Posts Tagged ‘revocable trust’

Nuptial Agreement Often a Necessary Estate Planning Tool

Posted on: April 4th, 2014 | No Comments

“Tom and Nancy” recently entered into marriage, the second time for each. Tom has three adult children from his prior marriage and Nancy has two adult children from hers. When they arrived at my office to discuss updating their estate plans, Tom and Nancy verbalized some very specific and definite goals.

“We have kept our finances separate,” Nancy told me, “and we want to keep it that way. So no matter who dies first, then that person’s estate will immediately go to his or her children.”

It was apparent from their financial statements that they didn’t need each other’s money to survive in retirement.

“So what you want,” I asked, “is to keep your estates forever separate – what is Tom’s will one day go to Tom’s three children and what is Nancy’s will one day go to Nancy’s two children.”

“Exactly!” they both affirmed.

“Do you have a nuptial agreement that affirms this understanding?” I asked.

“No we don’t, nor do we want one,” Tom replied. “We trust one another and didn’t want to throw water on our relationship by engaging lawyers to argue over a document that contemplates divorce.”

“I understand those feelings,” I began. “But you need to know that a nuptial agreement doesn’t necessarily need to address divorce issues. A nuptial agreement however, might also be crucial to protect your estate-planning intent and to make sure that what you want to have happen in your estate actually happens.”

“What do you mean?” Nancy asked.

“As married persons, when one of you dies, the other has certain rights conferred by the law in the other’s assets. If, for example, you haven’t updated your estate plan between the time of your marriage and the time of your death, then the surviving spouse is entitled to an ‘intestate share’ of your estate. In other words, there is a presumption that the decedent spouse would have left the surviving spouse a portion of his or her estate equal to what he or she would have received had the spouse died without a will. This may occur even if that presumption is untrue and can be rebutted by testimony. Under Florida law, that would mean that the survivor of you would be entitled to fifty percent of the deceased spouse’s estate, even if the will doesn’t provide the surviving spouse anything.”

“What happens if your plan has been updated? We are working now to update our estate plans, so we each plan to sign a new will which is obviously after our marriage.” Tom asked.

“Just because you have updated your estate plan doesn’t end it. The surviving spouse still has an ‘elective share’ available which would roughly give him or her thirty percent of the deceased spouse’s estate, even if the surviving spouse is excluded in the will.” I answered. “A nuptial agreement waiving these rights is the only legal way to foreclose this possibility.”

“It sounds like the survivor of us would actually have to do something proactive to take from the other’s estate,” Nancy pointed out. “And we trust each other not to do that. So is a nuptial agreement really necessary?”

“Not if the survivor of you doesn’t make the election,” I confirmed. “But imagine a scenario where the survivor of you has dementia and that spouse’s adult child who holds a durable power of attorney makes the election on behalf of their parent. The adult child would have a vested interest to do so since he or she would inherit more.”

“Well I would tell my children not to make that election.” Tom said. “But I see where the trust that Nancy and I have with each other sometimes might not be enough.”

“I haven’t even discussed the Florida homestead issue,” I continued. “The home is in Tom’s name,” I said, “so where would Nancy reside if Tom predeceases her?”

“I want my will to give a life estate to Nancy and then at her death the house would go to my children. They’d probably sell it and divide the proceeds.”

“Unfortunately without a nuptial agreement waiving Florida’s ‘descent and devise’ rules that provision in your will would be considered invalid,” I counseled.

“Really? I can’t do what I want with my home?” Tom asked.

“What would happen when your will contains an invalid devise is one of two things. Nancy could elect to take one-half of the residence as her own as tenants in common with your children, or she could take the life estate.”

“So it could work out as we want?” Nancy asked.

“It could, but there are no guarantees. If you both didn’t want Tom’s children involved in decisions regarding the home before you both were deceased, having a nuptial agreement would go a long way to solving that problem. Many married couples also want more flexibility than Florida law provides, such as giving the surviving spouse the right to sell the home and move to a different home.”

So one can see that a nuptial agreement may actually serve to ensure a married couple’s wishes are carried out without having to rely on the goodwill of other family members. A nuptial agreement need not even contemplate divorce but instead could be used as a useful estate planning tool.

©2014 Craig R. Hersch

How Much for My Image?

Posted on: March 28th, 2014 | No Comments

Next to this column is my portrait photo that was taken about three years ago. I’m certainly not famous, although I recently dined at Gramma Dots where someone recognized me as the guy who writes this column. They told me that they appreciate the information I give, so I was flattered.

So when I die, and leave behind estate planning books that I’ve written and a pile of my old columns, how much do you suppose the accountants would report as the value of those things? How about my likeness? If my estate licensed my likeness, what would the value be for federal estate tax purposes?

My guess is that my estate would value that with a big fat zero.

Amazingly, that value of zero would only be $2,105 less than what Michael Jackson’s estate reported as the value of his likeness. Never mind that Michael Jackson’s likeness is currently licensed to sell T-shirts, music and is seen on television commercials among other things. The IRS disagreed with his estate’s valuation, pegging its estimate of Mr. Jackson’s likeness at $434 million. The estate tax difference on those estimates approximates $170 million.

How about the value of the rights to various compositions that Mr. Jackson owned at the time of his death? He owned the license rights of many of his own recordings, but also to some Beatles hits including “Yesterday”, “Sgt. Pepper’s Lonely Heart Club Band” and “Get Back”. Jackson’s estate valued those recordings at zero. The IRS says they’re worth $469 million.

The difference between what Michael Jackson’s estate estimates as the federal estate tax that it owes and what the IRS says that it owes is greater than $500 million. The IRS estimates Jackson’s estate to be valued at $1.125 billion, which sharply contrasts with the $7 million valuation his executors say he was worth.

In addition to assessing the extra tax, the IRS also imposed 20 percent penalties and interest for what they claim to be a gross underreporting.

These issues highlight the problems in valuing assets for estate tax purposes. While Michael Jackson’s case is extreme, these same issues apply to many of us. At one end of the valuation spectrum, you have marketable securities. Since these are listed on a stock exchange and can be sold on a moment’s notice, everyone can agree on the value of publicly traded stocks, bonds and most mutual funds.

Real estate valuations are somewhere in the middle of the “difficult to value” spectrum. Appraisers can use the selling price of “comparable” properties – but no two properties are exactly the same. Whether or not the real estate produces rental income makes the valuation of it that much more problematic, as the there are many different components involved. The value of the land must be considered along with the value of the buildings and improvements as well as the leases. A lease with a tenant that is going to expire in a year would not be as valuable as a 10 year lease. Leases signed by local tenants who are experiencing financial problems aren’t as valuable as regional or national tenants with strong balance sheets.

Family business interests tilt towards the more difficult end of the valuation spectrum. What would the value of the business be if the patriarch/matriarch wasn’t involved anymore? Is that an important factor? Depends on the business. What is the business’ going concern value? What is the value of the business’ underlying assets such as real estate and inventory?

Sometimes it makes estate-planning sense to take hard to value assets (real estate, for example) and transform those assets into even more difficult to value interests. A common example includes real estate assets that are transferred into a family partnership. In so doing, a business valuation specialist may use “discounts” when valuing the underlying property for purposes of the gift, thereby reducing the value of the taxable estate for estate tax purposes.

The IRS is not fond of these discounts but will consent to those that are not overly aggressive. Suppose for example that father owns commercial real estate valued at $5 million. By contributing that real estate into a family partnership, the value of the minority shares gifted or otherwise transferred to family members usually enjoy a discount associated with their lack of control and lack of marketability. After all, who would pay full value for a 10% interest in a partnership that doesn’t have a ready market, where the shares are restricted by agreement and where one doesn’t have the ability to control?

When planning one’s estate these factors should play into the discussion, and the plan can be adjusted to reflect the opportunities associated with difficult to value assets.

©2014 Craig R. Hersch

You’re Never Too Young to Update Your Plan

Posted on: March 21st, 2014 | No Comments

Not that anyone reading this plans on mixing up a cocktail of illegal drugs and shooting them into one’s body, the death in February of actor Philip Seymour Hoffman at the relatively young age of 46 offers lessons of what not to do in your estate plan.

The last will and testament of Hoffman was signed in October 2004 when he had only one child, Cooper, now eleven years of age. Hoffman subsequently fathered two daughters, Tallulah and Willa, neither of whom is mentioned in his will.

Reports indicate that Hoffman’s estate is valued at approximately $35 million. He left everything to his longtime companion, Marianne O’Donnell, who is also his children’s mother. But Hoffman and O’Donnell were not married at the time of Hoffman’s death. To make matters worse, Hoffman is a resident of New York State, which imposes another 16 percent state level death tax. All told, the combined estate tax could reach more than $15 million.

How much would that tax had been if they were married?

Zero.

And how much of the remainder of that estate will be taxed in O’Donnell’s estate when she dies?

All of it.

So in essence, because they chose not to get married, all of Hoffman’s estate will be taxed twice. Once when he died and again when O’Donnell dies.

Hoffman’s will does give O’Donnell the right to disclaim assets so that she can use some of his exemptions to get the assets to the children. But because Hoffman didn’t update his will, the disclaimer would likely only benefit Hoffman’s son Cooper, leaving the other two children out. Moreover, the trust inside of Hoffman’s will provides outright distributions at age 25 and 30 rather than a continuing trust to protect the assets from a spendthrift beneficiary, divorcing spouses or other creditors and predators.

We don’t know if Hoffman had any life insurance policies or IRA accounts that he left to his children. If he did, it would appear that a court imposed guardianship over the assets would be necessary since the children are minors. It is also possible that Cooper would receive a large inheritance while Tallulah and Willa get nothing.

O’Donnell may have to look into getting a court-appointed guardian ad litem to represent the interests of Tallulah and Willa, as they may be entitled to assets under state law that treats afterborn children equally. The problem with the application of that law is that the children would likely have access to the funds at the young age of 21. Due to the lack of proper planning, O’Donnell may be boxed into the choice not to make any disclaimers on behalf of the children.

The lack of planning by Hollywood actors is not uncommon. Heath Ledger, who also died from a drug overdose, hadn’t updated his will to include his daughter Matilda Rose, who was two when he died in 2008.

Ledger’s three-page will, signed five years before his death (at the young age of 24) probably seemed adequate at the time. It called for the bulk of his estate to be put into trust and divided into two shares. The first half benefitted his parents, and the other half split between his three sisters.

Between the time that Ledger signed his will and died, he had become a famous, wealthy actor. A nasty mess of legal issues ensued to determine who was his rightful heir. The answer depended upon Ledger’s domicile – as he maintained residences in Australia, New York and California.

Fortunately for Matilda, Ledger’s parents and sisters chose to avoid courtroom drama and ceded the estate (reported to exceed $20 million) to Matilda. This may or may not have been what Ledger would have wanted.

Had Ledger and Hoffman paid attention to how their wills would distribute their growing fortunes, determining their intent and carrying out their plan could have easily been accomplished.

None of us knows when our time will come. But for those that have any degree of net worth (even if not up to Hollywood actor levels) it’s always a good idea to stay on top of your estate plan.

©2014 Craig R. Hersch

So Where Are You From?

Posted on: March 14th, 2014 | No Comments

So where are you from? And if you own a residence in Florida and haven’t declared Florida residency yet, why haven’t you yet?! In case you haven’t heard, living here can substantially decrease your tax bill. In contrast with forty-four (44) other states, Florida doesn’t impose a state income tax.

In 2014, fifteen states (CT, DE, DC, HI, IL, ME, MD, MA, MN, NJ, NY OR, RI, VT and WA) impose an estate tax, while seven states (IA, KY, MD, NE, NJ, PA and TN) levy an inheritance tax. Two states even tax gifts (CT and MN), and four states sock it to generation skipping transfers (HI, NY, MA and VT)!

By making your Florida residence your legal homestead, not only can you shed many of the taxes discussed above, you may also enjoy a property tax break due to the “Save Our Homes” property assessment cap that serves to limit each county’s tax appraiser’s ability to increase the assessed value of your homestead for property tax purposes.

Especially if you own a residence both here and somewhere else – and your current state imposes income, estate, inheritance or gift taxes, why would you remain a legal resident of that other state? The answer isn’t necessarily that you don’t spend enough time here in Florida. In fact, Florida really doesn’t care how long you stay here, so long as you take the necessary actions to establish residency which typically includes registering as a voter, obtaining a drivers license, declaring Florida homestead and disassociating yourself from the residency of your former state.

And that’s where most of the issues arise. It’s really not so much whether you can establish Florida residency under Florida law – that’s the easy part – it’s really all about whether you can successfully disassociate yourself under the statutory provisions of the state from which you formerly legally resided.

One important note of which everyone should be aware – if you have “source income” that is earned in another state, then that income will likely continue to be taxed in that state regardless of your residence. A classic example of source income is that earned in your employment or business activity in that state. Another example would be rental income from real estate located in that state.

In contrast, you may save considerable tax sums from interest, dividend, capital gains, IRA, 401(k) and similar accounts should you successfully break from your former state of residence. Breaking from that state doesn’t necessarily mean that you should sell your residence there. You just need to be aware of the rules that each state has created to determine who they consider a resident for tax purposes.

New York, New Jersey and Pennsylvania are examples of states that consider an individual a resident if that person spends more than 183 days in the state. They may also consider where your spouse and minor children spend a considerable amount of time when deciding whether you fit under their taxing umbrella. Minnesota recently considered some of the most draconian residency laws that beg to be challenged in court. I’ve written about those in a past column.

By and large, the individual states don’t want to lose tax revenue – especially to their residents who own homes in tax-friendly Florida, and are looking for any and all means available to retain their citizens as state taxpayers.

I’m often asked how the states determine how many days you’re actually there. With today’s technology, there’s a number of means available. If a former resident has filed his last state income tax return, and the state decides to audit whether he has established residency elsewhere, it may decided to subpoena credit card, cell phone records or even flight receipts.

To remove yourself as a taxpayer from a northern state, you may want to consider a two step process. The first step is to take the necessary actions to become a resident of Florida, with the second step including taking steps to abandon your former legal residence. When becoming a Florida resident, in addition to declaring homestead, obtaining a voters registration and drivers license, one should consider changing your address for passports, Medicare, Social Security and tax returns, as well as keeping a log of your travel.

When abandoning the old state residence, so long as you don’t have any “source income” in that state, filing a final state income tax return appropriately marked “FINAL” at the top of the return would be appropriate. If there is such a thing as a homestead declaration in your other state, you should renounce that declaration (which is also a Florida requirement). You would want to change your primary physician to Florida and change your legal documents, among other things.

If you decide to join those of us who agree that Florida is a great state to reside, you will have plenty of company. Florida recently overtook New York as the third largest state by population, behind only California and Texas. We welcome nearly 1,000 new residents every day.

So I ask again – if you own a residence here but are legally domiciled in a state that imposes its own income tax, estate tax, inheritance tax and/or gift tax in addition to what you pay the federal government, why aren’t you already one of us?

©2014 Craig R. Hersch

Celebrating a Half Century

Posted on: March 7th, 2014 | No Comments

Southwest Florida may be one of the only places in America where, when you comment to someone that you are turning fifty years of age, they reply that you are still a “whippersnapper.” I guess that’s a good thing – as it keeps me feeling young. Some also suggest that “50 is the new 40,” which I hope is true but I have my doubts…although I’m doing my best to proving that adage.

A few weeks ago, I tackled a three-day, 375 mile bicycling trek circumventing Puerto Rico with nearly 13,000 feet of elevation gain. And after finishing in four different half-Ironman triathlons over the last few years, later this year I will hopefully complete the 2.4 mile swim, 112 mile bike and 26.2 mile run of a full Ironman triathlon.

Despite my reluctance acknowledging that I’m now a fifty year old man, I realize that being middle age does have its benefits. Patti and I have settled into a comfortable spot in our now 25-year marriage. The kids are older – one’s in college, one’s in high school and the youngest begins high school this coming fall – so they don’t need (or want!) our constant attention like they did when they were young. We’re also very proud of how they’re turning out. That’s saying a lot since today’s youth have many more distractions and dangers to deal with than my generation did.

Our parents are aging and requiring more of our time and attention as well. I now fully understand what journalists who write of the “sandwich generation” allude to. But then again, people are tending to live longer. My mother should have been gone more than ten years ago after suffering from bouts of acute myelodysplastic leukemia, but has survived due to two bone marrow transplants and all of the professional expertise of the health professionals at the MD Anderson Cancer Center in Houston.

I would even say that I’ve lived quite a full life myself. I’ve experienced quite a lot in my half century on this planet – which has provided me insight that I likely didn’t possess a decade or more ago. Every encounter, both good and bad, leaves a mark that ever so slightly changes. Like the boulder that’s been smoothed over by a running river, I find my sharp edges slowly eroding. Some may tell you that they’re still plentiful – but if you talk to my legal assistant Dorothy, who’s been at my firm more than 42 years (the last 22 working with me), she’ll tell you stories about the young Craig.

Having served as an estate-planning attorney for many good people over the years has been an honor and a blessing. I’ve had a front-row seat as to what the next twenty-five to thirty years may bring– probably in much sharper focus than what many of my buddies my age may see. I’ve also learned a lot from my many clients. Almost every one of them has an interesting life story that I’ve been privileged to hear at least a part of. I found truth in the statement that America doesn’t mine its older citizens like we should. There’s a lot of wisdom out there that can and should be tapped.

I’ve witnessed triumphs and defeats, and helped others celebrate 100 year birthdays. I’ve also had a very good friend die at age 52, leaving behind a wife and two teenage sons.

About ten years ago I was lucky to survive a bicycling accident. One minute I’m on my bicycle on the Summerlin bike path and the next I’m in ICU at the Lee Memorial Trauma Center, hooked up to a bunch of beeping and whirring machines.

So I know that life can be fleeting. We should all enjoy and be grateful for our time here.

Thank you for reading my columns. I’m going to continue to keep you up to date on estate planning, trust and tax law. I will soon publish a book containing a compilation of many of my best ones. If you have a topic that you would like to see in a future column, please email me.

Here’s to another year of good times and good health for everyone.

©2014 Craig R. Hersch

Reverse Estate Plan to Eliminate Capital Gains

Posted on: February 28th, 2014 | No Comments

Estate taxes will not concern as many families now that the federal estate tax exemption amount has increased to $5.34 million. The increase in the marginal estate tax brackets, coupled with the Medicare Surtax result in income tax planning becoming more important inside of many family’s estate plans.

I recently attended the Heckerling Estate Planning Conference, a one-week high level continuing education course designed for trust and estate attorneys, CPAs and trust officers. Top academics and lecturers impart wisdom on the 5,000 attendees from around the country on how to help family’s plan their estates to minimize taxes and achieve the family’s goals.

During one of the sessions, an interesting idea surfaced related to the elimination of capital gains by “reversing” the normal estate plan. Instead of leaving assets down the generational line, this strategy actually moves assets from a younger generation member to a parent or other older generation family member.

In order to understand the strategy, one must first understand the “step up” in tax cost basis concept. If I purchase a stock at $1/share and later sell that stock for $10/share during my lifetime, I recognize a $9 capital gain and pay taxes on that capital gain. If, however, I die with that stock in my estate and it is worth $10/share, generally speaking my beneficiaries receive a “step up” in tax cost basis equal to that asset’s date of death value.

So, in my example, if I die with stock worth $10/share and leave it in my will to my children, and if my children were to sell the stock at $10/share shortly after my death, then they would not recognize the capital gain that I would have recognized had I sold the stock the day before I died.

Normally individuals’ estate plans leave assets to their spouses, children and grandchildren – not to their parents who have a shorter life expectancy. But consider a strategy where an individual has an asset worth $1 million that has a tax cost basis of zero. If he were to sell the asset, then he would recognize a capital gain equal to $1 million and pay 23.8% in federal capital gains taxes totaling $238,000.

Assume in my above example that the owner of the $1 million asset is a wealthy middle-aged child who has a poorer parent. Provided that the family members can work together, there is an opportunity to eliminate the capital gains tax.

Suppose, for example, that the child transfers the asset into a trust for his parent that pays the income to his poorer parent for parent’s lifetime. At parent’s death the trust contains something known as a “general power of appointment” that allows the parent to direct the disposition of the asset, but if the parent doesn’t so direct then the asset continues on in a generation skipping tax exempt trust to the child and that child’s descendants who originally gifted the asset to the parent.

If parent survives the transfer by at least one year, then on parent’s death the asset would receive a step up in tax cost basis to its current fair market value of $1 million. If the parent then dies, leaving the asset back to the child in trust, and the trustee sells the asset then the original capital gain could be eliminated.

There are issues that must be dealt with for the strategy to be successful. The trust must be drafted in such a way so as to avoid the IRS claiming that the whole transaction is a fraud to evade taxes, so the parent should not be so restricted that he must leave the asset back to the child who made the gift. Along those same lines, if the parent isn’t restricted, then the child may lose the asset in a gift to his or her siblings. These types of issues can be mitigated in several ways. The wealthy child could, as just one example, purchase an assignment of interest from his or her siblings of any assets that parent might leave them from this particular trust.

Another danger is if the poorer parent has any creditors who could have an interest in the assets of the poor parent’s estate. Again, these types of issues must be considered and planned for.

This is just one example. With the increase of both the federal gift and estate tax exemptions, a multi-generational family that shares common goals can work to save estate, gift and income taxes in a number of different ways. I’ll be exploring more of those ways in future columns.

©2014 Craig R. Hersch

Son Using Father’s Trust for Son’s Personal Advantage?

Posted on: February 21st, 2014 | No Comments

When you’re named as a trustee to a trust, especially a trust in which you are also a beneficiary, you are subjecting yourself to several legal responsibilities of which you need to be keenly aware. The foremost of those responsibilities is the potential conflict of interest that you may have in conducting any aspect of trust business.

Suppose, for example, that Son is the trustee of Father’s trust, as Father has become incompetent . Son was named as the successor trustee. Father went so far as to tell his estate attorney that he named Son to fill that role because of Son’s business acumen. When Father dies, Son and Daughter are the beneficiaries of the trust.

Assume further that Son is a real estate developer working on a project that needs a cash infusion. The project could result in millions of dollars in profits, but it could also go bust. Son is the confident sort who never expects one of his ventures to fail. Upon examination, the trustee powers contained in the trust document include the power to invest in stocks, bonds, mutual funds, real estate and business ventures.

So is that enough for Son to take Dad’s trust assets and invest in the venture? Does it matter if Son invests Father’s trust as an equity partner – buying shares in the venture or if Son loans money from Father’s trust, effectively making it a creditor of the venture?

What should Son do? Or should Son just keep Father’s trust’s existing asset mix?

It’s not such a simple question, right or wrong. Son was correct by first determining whether the trust instrument to determine if he even had the power to act as trustee to make such an investment. But the power alone is not enough.

Assume, for example, that Son intends to invest $750,000 of Father’s trust into the real estate venture. If the total value of Father’s trust approximates $1.5 million, then Son would be investing an unusually large percentage of the whole into a risky venture. This would probably fall outside of the “prudent investor rules” that Son should follow as trustee.

The “prudent investor rules” (Chapter 518 of the Florida Statutes) indicate that a Trustee should act reasonably given the risk tolerance of the beneficiaries, the investment portfolio mix and the goals of the trust. To take such a large amount of Father’s trust to put into a risky real estate venture would likely fall outside of the prudent investor rules.

Assume, instead, that Father’s Trust is worth $5 million and that Father made his money in real estate ventures before turning the family business over to Son. Now it would appear that a $750,000 venture may not fall so blatantly outside of the prudent investor statutes.

But what if Daughter is uncomfortable with the decision to so invest? Could that change our conclusion? As trustee, Son not only has a duty to Father to ensure that the trust is properly used for Father’s benefit for the rest of his life, but Son also has a duty to the remainder beneficiaries – including Daughter. Daughter’s risk tolerance should also be considered when making trust and investment decisions.

In addition to the prudent investor rules, Son has the obligation to account to all “qualified beneficiaries” of the Trust. In my example, Son himself and Daughter are “qualified beneficiaries” even though they are not vested, meaning that their interest in the trust property is not certain until Father’s death. The accounting not only must report the income, capital gains, losses and expenses of the trust, but must also report material transactions. The material transaction would likely include the real estate venture.

What if Daughter objects to the transaction? Can she block it? Since Son is the trustee, he is the one who decides where to invest the trust assets. If Daughter has enough lead time she could conceivably file a Court action to stop the investment. Usually, however, the trustee has already made the investment. In this case, if the deal doesn’t work out then Son would likely have personal liability to Daughter should she sue based on breach of fiduciary responsibilities.

Finally, let’s take the worst case scenario where Son simply takes Father’s trust money for his own use and never reports it to Daughter. When a beneficiary suspects that the Trustee is using the Trust property and assets for his own use and not for the express purposes of the trust, the proper course of action is to file an action to remove the trustee.

From time to time I’ll receive a call from a beneficiary of a trust complaining that they don’t have enough information to even determine whether their suspicions of improper activity are taking place. In these instances the beneficiary should demand an accounting, as is their right under Florida law and most other state’s laws. The accounting should indicate whether the beneficiary’s suspicions are true or not. If true, then the next steps of removing the trustee and seeking retribution payments back to the trust would be appropriate.

One can now see how important the selection of a trustee is. Don’t take this choice lightly, as a high degree of wisdom, integrity and judgment is constantly necessary when making daily decisions.

©2014 Craig R. Hersch

The New Estate Planning Paradigm

Posted on: February 14th, 2014 | No Comments

tax will consume half of our hard earned wealth when we die. The federal estate tax exemption amount currently is $5.34 million, allowing a married couple to together shield $10.68 million, and those amounts are tied to inflation meaning that they will increase in the coming years.

Even so, the new estate-planning paradigm will be to minimize income taxes. Without proper planning, those taxes could consume half of the income that our estates and trusts generate for our loved ones after we die.

This is largely due to the higher income tax rates (that began in 2013) imposed on estates and irrevocable trusts along with the 3.8% Medicare surtax imposed on net investment income. Adding those two taxes together, the highest marginal federal income tax rate balloons to 43.4%. For beneficiaries who live in a state that imposes a state income tax, the highest combined federal and state tax bracket could exceed 50%.

Capital gains will also be taxed at higher rates after we die as the Medicare surtax could push those rates up to 23.8% before any state income taxes are imposed.

What’s so scary about all of this is that once an estate or irrevocable trust’s income exceeds the whopping sum of $12,150 it is in the highest marginal income tax bracket.

There are proactive steps that one can take to minimize these taxes. Because of the shift in these laws, the standard estate plan that, upon death,creates a credit shelter trust and a marital trust may become a relic of the past for those whose net worth is below the estate tax thresholds. Instead, several new concepts will leap to the forefront when considering how to structure one’s estate plan.

This isn’t to say that trust planning is dead. Quite the contrary. Trust planning remains necessary to ensure proper distribution to our loved ones, keeping our assets within our blood-lines, divorce protection, planning for disability or incompetence, preventing beneficiary disputes, business succession planning and a host of other benefits.

What’s likely to happen is that attorneys will work with their clients to redesign their trusts to meet the challenges of this rising income tax environment. One opportunity, for example, is to take greater advantage of the “step up” in tax cost basis at death. If I bought a share of stock at $1 but at my death it is worth $10, then my beneficiaries inherit the stock at the $10 amount when I leave it to them.

The problem is that when I leave the stock in a “credit shelter” or “bypass” trust to my spouse (as most estate plans do – to the extent that my assets are worth less than the estate tax exemption amount, they are usually first funded into the credit shelter/bypass trust to consume my exemption) then my spouse receives the step up in basis at my death, but our children miss out on the step up when she dies. This is because the credit shelter/bypass trust is designed to exclude those assets from her estate for federal estate tax purposes. Consequently, in the “standard” estate-planning scenario, you only get one step-up at the first spouse’s death on that spouse’s assets.

But there are ways to achieve the step up in tax cost basis at both spouses’ deaths, meaning that our estate plans can be fashioned to leave our spouse with no capital gains inherent in our assets and do the same for our children when the surviving spouse dies. This could save more than 23.4% (or higher for beneficiaries who live in states with state income taxes)!

The reason that these opportunities exist is due to another new twist in the law called “portability”. Under the old law if my estate plan didn’t create the credit shelter/bypass trust at my death then I would have lost the use of my federal exemption forever. This is one of the reasons why attorneys were so diligent in dividing assets up between spouses and creating separate trusts.

Portability allows us to not be concerned with estate tax inclusion so long as the combined net worth of both spouses is less than their combined federal exemption. In other words, we don’t lose the first deceased spouse’s exemption even if we don’t create the credit shelter/bypass trust.

Therefore, I can construct my plan in such a way as to protect and ensure that my assets will benefit my surviving spouse for the rest of her life, protect them for our children and keep those assets out of the hands of any new spouse she might remarry, while at the same time minimizing capital gains taxes. I can also construct the income distribution provisions to ensure that the income is taxed at my beneficiary’s marginal tax rate, which is likely to be lower than that of the trust.

As always, the estate-planning arena has changed significantly. I’ll be writing more about these techniques in the coming weeks.

©2014 Craig R. Hersch

Same Sex Couples Estate Planning

Posted on: February 7th, 2014 | No Comments

Last year brought several favorable developments for same sex couples in the tax and estate planning arenas. First, in June, the Supreme Court ruled in the Windsor case that same sex couples were entitled to the same federal estate tax benefits that a traditional married couple enjoys. In Windsor the surviving spouse and executor of a same sex union sued the IRS for recovery of taxes paid that would not have been by a traditional married couple by way of the marital deduction.

The surviving spouse claimed that the Defense of Marriage Act (DOMA) that outlaws same sex unions and therefore lead to the denial of the estate tax marital deduction was unconstitutional. While the Supreme Court did not rule specifically on the direct issue, it did rule in a split (5-4) decision that when individual states recognize same sex marriages, the federal government cannot deny benefits to surviving spouses, including legal and tax benefits. That decision led to the surviving spouse in the Windsor union receiving the same federal tax benefits that a traditional married spouse would have received, and therefore the estate tax paid was refunded.

The Justice Department decided not to contest the constitutionality of the Supreme Court’s decision. Shortly thereafter the IRS issued a Revenue Ruling (2013-17) that responded to the Supreme Court’s opinion in Windsor, ruling that same-sex couples who are legally married in states or foreign countries that recognize the validity of their marriages will be treated as married for all federal tax purposes, even if they live in a state or other jurisdiction that does not recognize same-sex marriages. Specifically the IRS raised and answered the following three questions:

1. Do “spouse,” “husband and wife,” “husband,” and “wife,” include lawfully married persons of the same sex? Here the IRS answered “Yes.”

2. Is this true if the jurisdiction in which the couple is currently domiciled, unlike the jurisdiction in which the marriage was established, does not recognize same sex marriages? Again, the IRS answered the question as “Yes” – in other words – if a same sex couple were legally married in Massachusetts that does recognize same sex marriages, but subsequently moves to Florida that does not, the couple will still receive the benefits of being considered married for federal legal and tax purposes.

3. Is this true of registered domestic partnerships, civil unions, and similarly recognized formal relationships? Here the IRS answered the question “No.” The same sex couple must be legally married in a state or country that recognizes same sex marriages in order to be considered married.

When the revenue ruling was released, Secretary of the Treasury Jacob Lew said: “Today’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve. This ruling also assures legally married same sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

These pronouncements and rulings provide many federal income and estate tax benefits for same sex married couples. As mentioned in the Windsor case, the estate tax marital deduction is available to same sex couples, as is portability of unused spouse estate exemption, the filing of joint income tax returns, tax free gift transfers between spouses, gift splitting so that the spouses can double the amount of tax-free gifts to other loved ones and a variety of other benefits.

There are also downsides for same-sex married couples under the tax laws. The “marriage penalty” that serves to tax two-income earning married couples at a higher rate than if they were both single now applies to same-sex married couples. The maximum mortgage interest deduction is limited to $1.1 million of debt among a married couple as opposed to $2.2 million to a non-married couple.

Participants in certain employee benefit plans subject to the ERISA laws will be required to obtain the spouse’s written consent before designating anyone other than the spouse (such as a trust) as beneficiary of certain benefit plans. Losses are generally not allowed for transfers between spouses as well.

Although these new rules did much to clarify the income tax filing status for same-sex couples at the federal level, same-sex couples in non-recognition states will have to deal with their income tax filing status at the state level. Even if the state is a conformity state (that is, the state income tax return follows the federal return with certain specified adjustments), many non-recognition states have announced that same-sex couples must file separate state tax returns. This may require a same-sex couple that files a joint federal return to prepare pro forma federal returns with filing status as separate before they can prepare their state tax returns. The non-recognition states that follow this approach include Arizona, Idaho, Kansas, Louisiana, Michigan, North Carolina, North
Dakota, Ohio, Oklahoma, Utah, Virginia, and Wisconsin.

There will also be will construction issues in non-recognition states. For example, if a will governed by the law of Virginia (a non-recognition state) grants a New York beneficiary the power to appoint trust assets at death to the beneficiary’s spouse and the New York beneficiary has entered into a recognized same-sex marriage, can the New York beneficiary exercise the power in favor of the same-sex spouse? Other construction issues may arise in dealing with the discretionary power to distribute principal to a spouse where the will or trust instrument is governed by the law of a non-recognition state and the beneficiary has a same-sex spouse.

Same-sex spouses who entered into prenuptial or postnuptial marital agreements have often addressed how the fact that they did not qualify for various income tax benefits and other benefits affects their property rights vis-à-vis each other. Those agreements should now be reviewed, and future marital property agreements should be structured in light of these new laws.

There’s definitely a lot to consider. Those who are in same sex marriages should take the time to review their planning to make sure that it is up to date with all of these changes.

©2014 Craig R. Hersch

Five Signs a Caregiver is Stealing From Your Loved One

Posted on: January 31st, 2014 | No Comments

What do you do when an heirloom bracelet goes missing? How about when a bank account starts to inexplicably bleed cash? If you talk to anyone who’s hired someone to help care for an elderly loved one, theft is a big worry.

Your loved one is probably the most vulnerable when you bring a paid caregiver into the home. So it makes sense to be on extra guard against theft. Here are five warning signs that the caregiver is on the take:

1. Groceries and Drug Store Bills Increase. If grocery shopping and normal errands are among the caregiver’s responsibilities, it’s pretty easy for a personal item or two to make it onto your loved one’s credit card. The same holds true when going out to eat. Don’t let even the smallest transactions pass without scrutiny, as the caregiver may be testing the waters to see what he or she can get away with. If you find something unusual, confront the caregiver with the evidence in a gentle manner, so as to limit the damage if it wasn’t something out of the ordinary. If you hired a caregiver through an agency, report any problems with that agency as soon as possible. Another good idea is to replace credit cards with debit cards for common transactions, while maintaining low balances in the debit card account to limit the damage should fraud occur.

2. Frequent Cell Phone Use. If a caregiver is constantly on the phone, this could mean that he or she is not giving the requisite time to your loved one, or worse, planning with others how to steal from your loved one. Always run a background check on a caregiver before he or she is employed. Next, make sure that your family member’s finances, such as credit cards, bank and brokerage accounts are removed from the home and placed in the care of a trusted family member.

3. Getting Too Personal. Some thieves will plan a scam to “prime the pump” by seducing the elderly with lots of affection until she or he becomes emotionally dependent upon the caregiver. The elderly person will try to reciprocate the affection by giving expensive gifts, or worse, paying for the caregiver’s expenses like rent and food. Here it is important to ensure that your loved one has daily interactions with people who are not their caregivers. It is also a good idea to transfer bank accounts to those who hold a durable power of attorney or who act as a trustee to a trust.

4. Bids for Sympathy. The “getting too personal” phase may quickly rise into the “bids for sympathy” phase. The caregiver may concoct stories of the caregiver’s own family members who are in dire need of medical care, but do not have the resources to pay for that care. By planting the seed they hope that the elderly person under their care will offer money to help. It’s always a good idea to put every caregiver through a thorough background check to ensure that they don’t have any prior records, including allegations of fraud.

5. Missing work on Mondays. It could be a bad sign when a caregiver is AWOL on Mondays, even if he or she is responsible throughout the rest of the week. Monday absenteeism could be a warning sign of alcoholism or substance abuse. The caregiver may have gone out over the weekend and therefore is in too bad of shape to make it in on Monday. Checking your loved one’s liquor cabinet may be a good idea when you suspect that a caregiver to be suffering from dependency problems. Note the level of liquid in the bottles, and you may even go so far as to sample the contents to make sure that they weren’t replaced with water. If the caregiver has a few unexcused absences, that’s the time to discuss your concerns with the agency that you went through to hire them.

An ounce of prevention is worth a pound of cure when dealing with in-home caregivers. Too much can happen in such an unsupervised setting. Take all the necessary precautions by removing valuables, financial records and bank accounts, including checking accounts when hiring in-home care.

©2014 Craig R. Hersch

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