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Trusts, Estates and Succession

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IRS Provides Portability Relief

Since the federal estate tax was resurrected on January 1, 2011, the IRS has allowed for the concept of portability as a valuable post-mortem planning tool for married couples.  When an individual dies, his or her estate is exempt from this tax for an amount known as the “applicable exclusion amount.”  This amount is in addition to the marital and charitable deductions which are typically unlimited.  This amount is currently $5,340,000.  With proper estate planning, this amount can be doubled for a married couple.

In the past three years, however, many individuals have failed to properly protect their estates, as they have been unaware of the concept of portability.  Let’s take an example:

Ozzie died in 2011 with an estate of $4,000,000.  Harriet had $4,250,000 in assets of her own.  She inherited all of Ozzie’s assets, because he had a simple Will.  She died in 2013, leaving behind a combined estate of $8,250,000.  Based on the strict letter of the law, $5,250,000, which was the exclusion amount in 2013, will pass tax free.   The balance of $3,000,000, will be assessed a 40% tax, or $1,200,000.

There should have been no tax at all.  When Ozzie died, if the Executor of Ozzie’s estate had filed a Form 706 (the federal estate tax return), she could have claimed Ozzie’s $5,000,00 exemption (the exclusion amount in 2011) as her own (i.e. the portability of the exclusion).  If this had been done, when she died, she would have had a combined exclusion amount of $10,250,000 (his $5,000,000 added to her $5,250,000).  In that event, no tax would have been due.

In order to claim portability, a Form 706 would need to have been filed in a timely manner.  The due date is nine months after date of death.  However, many taxpayers, and unfortunately, many purported advisors, have been unaware of this provision in the law.

Fortunately, the IRS has decided to provide a limited form of relief in this area. Specifically, IRS Rev. Proc. 2014-18 allows for portability in certain cases where a Form 706 has not been filed in a timely fashion.  In order to qualify for this relief, three criteria must to be met:

  1. the first spouse to die must have passed away after December 31, 2010 but before December 31, 2013;
  2. the amount of said decedent’s estate must have been less than the exclusion amount for that year, thus making portability the only reason to file the Form 706; and
  3. the Form 706 must be filed on or before December 31, 2014.

Given that estate law frequently fluctuates, we encourage claiming the portability exemption even if it appears there may be no tax due on the death of the surviving spouse for two reasons.  Firstly, one can not be sure that the exclusion amounts will remain at their high levels. Secondly, portability allows for a step up in basis for capital assets if they are owned by the surviving spouse rather than in a disclaimer or applicable exclusion trust.  Without question, opportunity abounds this year, and competent advice should be sought as to the portability provision’s applicability to any estate that has been created in the last three years.

Protecting Your Assets and Preserving Your Wishes

Mike and Carol are a couple who both have children from a prior marriage.  Mike has three sons – Greg, Peter and Bobby.  Carol has three daughters – Marcia, Jan and Cindy.  After several years of marriage, they decide to execute Wills.  Wanting to keep it “simple,” Mike leaves everything to Carol, with the understanding that his estate will go to his sons if Carol predeceases him.  Carol does likewise.

Mike dies.  His entire estate goes to Carol. Carol dies.  Her estate goes to her daughters.  Because she inherited everything from Mike, her daughters not only receive her assets, but also the ones she inherited from him as well.  Mike’s sons get nothing.

Certainly, this is not what was intended.

Proper planning is necessary in order to avoid a scenario like the one stated above. Given that over fifty percent (50%) of all marriages end in divorce, there are many couples who each have children from prior marriages.  It is possible to take care of one’s spouse while insuring that the assets which each spouse brought into the marriage reverts to their respective families after both spouses have died.

Techniques to accomplish these goals include the utilization of a life estate for real estate and trusts as to various liquid assets.  A life tenancy in real estate allows a surviving spouse to live in a deceased spouse’s home under certain conditions.  However, when the surviving spouse dies, the home will pass to the family of the spouse who owned the property.  Trusts can provide income and principal for a surviving spouse, but insure that when that spouse dies, the remainder reverts to the family of the spouse who brought the property to the marriage.

Obviously, there are many variables which can be used for this planning.  When using a life estate, various issues must be addressed, such as who pays the carrying costs of the property and if the life estate can be terminated for reasons other than death (e.g. remarriage, entry into a  long term care facility).  When establishing a trust, conditions can be placed on when and to what extent the trust assets may be utilized.

In all, it is clear that proper planning transcends mere boilerplate.  It is especially important to plan cautiously in light of the fact that many assets, such as insurance and IRAs, pass outside of a Will.  Second marriages can present estate planning challenges. However, proper guidance can insure that a couple provides for each other while preserving the ultimate distribution of their assets for their respective heirs.

Higher Gift Tax Limits for 2014

With the beginning of another year comes changes in the laws effecting federal estate and gift taxes.  There are three primary taxes in this area: (1) federal estate, (2) the generation skipping transfer (GST), and (3) the gift tax.

For the year 2014, the exclusion from the federal estate tax is $5,340,000.  This is an increase of $90,000 over last year’s exclusion amount of $$5,250,000.  The exemption from the GST tax similarly increased from $5,250,000 to $5,340,000.  The gift tax annual exclusion remains at $14,000.  However, the lifetime gift tax exclusion increased to $5,340,000 as the lifetime gift exclusion is unified of linked with the federal estate tax.  Specifically, the exclusion can be used either during lifetime or upon death.  Any amount of the exclusion used during lifetime offsets that which can be used upon death.

For New Jersey residents, the state estate tax exemption remains unchanged at $675,000.

As always, proper planning is imperative.  In addition for individuals and couples to desire shielding the exposure of estates to death taxes, prudent planning can preserve assets from long term care costs and unnecessary administrative fees.  Moreover, it can insure that distributions to heirs can be undertaken in a manner to minimize income tax ramifications among other goals.

On behalf of the Trusts and Estates group at Capehart & Scatchard, we wish you a very prosperous 2014.

Choosing the Right Tax Clause

Lou Grant owned a successful horse tack business worth millions.  Through gifting and his estate, this business passed to his son, Lou Jr.  His daughters, Nancy and Virginia, had an opportunity to participate in this business but refused to sign the requisite agreements to do so based on the advice of Virginia’s husband who is an attorney.  Ironically, despite this apparent poor counsel, they filed a Will contest and other litigation to get the benefits of the business divided equally among the three children after their father died.

The good news for Lou Jr.was that the Will was upheld and he kept the business.  However, the bad news was that Lou was left with approximately 97% of the tax bill for the estate taxes which exceeded $1,000,000.  This result was mandated by the New Jersey Appellate Court despite language in the Will which said that the taxes were to be paid from the residuary estate.  However, after rounds of protracted litigation, the amount in the residuary estate was approximately $150,000.

This case highlights the need to closely examine how the provisions in a Will interact.  After gifting the business, there was not enough funds to pay the taxes from the residue.  Thus, clear direction needs to be obtained regarding these issues.  Moreover, this case reinforces the need for competent advice and the acknowledgement that Wills can’t be treated as fill-in-the-blank forms.

 

Questions regarding this article may be sent to Publications@Capehart.com.

Elder Law – 25 Years and Counting

In 1986, a group of attorneys from around the country met at the California Bar Association’s Annual Meeting to discuss the ever increasing senior population and how to deal with the myriad of issues facing them.  The theme of their talks was “How can we help?”  These attorneys came from diverse backgrounds including private practice, social work, legal service groups and the public sector.  Resulting conversations and meetings resulted in a 1988 conference in Tucson which was the first annual meeting for the National Academy of Elder Law Attorneys (NAELA).

NAELA’s attorneys have been a driving force in protecting the rights of the elderly in this country for 25 years.  It has presented numerous conferences across the country which have educated attorneys on how to represent their clients in diverse areas, such as estate and tax planning, public benefits eligibility, litigation and advocacy, housing rights, and establishing protective arrangement, like guardianships and trusts.

Over the past four decades, life expectancy in this country has risen dramatically.  Accompanying this growth has been an increase in the number of individuals and couples who are in a position to pass substantial assets from one generation to the next.  Unfortunately, quality of life does not always keep up with quantity of life, as evidenced by the growing number of long term care facilities that house those with dementia, strokes and other debilitating conditions.  Moreover, government regulations are poised to drain the assets of those with modest means who need long term care, while imposing significant taxation on those who have accumulated a respectable nest egg.

Elder law attorneys can assist their clients in a manner which acknowledges their distinct individual and financial backgrounds.  Everyone needs their financial and personal affairs in order.  In this day and age, an elder law attorney should be consulted to insure that such needs are addressed properly.

Trusts For A Lifetime

In various posts we have talked about the use of trusts – revocable trusts to manage assets and avoid probate, generation skipping trusts to benefit descendants of several generations, irrevocable trusts to remove life insurance from your taxable estate, special needs trusts for disabled beneficiaries, to name just a few. As a side benefit most trusts help to protect the assets in the trust from the beneficiary’s creditors.

A trust can be written to hold the assets until a beneficiary reaches a certain age, or to distribute the assets in percentages when the beneficiary reaches specified ages.  The thinking behind this “age based” distribution is that a beneficiary may not be able to handle the principal at a young age, but should be able to as she grows older.  But in almost all cases, I advise my clients to create the trust to last for the lifetime of the beneficiary. The beneficiary may not be more skillful at handling money or become more reliable as she grows older, and creditors may have claims at any time during the beneficiary’s life.

Often clients react: “But I want my son/daughter to be able to use the inheritance.”  I explain that the beneficiary will have access to the funds if the trust has a distribution standard allowing the trustee to distribute principal for health, support or education.  In fact, the beneficiary can act as her own trustee, giving her the right to invest the funds as she wishes, and make distributions for her needs.

Moreover, the beneficiary can be given what is called a “power of appointment” to name in her Will the people who will receive any trust assets remaining at her death.  The power of appointment gives the beneficiary the same power as she would have had, had the inheritance been given to her outright. The power to say who gets the property is just short of ownership.

And you can limit the power of appointment.  Say you don’t want your daughter to give any balance of the trust to her nephew, with whom she is close, because he is estranged from the rest of the family. You can limit the power of appointment to allow her to distribute the trust assets at her death to anyone other than the nephew, or to only your direct descendants, or only among her then surviving siblings. You can make the power broad or narrow, and tailor it to the family situation.

Because trusts can be written with (almost) as much flexibility as you want, I see no reason not to use a trust for the life of the beneficiary. And a broad power of appointment can give your beneficiary the control she would otherwise have to pass the assets on to someone else.

 

Questions regarding this article may be sent to Publications@Capehart.com.

Have You Had The “Talk” With Your Family Members?

If you are a parent, you may be thinking of the “talk” you had with your children when they were pre-teens, but, that is not what I am referring to. This “talk” is with your family members about your “later in life” thoughts.

Do your family members know your preferences about critical life support?  Funeral details?  Where to find your important documents?  Your assets?  Who you wish to have notified in the event of illness or death? Computer passwords and log in?  Your safe deposit box location? Your list of medications? Health history?

You may have shared this information at some point with your family, but situations change.  Perhaps you have moved — do they know where you have placed your documentation?  Perhaps you have named new parties to act on your behalf.  Have you discussed your affairs with them?

If you use a computer, do you have log-in information and passwords written someplace to enable them to access your “electronic” assets?

While knowing the whereabouts of your financial information and Estate documentation, your last wishes are some of the most important details to share with your loved ones.  Do your loved ones know your wishes?

With regard to Health Care Directives, do not assume your loved ones are of the same opinion as yours, or each other.  If you don’t have your documents in order, it can be difficult for your loved ones to make a decision.  You should carefully consider the person you are naming as your agent to make health-care decisions when you are unable to make them for yourself.  Have a heart-to-heart talk with this person to feel comfortable in knowing they will abide by your wishes and that they share the same thoughts as you.

This is a difficult conversation to have, but there are advantages of doing so — to name a few:  your wishes are known, you have named someone to make decisions on your behalf thus hopefully avoiding angst and tension among your loved ones, and not the least of all, avoiding medical personnel making decisions which may be contrary to your wishes, some decisions that when made and implemented are not easily undone.

In addition to health care issues, share with your family your wishes for your funeral — do you have arrangements made, what your views are as to burial versus cremation, cemetery location, religious or memorial services.

Many times, as a part of your Estate planning, attorneys will draw up a separate document to address these issues of post-mortem wishes.  The document is separate from your Will, but provides information and your preferences to your loved ones.

If you are a parent, this “talk” may be more difficult than the “talk” with your children years ago, but is perhaps more vital than the earlier one.  Don’t put it off.  Children – encourage this dialogue with your parents – some day you will be glad you did.

Making Sure Your Will and Your Wishes Are Met

In 2005, Edwin Fisher executed a Will which established two trusts for the benefit of his wife.  The trusts were established to minimize death taxes upon their deaths.  His wife predeceased him.  He died in 2008.  The remainder of one trust was to be distributed among a variety of charities.  The other trust was to be distributed among a number of nieces and nephews.

Unfortunately, due to a decline in the stock market, there were not enough assets to fund the bequests to the charities in the first trust and nothing left in the second trust. A suit was commenced by the Executor to obtain permission to distribute everything to the beneficiaries of the first trust.  The nieces and nephews filed an action of their own. After a trial, the court stated that the funds in the estate would be distributed pro rata among the charities and the nieces and nephews.  It did so by invoking what is known as the doctrine of probable intent.  Although the Will clearly did not provide for same, the Court stated its belief that Mr.Fisher would have wanted all parties included.

Based on a review of the case, this may have been a reasonable result.  However, this result came after a massive expenditure of counsel fees and court costs.

The case exemplifies that Wills must be drafted to incorporate not only the circumstances of the day but the future as well.  Proper drafting must also reflect that many assets are owned outside of the estate which typically passes through the Will.  In order to insure that one’s wishes are truly met when he or she executes a Will, proper advice needs to be provided to respond to changes his of her financial and personal background.

Use Caution With UTMA Accounts

Many of you have been in this situation. Grandma or Aunt Tillie wants to give your child money or stock – not enough to warrant some more aggressive estate planning techniques, but enough that the donor wants the funds to be invested for the long term.  This is where the Uniform Transfer to Minors Act (UTMA) comes in handy.  A UTMA account is easy to set up – any bank or broker can help the donor and there is no need to create a trust document.  Almost any type of property can be held in the account. For simple situations, it may be ideal.

The account is opened in the name of a “custodian,” who could be a parent, grandparent, or actually any adult or even a financial institution. Make sure the donor names a successor custodian to take over in case the first one dies or fails to act.  If you are acting as custodian, you should name a successor now to take your place if you can no longer serve. I have seen more than one situation where a successor was not named, and in that case either a guardian must be appointed for the minor or an application must be made to the court to appoint a successor.  Having to take these steps involves additional time and expense and negates the simplicity of setting up a UTMA account in the first place.

A UTMA account is like a trust in many ways.  The custodian acts like a trustee, in that he/she holds the money and invests it (or lets it accumulate interest). The custodian decides when to spend the money and for what purpose – although the funds must only be spent for the use and benefit of the minor.

But there are substantial disadvantages to a UTMA account. It is much less flexible than a trust.  The balance must be distributed no later than age 21 (and in some cases at age 18), when many children are not ready to handle the funds, but the custodian has no choice or discretion in the matter.  There can only be one custodian at a time – so if the intended custodian is not good at handling money, the donor can’t name someone else to act with the custodian as investment advisor.  An account can only be set up for one beneficiary and once the beneficiary is named, the donor cannot take back the gift or redirect it to another beneficiary based on future circumstances. If these factors are important, you should reconsider the use of a UTMA account and create a trust instead.

 

Questions regarding this article may be sent to Publications@Capehart.com.

How to Stop a Will Contest

As a recent saying goes, “If there is a Will, there may be a Will contest.”  Probate litigation continues to increase, especially when there are families who have some level of discord.  Frequently, families want to disinherit or limit the share of one of their children.  However, they also wish to insure that when they die, the other heirs do not have to endure a Will contest.

The typical scenario is that an individual has children, but wishes to disinherit one because they are estranged or because one or more events has strained the relationship.  Without question, no child has a right to an inheritance.  Thus, disinheritance is appropriate.  However, it may not stop a Will contest because, when one is completely disinherited, he or she has nothing to lose by filing litigation.

There are three ideas to employ to minimize the chance of a Will contest.  First and foremost, provide a modest bequest and put in an in terrorem, or no contest, clause.  This clause provides that one who contests the Will loses their inheritance.  Second, re-execute the Will periodically, as the law says that if a Will is deemed void, the prior Will shall take effect.  Third, do this re-execution with slightly increasing bequests.  Thus, if the current Will is voided, the contestant shall take under a prior Will which leaves him or her less.

In all, proper planning can be used to minimize the chance of a Will contest.

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