CA Estate Planning

HOW DO YOU PLAN YOUR ESTATE AS "TAXMAGEDDON" APPROACHES?

If you’ve been planning your estate, then you’re no stranger to the ominous feeling of waiting for Congress to act on the tax front. The clock is ticking.

Returning readers are probably already familiar with the uniquely ominous circumstances surrounding the end of 2012. Still, some things bear repeating early and often. This is one of them.

As noted in a recent SmartMoney article titled “Preparing for ‘Taxmageddon,’” the Bush tax cuts were set to end in 2010. Then, in a grand, last minute gesture, a “compromise” was struck to extend similarly generous provisions until the eve of 2013. In reality, this compromise was just a way of buying time and kicking the can down the road.

While the resulting tax benefits, although fleeting, have been truly great for some estate planners, the country is evermore divided and stuck in an election mindset. Nevertheless, the clock continues to tick away toward December 31, 2012, and, well, “Taxmageddon.”

Regardless of which party takes the executive and legislative branches in November, it is far from clear that the “lame duck” Congress will be able to do the work in time. In fact, the likelihood of increasing taxes will simply default because the executive and legislative branches simply will not hammer something out.

So, how could this scenario ruin estate plans, if it comes to pass? I recommend reading the original article in SmartMoney and while you are at it, journey over to an older article in The Wall Street Journal here, titled “Preparing for the End of the Bush Tax Cuts.”

Teaching point: everything tax-wise is on the line these days. Since it is nearly impossible to say which way things will tip, plan accordingly.

Reference: SmartMoney (May 23, 2012) “Preparing for ‘Taxmageddon’ ”

 

 

 

Gore-Tex Heiress Unable to Avoid Soaking!

F. Scott Fitzgerald observed that the rich are different, but that does not mean an heiress can adopt her 65-year-old ex-husband to increase her family's claim to a billion dollar inheritance.

You can pick your husband and, if you adopt, you can even pick your kids. However, according to at least one court, you can’t adopt your ex-husband to be your adopted child in order to cut your death tax exposure.

Just when you think you have seen it all in the exciting world of estate planning, along comes a gem. Enter a recent case concerning the Gore-Tex fortune.

As Reuters reported in an article titled “Court: Gore-Tex heiress can't adopt ex-husband,” the Gore-Tex fortune was set to pass through a family trust amongst the children and grandchildren of the aging founders. All of the first generation down – the children of the founders – had four children themselves, except for Susan Gore. Susan had three children with her husband Nathan Otto before they split in a divorce.

Once Susan did the math, she discovered her side of the family equation was getting stiffed an entire person’s share. Why? Because she was short an heir. Solution? Her ex-husband agreed to be adopted by Susan as her fourth child by way of a secret adoption.

When it came time to distribute the first trust to the beneficiaries, the trustee balked at the secret contrivance to seek out more shares. The court agreed.

While Susan should receive high marks for her creativity, it really was a bald-faced attempt to grab at the family fortune. Then again, it’s not uncommon for bickering heirs to do this sort of math and resort to just this type of contrivance.

As the old tax maxim goes, however, pigs live and hogs get slaughtered.

 

Reference: Reuters (May 23, 2012) “Court: Gore-Tex heiress can't adopt ex-husband”

 

 

'TIS BETTER TO GIVE THAN RECEIVE. 'TIS BETTER YET TO GIVE AND RECEIVE!

More people are seeking investment income from an unlikely source: their favorite nonprofits. Why "gift annuities" are on the rise. In charity, as in all matters, the greatest gifts are the ones that keep on giving. This is especially true when the gift actually gives back to you after you make the gift. It comes as no surprise then that “gift annuities” are rather popular right now. That noted, gift annuities are not perfect for everyone and there are some risks. A recent article in SmartMoney titled Charitable Gifts That Give Back addressed both sides of the gift annuity coin. The essential idea behind any annuity is to transfer a large sum of money in exchange for regular and equal payments over a specified period of time (to include over the remainder of your life). As such, annuities can be a powerful source of predictable income late in life under the right circumstances. Commonly, you establish an annuity with a large financial institution because it can make enough money off of your money (and the money of other annuitants) to honor its commitment to make the current and future payments back to you. On the other hand, should you establish your annuity with a charity, the annuity works the same way but with certain valuable additional benefits, depending on the kind of trust that you create. First, if at the outset, you transfer an asset that has greatly appreciated in value, the charity can sell the asset without any paying capital gains tax. The charity pays you an annuity and at your death (or even after the death of your spouse), the balance of the initial funds are available to the charity for its own purposes (known as a charitable remainder trust). Secondly, because of your immediate transfer to the charity, your initial lump sum funding counts as a charitable gift and is deductible for income-tax purposes in the year it is made. [Note: There is a rather sophisticated calculation that determines the actual amount of the deduction and over how many years.] There is another basic form of charitable trust where the charity has immediate use of the funds and transfers to assets back to your heirs on your death without payment of any estate or gift tax. This is known as a charitable lead trust. [Note: It is not that simple but that is the basic idea.] As with most financial decisions, caveat emptor (i.e., “let the buyer beware”). Not all charities offer gift annuities and, if they do, you should be sure to evaluate their ability to make good on the payment stream. While the gift annuity process can be uniquely satisfying, and is therefore worth consideration, be sure to look carefully before you leap. Reference: SmartMoney (April 6, 2012) “Charitable Gifts That Give Back”

The family farm is a business and business succession planning is critical, sooner rather than later.

Perhaps more than any other kind of industry or property, planning for the succession of the family farm poses a significant challenge to the estate planner.

Some of these challenges are described in a recent article in Agri-View titled Estate planning lays framework for smooth transition.

When the farm is a family farm it is also the family business, and your estate is really about planning for the succession of the business and the farm. This can be a delicate process, but it is better to start the process sooner rather than later.

For one thing, don’t overlook the fact that farmland values can trigger estate taxes (real estate bubbles aside, land is the only thing that consistently grows in value – there isn’t likely to be any more of it made – and farms are all about land).

Accordingly, some rather sophisticated estate planning (and liquidity planning) may be in order, or the family farm could be lost to the IRS.  Estate taxes aside, there are many other considerations to secure the future of the “family” element of the family farm.

For example, who will inherit the farm, let alone continue to operate it? What if your children live in the suburbs and work every day downtown? Who will actually do the “farming”? Perhaps renting or sharecropping might be more practical. Regardless, these are the kinds of practical real-world matters that ought to be decided within a legal framework to ensure succession success.

So, if you are a farm-owner, and particularly the owner of a family farm, then there is much work to be done. While I recommend reading the original article, be sure to engage competent legal counsel, as well as any farm extension agent assistance that may be available.

Reference: Agri-View (March 29, 2012) “Estate planning lays framework for smooth transition”

 

Is 2012 the year to transfer your business for greater tax benefits?

“I’ve heard recently about the federal gift and estate tax window of opportunity for asset transfer, and was wondering if that impacts succession planning. Will there be greater tax benefits for me to leave the business in 2012, rather than 2013?”

Success in business is often dependent on good timing. Business owners time the market, time their sales, time their marketing, time their expansion, and just about everything else. Logically, then, succession planning for your business requires careful timing.

A recent article in Businessweek, titled Family Businesses Should Plan Now for Rising Gift Tax, took up the matter of succession timing. In fact, the timing component of succession planning may be more important now than in recent times, especially given the state of gift and estate laws. The current exemptions and rates were the fruit of the “great compromise” between the White House and Congress at the end of 2010. The compromise created a lifetime gift tax of $5.12 million (adjusted for inflation) for 2012, but only guaranteed that amount until the end of 2012.

As a result, if you want to transfer large assets – like a business – then 2012 may be the year. The current $5.12 million will default to $1 million at year’s end, unless the White House and Congress agree to retain the current exemption.

So 2012 may be the year – perhaps the last year – to transfer large assets with such a generous tax exemption. Depending on the value of your business, 2012 may be the year to make your move. This is especially true if your business is valued at more than $1 million and would be at risk were the laws were to sunset.

Of course, as a general rule of thumb, it is oftentimes easier (and more efficient) to transfer a business incrementally since, if nothing else, it can be monitored and protected at each stage.

In the end, be sure to engage competent counsel before taking action. There are some very complex issues that need to be considered, to include valuing the business itself, structuring the transfer and a very open tax issue regarding a potential “clawback” in the future.

This is not a D.I.Y project.

Reference: Bloomberg Businessweek (March 19, 2012) “Family Businesses Should Plan Now for Rising Gift Tax”

 

Will your beneficiaries appreciate your art collection as much as the IRS appraises it for estate tax?

How do you dispose of your valuable art collection?  Does it go to a museum where many may appreciate it?  Will your heirs appreciate it or just send it to auction?  Here are some options.

Collecting artworks has been your passion for many years; you've built a fine collection.  However much you may appreciate early Renaissance Madonnas, your children may be more into Jackson Pollock or Joan Mitchell. Or you may have discovered Lucien Freud before he came popular and your collection has greatly appreciated in value.  Capital gains, estate and gift taxes are on your mind.  

So, how do collectors and their estate planning attorneys make proper plans for the transfer of your treasures?  There are many different options, but first of all it may be a good idea to determine the market value of the collection for taxation purposes:  This is valuation used by the IRS.

The next challenge is determining who will receive your collection.  Recently, estate planning issues regarding art have received media attention (to include the strange case of Ileana Sonnabend) as highlighted in a recent article in the Wall Street Journal appropriately titled The Art of Passing Along Art.

As the article notes, the major problem with making an estate plan to transfer art is the nature of “art” itself.  Ultimately, you need to ask yourself why you are giving the art collection in the first place. Are you giving to an art-lover or in lieu of liquid assets? Are you actually giving to the beneficiaries or are you simply trying to find safe homes for the pieces?  Or, do you bequeath it to a museum and offset the charitable deduction against your estate taxes, and probably avoid capital gains tax if you sold the pieces during your life.

Whatever your wishes, there are estate planning solutions. However, you need to prioritize your own goals and wishes for your loved ones, as well as for your art treasures.

Reference: The Wall Street Journal (March 2, 2012) “The Art of Passing Along Art”

 

IS IT SAFE TO MAXIMIZE GIFTS IN 2012 WITHOUT RISK OF A TAX “CLAWBACK” IN 2013 OR LATER?

If you have not used up your 2012 gift tax exemption yet, there’s a pretty compelling case to do so this year.

Lately, writing about estate tax law is a lot like writing commentary on a monster movie. This estate tax law “monster” should be known as the dreaded “Unknown 2013.” It’s the unseen and unknowable creature that lurks just after the upcoming election,  before or after the fall of the globe in New York’s  Times Square on the last day of 2012: What’s going to happen to the “death” taxes in 2013? But that’s not the only monster on the loose this year. No, there is a terrible twin, known as the dreaded “Clawback” that could prey on your 2012 gifts in 2013 and beyond.

The legal community itself is entirely uncertain whether Clawback will rear its ugly head, but to be “rather safe than sorry” estate planners are suggesting ways to protect 2012  gifts from the Clawback, that is if you heed the latest warning from Forbes and utilize whatever means are available to you. I thought it was worth sharing.

As a monster, the Clawback is something of a ghost in that it haunts people from the grave and does so because of decisions made during life.“Clawback” could arise if the estate tax laws which unify the gift tax and estate tax exemptions (known as the “unified credit”) lower the unified credit below $5 million during the next Congressional cycle or later.For example, if you made a mega gift in 2012 the unified lifetime gift and estate tax exemption is $5 million this year), but then died in 2013 and under 2013 laws the unified credit is $1 million (the “default”), or a unified exemption less than $5 million, then you may have used up your entire unified credit simply because the tax laws have been changed!

To make matters worse, the gift and estate taxes will kick in and “clawback” those assets that were gifted upon the beneficiaries of your largesse to pay for the gift tax on your mega gift because the exemption is lower at the time of your death. That’s bad enough, but what if yours is a blended family? What if the beneficiary inheriting your estate, who has to pay the gift tax on your mega gift “clawed” back into your estate for tax purposes, was not the same beneficiary who received your mega gift while you were alive? What if your “inheriting” beneficiary and your “gifting” beneficiary don’t like one another? That’s an unfortunate tinder box.

It is hard to pin down whether these twin monsters will show up and, if they do, what form they will take (they are master “shape-shifters”).

The point is that there are ways to help avoid the “Clawback,” whether it raises its ugly head, or not. If you’re savvy enough to want to take advantage of 2012 gift tax law, then make sure you’re savvy enough to see your estate planning attorney and ensure you avoid the monster as far as possible!

Reference: Forbes (March 12, 2012) “Should Threat of Clawback Discourage 2012 Mega Gifts ?”

TAX PLANNING & CHARITABLE DONATIONS

Giving to charity can be a very noble thing and to many of us it comes quite naturally, unfortunately it’s also rather easy to give incorrectly, at least as far as taxes are concerned. To prevent a simple but all too common mistake, the Wall Street Journal offers a mantra: “Get the letter. Get the letter. Get the letter.”

If you are making a donation of more than $250, the charity must properly acknowledge your donation before the IRS will, and that means a letter. Indeed, the IRS is surprisingly literal about this and refuses to bend or accept other means of proof, even when people go out of their way to offer alternatives. You must have a letter written by the charity that clearly delineates the amount of the donation. Further, the letter also must affirm that no goods or services were rendered or, if there was an exchange, the letter must itemize and deduct the cost of those goods and services from the overall donation.

When comes to any tax deduction, charitable or otherwise, remember the IRS likes to have hard answers and cold facts. Laura Peebles, a director at Deloitte Tax in Washington summed it up for the WSJ, “If you don't have the correct paperwork, there's no way to fix the problem.”

For more answers to your Estate Planning questions please visit our website. This blog is intended to provide general information only and is purely a public resource (See website disclaimer).

 

ESTATE PLANNING & GIFT TAXES

If you own private business interests or other rapidly appreciating assets, and would like to gift those to the next generation at the lowest possible tax cost, you may want to act sooner rather than later. The Tax Relief Act of 2010 included a 400 percent increase in the lifetime gift tax exemption, from $1 million in 2009 to the current $5 million ($10 million for a married couple). These provisions are due to expire on the last day of 2012. If you are considering a gifting strategy, you are wise to start exploring your options now, while you have time to carefully consider, since giving away assets requires careful thought and planning,

There are several strategies we could use to maximize the value of the exemption, to include an advanced strategy known as an installment sale to an Intentionally Defective Grantor Trust (IDGT). Gavin Morrissey of Commonwealth Financial recently wrote in detail about how this strategy works. The bottom line is that this complex strategy, when properly executed in the proper circumstances, can result in quite significant tax savings.  As Morrissey points out, the strategy works best when the assets to be transferred are rapidly appreciating – such as private business interests or pre-IPO stock.

For more answers to your Estate Planning questions please visit our website. This blog is intended to provide general information only and is purely a public resource (See website disclaimer).

 

 

FORBES does its readers a great disservice regarding estate planning!

In the May 30, 2011 issue of Forbes, Steven Gibson wrote that the “vast majority of people no longer need sophisticated estate planning to avoid estate tax” and that “people are reluctant to pay fees for work that does not currently benefit them.”

This is unfortunately misleading, and Gibson does the “vast majority” of people a disservice:  They have never had a need for estate tax planning. 

What the vast majority do need is an estate plan, however rudimentary or complex, for a wide variety of non-tax reasons.  As Gibson concedes, people still need to plan their estate, with the assistance of an estate planning attorney, because “poorly-drawn, ambiguous documents can spark litigation, and fail the testator’s purpose.” 

A well-written estate plan not only ensures a person’s property is distributed in accordance with her wishes, especially in blended families or second marriages.  It dictates what happens in the case of incapacity, so often fraught with problems, and, apart from avoiding probate when needed, it can be critical for so many other non-tax reasons.

The growing proliferation of online non-lawyer document providers offering wills and trusts for $75, or less, can have disastrous consequences for those you most love, as I see in my office only too often.

For more answers to your Estate Planning questions please visit our website.