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 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

There are a lot of things to look forward to in 2010, but those of us in estate planning and probate law were hoping for one last act of 2009 – Congressional action on the Death Tax.

The Death Tax officially died at midnight, December 31, 2009 meaning that any taxpayer dying in 2010 will not have to pay taxes on his or her estate. It will resurrect itself on January 1, 2011 at Clinton-era levels exempting only the first $1 million with a 55 percent tax rate.

Despite the appealing zero percent tax rate against estates, the hidden danger lies in recent changes to the capital gains tax laws. Heirs face heavy capital gains taxes on the sales of any inherited assets, which may potentially be more costly overall than the death tax.

President Barack Obama and members of Congress have indicated that they want to freeze the levy at 2009 levels ($3.5 million exemption, 45 percent tax) instead of letting it expire.

The House voted in December to put this plan into law. The Senate, though, declined to act until a more permanent solution was found.

It’s expected now that the Senate will take action (when, we’re not sure) and apply any new tax law retroactively. That move may face legal challenges and it still doesn’t help those looking to put into place a responsible estate plan.

Without government action, it is difficult for estate planning lawyers to properly advise clients.

Until this is resolved, all eyes are on The Hill.

James D. Perry

Stories in the news this month have really highlighted the need we have in this country to truly care for our elderly family members and friends, protecting them from exploitation.

Brooke Astor’s son, Anthony Marshall was sentenced this month to as many as three years in prison for swindling millions of dollars from his mother, who suffered from Alzheimer’s disease. And, a Long Island woman was convicted just recently of stealing the home of a 93-year-old retired barber.

MetLife’s Mature Market Institute estimates that financial scams cost the elderly about $2.6 billion a year. Only one in 25 cases of financial abuse is ever reported.

Many people are quick to point to reverse mortgage lenders as the greedy, moustache-twirling villains of financial abuse. Reverse mortgages are loans against the equity in your home that you do not have to pay back until you voluntarily move or sell your home or until you die.

They are ripe for abuse because aggressive ad pitches often involve coercion and deception promising “free money” and failing to disclose fees and terms of the loan, similar to problems raised during the flood of subprime mortgage rate loans into the market that created the housing boom and subsequent collapse.

However, financial abuse can often come from closer to home. Lisa Nerenberg, an elder abuse consultant recently told the Los Angeles Times that the chief perpetrators of financial elder abuse are family members. MetLife puts the percentage of substantiated cases of financial abuse involving an adult child around 60 percent.

As a senior citizen, you can help protect your assets by assigning them into trusts and by choosing a trust-worthy individual to have power of attorney or to serve as a fiduciary. Others can help prevent financial elder abuse by simply opening up a dialogue with their loved ones about finances and keeping an eye out for scams.

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

The Wall Street Journal reports that there has been an upswing in the sales of cemetery plots. As peoples’ financial situations worsen, they are turning to their assets for the hereafter to pay their bills for the here-and-now.

There is little likelihood that you’d be able to sell your plot directly back to a private cemetery, but municipal cemeteries and brokerages are more easily able to turn them around for resale. There is also the option of unloading the plots on the secondary market. A number of websites aid the direct sale of cemetery real estate. The crypt above Marilyn Monroe recently got bids as high as $4,602,100 on eBay, for example.

However, if you’re going to be buying or selling on the secondary market, I’d like to highlight the precautionary measures advised by the WSJ article.

Sellers need to be sure their cemetery allows them to sell on the secondary market. It’s also worth checking with the cemetery to see if they will in fact buy back the plot.

Buyers should make sure the seller is the owner on record with the cemetery to ease the transfer of ownership. And, check with both the seller and the cemetery to see if ancillary costs, such as headstones or burial services, are included in the purchase price.

If you are thinking about buying or selling a plot, check out this website http://plotexchange.com/.

James D. Perry

Nearly 70 percent of those 65 and older will need some sort of long-term care before they die, and already Americans are spending an estimated $160 billion on long-term care services, such as nursing home stays and in-home care.

Emerging within the health care debate is a national discussion on the cost of long-term care for the elderly and disabled.

A news story out of Miami this week highlighted the plight of Gillian Lloyd who is struggling to continue caring for her aging parents despite the sizable nest egg they put together prior to their retirement.

Her 84-year old mother suffers from Parkinson’s and her 85-year old father has dementia. Their retirement fund of nearly a half-million dollars is almost gone after paying aides for in-home care, and Lloyd doesn’t know where to turn next.

Medicare doe not cover long-term nursing home stays, and Medicaid is unavailable to all but the poorest. With the increasing costs of long-term care on Medicaid, officials say the spending is unsustainable. And yet, the current proposed health care plan in Washington D.C. doesn’t really address long-term care.

The late Sen. Ted Kennedy’s proposal included provisions for Americans to buy long-term care insurance from the government at a minimal cost, but since his death, none of his colleagues have taken up the cause or proposed alternatives, and the Obama administration remains silent on the issue.

As of now, it remains to be seen how Congress will choose to address the issue of long-term care costs, but this is definitely an area of policy to watch.

James D. Perry