Archive for Trusts
ANOTHER ESTATE PLANNING HORROR STORY FROM THE REAL WORLD – SECOND MARRIAGE MISTAKE
We recently had a client inquire about challenging his stepmother’s will. Our first thought, and perhaps yours, was that the desire to challenge came from a history of animosity between the client and his stepparent, something we see all too frequently. However, in this case, the client was actually fond of his stepmother – that is, until she died with a will that left all of his father’s assets, including the family home, to her children.
Our client’s father (we’ll call him “Bill”) made a classic second marriage planning mistake: his only estate plan was a simple “I Love You” Will that left everything to his second wife, if she survived him, and then to his children. Bill’s intent, according to our client, was to take care of his wife first, and then his kids. His plan may have worked in a first marriage where Bill and his wife only had children with each other (but even then, only if the wife did not remarry before her death and had an identical will).
However, what actually happened is that when Bill died before his second wife, she received his assets with no strings attached. She could have made an estate plan that included Bill’s children as well as her own, but she was under no legal obligation to do so. Therefore, we had to advise our client that a will challenge would be fruitless because he and his siblings had no legal right to their family home or to any of the other property their stepmother received from their father.
We were truly sorry to have to deliver such bad news to our client. But what makes it worse is that Bill easily could have achieved his true objective of taking care of his wife for the rest of her life, and then leaving an inheritance for his children, with proper trust planning. Unfortunately, in second marriage situations, what an “I Love You” Will really says is: “I Don’t Care About My Kids.”
“I LOVE YOU” WILLS – THE PERFECT PLAN FOR COUPLES?
Still looking for that perfect gift for your valentine? If so, you may be thinking an “I Love You” Will – really anything with those three little words in it – might do the trick. But what exactly is an “I Love You” Will?
When wills and trusts lawyers talk about “I Love You” Wills, we are referring to a simple will that leaves everything first to your significant other and then to your children. The name comes from the fact that we usually design these wills in pairs for happy couples who love each other and the responsible adult children that they had together. If you are lucky enough to lead such an idyllic life, an “I Love You” Will might be a suitable estate plan for you.
However, there are many issues common to the rest of us that are not adequately addressed by an “I Love You” Will. For example, such a will does not make any plan for the possibility that your significant other or one of your children will be disabled and/or receiving government benefits at the time of your death. An “I Love You” Will also does not address who will care for your minor children, or how that care will be paid for, should something happen to you. In fact, it doesn’t even address how you would like to be taken care of if you were to become mentally disabled.
Planning your estate can be a wonderful gift to your loved ones – and yourself – but you should consult an attorney to make sure you are getting true peace of mind and not a false sense of security. If you would like more information on “I Love You” Wills or any other type of estate plan, we are here to help.
NEW ESTATE TAX LAW – TIME TO EXHALE?
So, it appears that we did not go off the first “Fiscal Cliff” and some momentary “permanence” has been given to the Estate Tax Law. In the just passed “American Taxpayer Relief of 2012,” Congress kept in place the 2010 estate tax law with its Five Million Dollar ($5,000,000.00) personal exemption, adjusted annually for inflation. The only thing the lawmakers actually changed is the gift and estate tax rate, which has gone up to a top rate of forty percent (40%) from a previous maximum of thirty-five percent (35%). The exemption amount in 2012 was 5.12 million dollars, per person. The 2013 exemption amount is reported to be 5.22 million dollars per person. This amount of money either can be given away during lifetime or after death; it also can be given or devised to grandchildren without occurring any additional generation skipping tax.
Congress also increased the gift tax annual exclusion to Fourteen Thousand Dollars ($14,000.00). Remember, you can give away $14,000.00, per year, per person, to any individual(s) you choose, without it counting against your 5.22 million dollar lifetime exemption.
Can we now exhale? Will we ever have to worry again about the personal exemption reverting back down to $1,000,000, per person, as was only hours away from happening on January 1? I must give you the typical lawyer answer, “it depends”, and here’s why: the estate tax has been around almost 100 years. Throughout that time, an average of about 2% of all adult deaths resulted in taxable estate tax returns being filed. Under the current law, it is estimated that only 0.2% of all adult deaths will result in taxable estate tax returns. In order for the estate tax to continue to generate taxable estates at its historic 2% average, the personal exemption would have to be reduced to about 1 million dollars ($1,000,000.00). Yes, we have the lowest estate tax rates ever and yes, Congress seems to have made those tax rates permanent. However, in looking at the historical perspective, coupled with upcoming “fiscal cliff” (automatic spending cut) deadlines and a growing federal deficit, you have to wonder how long these historically low rates can be sustained.
The best way to stay abreast of continuing congressional volatility and changes in the estate tax laws is to have an ongoing relationship with an estate planning attorney, such as we provide with our Annual Maintenance and Updating Program.
SOME BASICS OF BUSINESS SUCCESSION PLANNING
More than eighty percent (80%) of businesses in the U.S. are private or family dominated. Yet, these closely held businesses have an extraordinary failure rate. Seventy percent (70%) do not survive to the second generation. Eight-five percent (85%) do not survive to the third generation. The average family owned business lasts only twenty-four (24) years.
Why do so many businesses fail after the first generation? Primarily because the majority of business owners do not have either a formal business succession plan or comprehensive estate plan. A business succession plan must be part of the business owner’s overall estate plan. The four (4) leading causes for failure of family owned businesses are: inadequate estate planning; failure to properly prepare and provide for the transition for the next generation; lack of funds to pay estate taxes; and conflicts with family members not actively involved in the business.
There are many ways to guard against such failure. This article will highlight the following five (5) techniques for business succession planning: Buy/Sell Agreement; Family Limited Partnership; S. Corp. Recapitalization; Employee Stock Ownership Plan; and Intentionally Defective Grantor Trusts.
A “Buy/Sell Agreement” is an agreement among the Company and shareholders to buy stock from shareholders upon certain events, such as, disability, death, divorce, or retirement. Key components of a Buy/Sell Agreement include properly valuing the business and providing for funding of the agreement, usually by an insurance policy taken out against the shareholder’s life.
A family limited partnership strategy works well when a business owner has family who will continue in the business and the business is valued at $5,000,000.00 or above.
One of the most frequent types of business ownership for closely held interests is an S. Corp. Unfortunately, due to the ownership restrictions of S. Corp., many business succession strategies are not available to S. Corp. owners. There is, however, one strategy known as “S. Corp. Recapitalization” which is available. This technique is typically used when the owner has family who will stay involved in the business.
An Employee Stock Ownership Plan (ESOP) allows owners of closely held companies to sell to an ESOP and reinvest the sales proceeds on a tax deferred basis, providing the ESOP owns at least thirty percent (30%) of the company and certain other rules are met. The company establishing the ESOP must be a C. Corp, not an S. Corp. This technique provides liquidity for the retiring shareholder and also provides motivation for employees to continue the company as owners. Use of this technique requires that there are key individuals who are willing and able to continue the business after the current owners have sold or retired. ESOPs are effective, but are subject to many rules and regulations and should be considered only after a thorough examination of all factors involved.
With an Intentionally Defective Grantor Trust (IDGT), the owner sells shares of stock in the company to an irrevocable trust in exchange for a small cash down payment and a long term installment note. This freezes both the value of the asset and the return on that asset (and reduces the size of the grantor’s estate.) The trust is intentionally drafted so that the creator is treated as the owner for income tax purposes. By paying the income tax on trust income, the grantor effectively makes additional gift tax free transfers to the beneficiaries. Children of the owner are usually the beneficiaries of this type of trust. A major concern with this technique is whether there will be sufficient cash flow to play the installment obligation.
In summary, there are a number of techniques available to minimize estate tax exposure while achieving a business owner’s wishes to transfer and continue the business which he or she has built. Whichever technique is used, it should be part of a comprehensive financial and estate plan. The attorneys at Cramer Law Center are available to assist with that planning. Remember, history has shown that having a good estate plan does not accelerate the date of death.
AN ESTATE PLAN FOR SANTA CLAUS
What if Santa and Mrs. Claus decided to do an estate plan? Although they would doubtless be great clients, the actual plan could be challenging.
What is the size of the Claus estate? It is extremely hard to calculate, even for Mr. and Mrs. Claus. Their accountant merely shrugs when asked. Unless estate taxes are totally repealed forever, Santa has a tax problem. Santa’s toy making business is prospering. He has enough inventory to supply every child on earth with at least one toy each year. There are now over 6 billion people on earth, and if just half of those are children, and if Santa spends just $20 on each child, he is spending 60 billion dollars per year on Christmas gifts alone. Apparently this formal gifting program is not reducing the size of his estate nor his tax liabilities sufficiently since he’s continued to do this since the 4th century.
Another consideration for Santa’s estate plan will be caring for the hundreds of elves that work in his shops and are apparently totally dependent on his largess for survival. There are no known relatives to serve as guardians in the event of Santa and Mrs. Claus’s joint demise. And even if relatives can be tracked down, it is doubtful that they will have the wherewithal to care for so many dependents. We might want to consider starting a charitable organization that establishes homes, jobs, and caretakers for these magical little people.
Santa has also invested a lot of time, money, and love in his wild animal preserve. Besides the normal elk, caribou, and polar bears, Santa has successfully bred a unique species of flying reindeer and at least one with a light-emitting snout. It’s likely that several world zoos will be clamoring to add these animals to their collection, but it would be advisable for Santa and Mrs. Claus to make some of these decisions ahead of time, and use these charitable opportunities for further estate tax planning.
Obviously, death isn’t the only concern for the Clauses. If Santa were to be disabled by a collision with an aircraft, a fall from his sleigh on a fast take-off, or a gunshot wound from someone who mistakes him as a burglar, the business could be in trouble. Mrs. Claus has had her hands full taking care of the elves, and hasn’t had a lot of direct involvement with the toy making. It might be wise to pick some key elf employees from executive management who can be trained to take over. Perhaps an ESOP is appropriate, or a pre-negotiated buy-sell agreement. Due to his advanced age (approximately 1600), and the fact that he is overweight and smokes, life insurance is also unlikely – but should not be ruled out because of his overall good health and vitality.
One other issue to be considered is citizenship. Although we think of Santa as an American icon, he was actually born as Nicholas of Myra in Anatolia – which is now southwestern Turkey. Rumor has it that he met Mrs. Claus while watching the annual tree lighting at Rockefeller Center in New York. If Mrs. Claus is a U.S. Citizen, proper tax planning will require her to at least prepare a Qualified Domestic Trust.
Obviously, planning for Santa and Mrs. Claus will be a daunting task requiring our best efforts. Like Santa, our firm wishes you a “Merry Christmas to All”, Happy Holidays, and a Happy and Prosperous New Year.
DEFINITIONS OF FAMILY: YOURS VS. THE STATE’S
With the holiday season in full swing, you are likely thinking about and spending time with your loved ones, your “family.” Chances are, they are not all related to you by blood. Most of us have spouses, in-laws, stepchildren, stepparents, or even friends that we consider to be part of our family. Sometimes we are more tightly bonded with these people than with our actual blood relations.
Unfortunately, the state of Florida defines “family” much more narrowly for the purposes of intestate succession (who gets your stuff if you die without a will). Your current spouse is your closest family member under Florida law and will get everything if you have a “traditional” family. However, as soon as you get into a blended family situation – i.e. either you or your spouse had a child with someone else – things get messy. Your spouse will have to split your assets with your kids in the proportions dictated by the state, regardless of what you would have wanted. Stepchildren are left out altogether because they are not considered “family” unless you have legally adopted them.
Florida law’s preference for blood relatives can produce even less desirable results if you die without a spouse, children, or a will. We recently had a case where a man’s assets, primarily his home, were split between more than a dozen blood relatives (siblings, nieces and nephews), many of whom did not even speak to the decedent, rather than going to the few people, including his girlfriend of many years, who actually took care of him.
The state’s intestate definition of “family” is one size fits all, meaning that it often fits no one. If you don’t agree with the people that definition includes and, especially, excludes, you need to make your definition of family clear with a will or trust.
CHOOSING AND TRAINING FAMILY TRUSTEES
One of the most important decisions we ask our clients to make is who they want to take over as successor trustee of their trust after the client’s disability or death. Many of our recommendations for this position are obvious; a trustee must be willing to take on the responsibility, should be a person or institution that the client trusts wholeheartedly, andideally has some relevant experience or knowledge. After (and sometimes despite) hearing this advice, most of our clients want to name family members, usually their spouse or adult children, as their successor trustees.
Naming a family member as trustee is not necessarily a bad idea, but it is crucial that you be honest with yourself, and your attorney, about your family dynamic. For example, we recently had a case where a mother named one responsible, level-headed child to serve as her successor trustee. However, her trust (not drafted by us) provided very little guidance to the successor trustee, which made it difficult and stressful for the successor trustee to deal with the demands of her greedy, bullying sibling. If the drafting attorney had asked the right questions, and the mother had been honest about her children’s personalities, detailed instructions and protections for the successor trustee child could have been built into the trust.
Another concern about leaving your trust in the hands of a family trustee is that he or she may not have the requisite knowledge or experience for the job. However, we believe that, with proper training, most family members can smoothly administer a trust without first passing the CPA or bar exam. At Cramer Law Center, training for family trustees and other estate plan “helpers” on what to do in the event of a disability or death is just one of many services we offer to our estate planning clients.
IT’S ESTATE PLANNING AWARENESS WEEK!!
Hopefully we do our part to increase awareness of the need for estate planning every week with our blogs and newsletters, but we just had to make sure you knew that this week is National Estate Planning Awareness Week. Congress officially designated the third full week of October as National Estate Planning Awareness Week in 2008, stating that:
“[I]t is estimated that over 120,000,000 Americans do not have up-to-date estate plans to protect themselves or their families in the event of sickness, accidents, or untimely death; …
[M]any Americans are unaware that lack of estate planning and `financial illiteracy’ may cause their assets to be disposed of to unintended parties by default through the complex process of probate; …
[C]areful planning can prevent family members or other beneficiaries from being subjected to complex legal and administrative processes requiring significant expenditure of time, and greatly reduce confusion or even animosity among family members or other heirs upon the death of a loved one; [and] …
[T]he implementation of an estate plan starts with sound education and planning, and then may require the proper drafting and execution of appropriate legal documents, including wills, trusts, and durable powers of attorney for health care; ….”
House Resolution 1499, 110th Congress (2008).
Although we are often disgruntled with what Congress does (or fails to do), we think that this time they got it right. Please feel free to share this information, or any of our other newsletters or blogs, with your loved ones. We also invite you to attend one of our Truth About Estate Planning workshops, “like” us on Facebook, or “follow” us on Twitter to increase your own awareness.
WHAT SHOULD I DO WITH MY INHERITED IRA?
As employer pension plans go the way of the dodo bird and social security becomes less secure, we are seeing more and more of our clients have planning for their retirement with individual retirement accounts (IRAs). In fact, it is becoming common for IRAs to make up a significant percentage of a client’s total assets, especially when he or she is at or near retirement age. Because so much wealth is likely to be passed to the next generation through IRAs, it is important for IRA owners and potential beneficiaries to know how to get the most out of inherited IRAs.
In a traditional IRA, the money you put in is allowed to grow tax-deferred (you don’t pay taxes on gains as they are incurred). However, at a certain age (70 ½), you will be required to start taking distributions in an amount that is based on your life expectancy. You will pay income tax on these required minimum distributions (or any other distributions you choose to take).
If you leave your IRA to your spouse, the account can “roll over” into your spouse’s name. This means that the required minimum distributions will be based on your spouse’s (hopefully longer) life expectancy, allowing for a longer deferral of taxes (often called a “stretch out”). Your spouse can name younger beneficiaries to take over the IRA next, producing an even longer stretch out.
What if you leave your IRA to someone other than your spouse? The rules change a little; no “roll over” is allowed. An individual beneficiary can either cash out the IRA or retitle the account. While cashing out may be tempting, it will result in immediate tax consequences. The alternative is to stretch out the distribution schedule (and thus the tax-deferred growth) of the IRA by changing the title so that required minimum distributions will be based on the beneficiary’s life expectancy.
If you’re thinking this sounds complicated, don’t worry; you also can take advantage of IRA stretch out opportunities through proper trust planning. For more information, call us to set up a free estate planning consultation or see How to Handle Inherited IRAs by Jane Bryant Quinn: http://www.aarp.org/money/investing/info-10-2012/how-to-handle-inherited-iras.html
PLANNING FOR SPECIAL ITEMS IS ESSENTIAL PART TWO – COLLECTIBLES
Last week, we wrote about a unique automobile that sparked a legal battle and ultimately fell into the wrong hands due to a lack of planning. We encouraged everyone who owns any kind of special item to plan now to avoid expense and stress later. This is especially true for collectible items, such as art, coins, stamps, antiques, etc.
Early planning for collections is crucial due to tax and valuation issues. When a collector passes away, the IRS wants to know how much his estate is worth, including collectibles. Although it can be difficult to determine the value of a collection, it is an important consideration for both lifetime and estate planning. If you have a good idea of what the IRS thinks your collectibles are worth, your estate planning attorney will be better able to advise you on estate and gift tax considerations. Depending on your situation, you may need to consider gifting or selling your collection during your lifetime.
Of course, many collectibles hold sentimental value for their owners, making tax and market value concerns secondary to the desire to keep the collection in the family or intact. When this is the case, timely planning is again the best solution. As a first step, we recommend evaluating your family’s appreciation of your collection and their willingness to maintain it. As with all other aspects of planning, knowing your family and sharing that knowledge with your lawyer will help you get the best plan possible.