or legacy letter, is a document designed to pass on ethical values or life lessons from one generation to the next. It is drafted by you, not me or any other attorney. There are examples of early ethical wills written throughout the Christian Bible, the Jewish Torah, and they are even contained in the oral traditions of Native Americans.

Ethical wills often contain meaningful family stories, personal values and beliefs, statements of faith, blessings, advice, and expressions of love. They may even share regrets, apologies, and final requests. There are no rules or laws about the length or content of an ethical will. It can be a few lines, or paragraphs or many pages in length…this is a case where it really is the thought that counts.

Your ethical will may be kept in a separate document with your last will and testament. However, as much as you hope your heirs follow your sage words and honor your legacy, there is no binding legal authority behind the contents of your ethical will.

Every ethical will is unique. And, while there is no standard format for writing one, there are resources available (books, audio CDs, DVDs and podcasts) to help you write your own.

I urge you to provide for the security of your family by crafting a solid estate plan. But, I also encourage you to be just as generous with your life experiences and values, leaving your loved ones more than just your material possessions.

James D. Perry

In 2008, the federal government collected in excess of $25 billion on individual estates via the estate tax, sometimes called the “death tax.” It’s been six months since the tax lapsed as part of legislation enacted under President George W. Bush in 2001.

Now, the death of one American billionaire, oil magnate Dan L. Duncan, is casting a spotlight on how much the federal government is not collecting.

Duncan’s fortune was estimated to be worth $9 billion, ranking him as the 47^th wealthiest person in the world. Had he died in December 2009, any part of his estate not left to his surviving spouse would have been taxed at a rate of at least 45 percent – at most, $4 billion for the federal government.

The House and Senate failed to come to any consensus last year on legislation that would have prevented the repeal. But, the Senate Finance Committee wants to reinstate the estate tax – the only question being whether the final legislation on the matter will include provisions to collect on the estates of those who have already died this year.

Advocates of the tax point out that the U.S. is home to more than 50 of the world’s billionaires over the age of 80, and claim that the repeal amounts to an unconscionable tax break for the ultra-wealthy in very lean times and historical income disparity. Opponents argue that the tax is unfair because it taxes the same income twice – once when it is earned and again when it is passed on to heirs.

Lawyers agree that any attempt to apply the tax retroactively to the Duncan estate will be met with well-funded legal opposition and arguments that a retroactive tax is unconstitutional.

Congress has another six months to figure out what to do with about Tax-Free 2010. The tax returns at a rate of 55 percent in January 2011.

James D. Perry

It is estimated that by the year 2020, 12 million elderly Americans will be in need of long-term care.  Many of them will have to rely on their adult children as caregivers.

This imposes a heavy emotional and financial burden, even on happy and willing caregivers, and financial assistance for long-term care is sparse.

Medicare generally does not pay for long-term care, which assists people with daily living activities such as cleaning, meal preparation, dressing, bathing, using the bathroom.  Medicaid may pay for some long-term care services, but its eligibility is limited to people with low incomes and limited assets.  Private long-term care insurance can be pricey, especially if you wait until you are over the age of 50 to begin paying premiums.

The new Community Living Assistance Services and Supports (CLASS) Act is an attempt to close the gap between people too rich for government assistance, but not rich enough to afford they care they need.  It goes into effect January 1, 2011 and enrollment is expected to begin in 2013.

The government program acts like long-term care insurance – you pay premiums for five years (working at least three of those years) and it will provide cash to pay for care when you need it for as long as you need care.  No tax dollars are to be used to support the program.

The CLASS Act is not meant to cover the full cost of 24-hour in-home care or a nursing home, but to supplement your personal contribution.  The Congressional Budget Office has assumed a cash benefit of $75 a day, but the Department of Health and Human Services has until October 2012 to hammer out the rules.  But, to put this in perspective, the national average cost last year of an assisted living facility was $37, 572; $75 a day would pay almost three-quarters of that expense.

The best thing to do is to plan now as if long-term care, for yourself or for your aging parents, is a financial inevitability.

James D. Perry

My Dad was a guy who loved is family and took care of little things behind the scenes to make his kids lives a bit easier. One of those things was to prepay a cremation of his body and interment of his ashes at plots that he and my mother purchased years ago at Rose Hills.

When he died, his preplanning saved me many hours of decision-making and legwork. The only downside, if there was one, is that I get periodic calls from my Rose Hills representative urging me to prepay my own plan.

Paying in advance combines pre-planning with pre-funding, which makes it an attractive estate planning mechanism. Often, prepaid burial plans are a tool used to “spend down” excess funds to qualify a client for MediCal Long Term Care benefits.

There are primarily three ways to pre-pay for a funeral: insurance, trusts, and individual funding.

An individual may buy a whole-life insurance policy to cover the costs when needed, or money may be put into a trust run by a financial institution or statewide funeral directors association.

Individual funding may be done through so-called guaranteed and non-guaranteed plans. Under a guaranteed plan, a funeral home promises that if you pay today, it will provide services to you when needed no matter how much prices rise. Many of them exempt other costs, such as flowers and music, though, and changes to the plan potentially void the price guarantee. A non-guaranteed plan offers no such price protections.

Whatever route you might choose to take in pre-paying your funeral, though, be aware of the risks.

Revoking a prepaid plan is not easy. California imposes up to a 10% fee on prepayments in trust. And, canceling an insurance policy entitles you to receive only the cash value of the policy – not necessarily the value of premiums paid – minus commissions and costs.

Also, there are widespread allegations of fraud and mismanagement within the industry. State and federal legislators are working to curb abuses through regulation and disclosure requirements, but consumer protections for those caught in a scam are still not strong.

Some consider it sound financial planning – a hedge against inflation locking in today’s prices in an industry where prices continue increasing. Others simply wish to spare their loved ones the trouble of picking out caskets, buying burial plots, and making other arrangements during their grieving.

As with any investment, diligent scrutiny and seeking legal and financial advice where needed are key to ensuring your money and your loved ones are protected.

James D. Perry

I blogged a few months ago about the change in California law that permits probate courts to rule in on the validity of a statement in your will that threatens to disinherit any person who files a lawsuit contesting the validity of your will.

Under current law, the courts will allow good faith challenges that allege some sort of wrong-doing in the creation of the will, including an allegation that the testator was under some undue influence in writing out the terms of his estate distribution.

So what is undue influence? One example was in the infamous Marshall v. Marshall battle where Anna Nicole Smith alleged that her late husband’s son engaged in malicious and willful behavior to prevent his father from leaving Anna Nicole a substantial gift in his will.

Many times the elderly are easy targets for manipulation and unscrupulous individuals, often family members, who try to manipulate them into signing a last will and testament to their advantage.

The court will look at all the circumstances to determine whether an individual asserted undue influence and it may void a gift under a will.

The court may look at the relationship between the donee and the testator (drafter of the will). Why is this person getting the money? Is the donee a family member or a normally expected heir?

The court may also look to the level of involvement in the donor’s affairs or the involvement in the gift itself. The greater involvement, the less questionable it might be that the person would inherit. For example if the donee drove the testator to the attorney’s office, sat in on the meeting with the attorney, and paid the attorney fee, the court would presume that the testator was subjected to undue influence.

It’s also worth noting the circumstances under which the property was promised in the will, such as if and when the will was changed from a longstanding estate plan, and whether the change was made in secret or if the testator’s intentions were shared with others. Also, what was the physical and mental state of the testator at the time the will was written or changed?

These aren’t exclusive factors in determining whether there was undue influence or not, but they are questions worth asking in the interests of protecting yourself and your loved ones.

On a final note, there is no law against asking someone to leave you something in a will. You and your sister might both ask your 96-year-old grandma to leave you her 5-karat Harry Winston diamond ring. But if your grandma is in a fragile mental or physical state, and you lie to her and tell her that your sister is a drug addict who will surely pawn any jewelry for cash – that’s undue influence. You usually know it when you see it…it doesn’t pass the smell test.

James D. Perry