Immigrant Success Juxtaposes News Reports

For the past 13 years, I’ve participated in Strategic Coach, an international entrepreneurial coaching program. I fly to Chicago or Toronto quarterly to meet with my coach, Dan Sullivan, in a class consisting of about fifty other business leaders, professionals and entrepreneurs mostly from the United States, but also from around the world. Most of the participants in my group established and built multi-million dollar businesses employing anywhere from a few dozen to several thousand employees.

My estate planning legal practice is a spit in the ocean compared to what many of my classmates run. I find it invaluable to be in a room of wise, sound businessmen and women, most of whom also support a variety of philanthropic causes. They give me fantastic ideas how to streamline work, upgrade client service and market my law practice through valuable client education using today’s technology.

But here’s my anecdotal observation: roughly one-third of the participants are either immigrants themselves or first generation children of immigrants to the United States.

One out of every three!

These are individuals who left their homeland, some not knowing how to speak English, having little or no financial resources to make a go of it in our country. Many attained college degrees at our fine colleges and universities while some did not, but all of them built something quite substantial. The program’s annual tuition is $25,000.00, so we don’t have charlatans among us. These people are the real deal.

Before joining Strategic Coach, I would never have guessed that so many created so much in such a short period of time. They are men and women, white, black, brown and every shade in between. I’ve met a Muslim from Asia looking for a bigger future in America, despite knowing he would likely face discrimination here. Another in my class fled Macedonia with his family when war broke out in the 1990s. A Christian Iranian fled as a child with his family when the Ayatollah came into power in 1979. Several Indian nationals have established technology centers here and in their homeland.

They are all multi-millionaires who run successful organizations.

It’s truly amazing what these individuals have accomplished in such a short period of time. And besides, they are nice, quality people that are interesting to talk to. They love our country and the opportunity it provides.

And they give back.

They’ve established centers to help refugees stricken by war around the world. They’ve created foundations to fight dreaded diseases and to feed the homeless. One I know has a program to hire wounded American veterans suffering from PTSD.

I therefore don’t understand the news reports that would have one believe our country has become a conglomeration of xenophobes. Certainly not every immigrant constructs million dollar enterprises, but you also notice hard-working immigrants in restaurant kitchens, hotels, landscaping companies, manufacturing firms and a host of other jobs that require back-breaking hours.

Just about every one of us traces our ancestry back to an immigrant. My great-grandparents landed on Ellis Island in the early 1900s to escape European pogroms. They worked in sweat shops in the lower East side of Manhattan, which at the time was the most densely populated place on earth. Later, they built clothing manufacturing firms and later general retail stores.

My ancestors would beam with pride if they could witness what their progeny have achieved these many years later.

I don’t know why our country can’t readily admit, as a full-fledged citizen, anyone who earns a college level diploma here. Instead, these individuals must endure a grueling application process. Do we really want the brainpower that our colleges and universities train creating businesses, hiring workers and paying taxes somewhere else – especially when they would prefer to reside here?

Yes, we certainly have to be concerned about and screen for those who have destructive intent. Many of our nation’s recent terrorist incidents were home-grown, however. Almost all of those entering our country work an honest job to make it here like the rest of us.

The “brand” of our country, if you will, is built on immigration. I’ve been fortunate to witness first-hand the significant contributions recent immigrants have made. I hope as a country we promote a liberal immigration policy to attract the best, brightest and most ambitious.

Our future depends on it.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Island Residence Dreams Shattered

Many of my clients who live on the islands dream of leaving their beloved residence to loved ones. They imagine that, long after they are gone, their children and grandchildren will frolic on the beach at the family beach house, remembering the good times that they all had together while building more good times for the future.

This dream is often shattered when the children actually inherit the island residence. Upon the death of their parent, the residence loses its “Save Our Homes” property tax assessment cap that the parents enjoyed when the residence was homesteaded. This often results in a significant increase in property taxes, sometimes to the point that the family can no longer afford to retain the residence. When you add on the increases we have all experienced in homeowner’s insurance rates in Florida, it is not uncommon for even a modest town-home on the island to require tens of thousands of dollars to maintain on an annual basis.

There are additional issues as well. Who should inherit the residence? Should the residence be treated as satisfying a share of one of the children beneficiaries? What if he or she doesn’t want the residence? If you instead leave the residence to all of the children, who decides when each family can use the residence during the most popular vacation periods such as Christmas or spring break?

What happens if you leave the residence to a child who then gets divorced? Might a former daughter-in-law or son-in-law own a stake? What if one of the children isn’t financially capable of contributing his or her fair share of the annual expenses?

I am aware of at least one situation where the residence was left to all of the children, some of whom wanted to retain the residence as a vacation home and the others wanted to sell the residence. The children who wanted to sell the residence disagreed how much they should get paid from the other children who wanted to keep the residence for each of their shares. Something ugly like a partition action which results in a forced sale could erupt.

These are all serious issues that merit attention. I happen to be giving a free lecture open to the community sponsored by the Sanibel-Captiva Trust Company on Wednesday, April 11th from 9:30am to 11:30am at the Sanibel Community House. I’ll be able to delve into the details at that talk, but there are some general guidelines that you might want to consider before telling your estate planning attorney how you would like your island residence bequeathed.

First, you want to consider whether your children really do want the residence. Is leaving them your Sanibel or Captiva property important to them? Or is it just important to you?

If your children are busy raising families and working in a career, a Sanibel residence might be viewed more as a burden than as a gift.

How should the residence be bequeathed? Rather than outright bequests to one or more children, consider creating a testamentary trust inside of your estate plan, or perhaps form a family partnership. This could serve to both protect the residence from a beneficiary’s divorce or other creditor problem, as well as centralize its management and control. It’s usually better to put the responsibility of collecting the money for annual expenses on one or two of the children rather than all who own it.

You may also want to consider providing a source of liquidity to pay for the expenses associated with the residence. It’s not right to put a specific monthly or annual dollar amount in the trust. Instead, it’s important to allocate a sum of money to be held in the continuing trust to generate income (or invade the corpus itself) to pay for the expenses associated with the residence.

There certainly are many issues to consider. But doing this thinking up-front will help you and your family to better realize your dreams of continued enjoyment for generations to come. If you’d like to hear more, contact Frances Steger at the Sanibel Captiva Trust Company at 239.472.8300 or email at

©2018 Craig R. Hersch .Learn more at

Delayed Decisions

I’m usually not a big proponent of procrastination. The longer one takes to act, the more difficult the decision usually becomes.

Unless you’ve just lost a spouse or significant other.

When that happens, there are many fears and concerns. Will there be enough income to pay all the bills? Should I put the house on the market?  What about our health insurance or supplemental Medicare plan? Do I change financial advisors?

After the death of a loved one, it seems that the world becomes unhinged. Normal routines are no more. After the flurry of the funeral with family and friends surrounding you is over, meals are often spent alone, meaning that there is too much time to dwell on all of the fears and insecurities that arise. On top of that, it’s difficult if not impossible to think clearly through the mourning and grief.

So what I’m advising is to not make major decisions during this emotional and difficult period – unless you absolutely have to.

Don’t put the home on the market.

Don’t change financial, legal and tax advisors.

Don’t sell all the investments and go to cash.

Don’t buy that new car that you’ve been eyeing.

This is not to say that you should put everything on hold. There will be tasks that you have to complete within a time frame. If your spouse’s will or trust has to be probated or administered, visit with your attorney and get that going. Waiting too long could result in adverse legal or tax consequences, for example. Provided that you have confidence in your attorney, let him or her guide you through the process.

Let your attorney help you make death claims such as life insurance, annuities, VA or other government benefits. Make sure that the checks are deposited in the correct accounts if you or your spouse created a revocable trust. If a federal estate tax return is going to be due, make sure that you ask for a Form 712 from the insurance company when they pay the claim, as your CPA will need that.

Don’t rush to transfer joint accounts into individual name, either. Sometimes checks will arrive made out to the deceased. If a joint account isn’t still open, the only way to deposit that check may be to open a probate, which is time consuming and expensive. If a probate is not otherwise necessary, (the usual case when the deceased owns a fully funded revocable trust, for example) then it is important to have a place to deposit the rogue checks made payable to the deceased that may come in over the next few months.

Provided that you are over 59½ let your financial advisor help rollover any 401(k) or IRA accounts. If you are under 59½ and if you were relying on IRA distributions that your spouse was taking prior to his or her death, don’t roll over the account right away. If someone under 59½ rolls over the IRA account into his or her own name, then he or she generally can’t take distributions before that age without incurring an excise tax penalty.

Certainly if financial realities require a change in spending habits or force the sale of certain assets, you can’t wait too long to make certain financial decisions. Here you may lean on your CPA and financial advisor to create budgets and to lay out a prudent plan to keep you living in reasonable comfort.

Aside from those situations, nearly everything else can wait. The advice of most mental health professionals is to wait a year before making any major decisions. That amount of time allows one to process the grief and loss of a loved one, and return to a state where logic and careful thought are more likely to govern your actions.

While family and friends may have the best of intentions, try to take their advice with a grain of salt. Even if something works for them, it may not work for you as everyone’s individual circumstances is different. Surround yourself with an excellent team of professionals and rely on them.

It’s always tragic when we lose a loved one. Try not to compound the tragedy by making difficult decisions on your own and too early.

©2018 Craig R. Hersch. Learn more at

More Than Pushing a Button

We can accomplish so much these days simply by pushing a button. I just returned from a conference in Washington, DC, where I pushed many buttons using apps on my iPhone. It was simply amazing when you think about it.

I pushed buttons to check into my flight and to display my boarding pass. Another button informed me if my flight was on time, while yet another button tracked my bags onto the plane. Upon arrival at Dulles International, I pushed a button to summon an Über to take us to our hotel.

Rather than wait in a long line to check into our room, I pushed a button to check in, reading the assigned room number on my screen. We ascended in the elevator, and, after finding our room, I proceeded to punch another button to unlock our door. Once in our room we used buttons to read restaurant reviews and make a reservation.

We even pushed buttons to enroll in the conference break-out sessions, find the location of those sessions around the conference center, and communicate with the conference organizers.

There was virtually no interaction with a human being to accomplish all of these tasks. It seems that we can do a lot pushing buttons.

Even construct an estate plan.

But not a good one.

You see, unlike many transactions, a good estate plan is only developed through a meaningful interaction with a knowledgeable professional. Sure, you can access web-based estate planning programs, but those can only perform one minor function in an estate plan—that is preparing a legal document that would say who gets what in the event of your death. Even then it probably doesn’t do a thorough enough job.

Why is that? Because there is so much more thought that should go into constructing an estate plan. Consider, for example, that you have several different baskets of assets. Some carry taxable income with them (such as annuities, IRA and 401(k) accounts), while in others you might achieve a step up in tax-cost basis that eliminates capital gains to your beneficiaries.  Without a thorough understanding of the complexities surrounding these issues, it’s likely that you don’t maximize your plan, and that Uncle Sam becomes a larger beneficiary than he should.

How about those in blended families? A computer program won’t provide any insight into the problems associated with economically tying your spouse who is not the parent of your children to those children through marital trust planning. Sure, the program will describe the benefits of providing income to your spouse for the rest of her life, and then how the trust will distribute principal to the children upon her death. Seems pretty straightforward.

Except it’s not.

Will that computer program reveal how to maximize family harmony when every dollar your spouse spends following your passing will result in one less dollar that the children inherit? There are strategies to consider beyond what the cold calculations that artificial intelligence can master.

How about protecting your children’s inheritance from divorce or other economic maladies? Will those computer buttons know how to give your children the greatest amount of freedom in choosing their investments, distributing the trust income and principal, and ultimately deciding who should benefit from the inheritance following their deaths? I usually have lengthy conversations with my clients about the hopes and wishes that they harbor for their loved ones. Can you do that with Siri?

No. You can’t.

Selecting your trustee in the event of your disability is usually another in-depth conversation that I engage in with my clients. There’s so much to it, in fact, that I wrote a book exclusively on that subject. If you’d like a copy of that book please email me at Once you receive it please read the preface where I described how shocking I found the crushing responsibility to be when my mother contracted leukemia and I became the trustee of my parents’ trusts. Reflect on the fact that I’m a board certified wills, trusts and estates attorney and a licensed CPA, and I found the responsibilities overwhelming. This is my career. Think about that for a moment.

There are so many variables to a good estate plan that every person’s plan will be unique to that individual. Sure, if you have less than $100,000 in assets and a house you probably don’t need the best estate planning attorney out there, and perhaps a computer program will suffice.

If you’ve taken the time to read this column, chances are you’ve accumulated somewhat more than that.

Yes, it’s great that we can do so much by pushing a button on our Smartphones. But do you really want to put that small amount of thought into constructing a plan to protect you and your loved ones with what took you a lifetime to accumulate?

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Heavy Lifting and the Do-it-Yourselfer

Twice a week I train with a personal trainer to help keep myself physically fit. During the training sessions, I will often bench press free weights. For a guy approaching 54 years of age, I don’t do too badly. But my trainer always “spots” me, making sure that if the weight I’m lifting is too much, he’s there to keep it from crushing my chest.

Sometimes I lift when I’m alone and not in a training session. When I do this, I tend to lift less weight than I know I can handle because I don’t want to be crushed when no one is there to help me if I find myself having unexpected trouble.

Which leads me to today’s estate planning topic – do-it-yourself estate planning. I have come across many intelligent people who have invested quite well for themselves over the years and have diverse and complex family situation and intent for their assets. They shun financial advisors, estate planning attorneys and CPAs. “Why should I pay them to manage and plan for my money and my family when I do a better job on my own?” they often state.

I’m here to tell you, though, like the guy who tries to lift too much weight without a spotter, it’s probably a mistake to go it alone with your estate and financial planning, especially as one ages.

Allow me to illustrate with two examples. First, we’ll consider Marcus and Diana who have been married fifty years. Marcus has always done well investing in the market, and is adept at moving in and out of certain stocks and bonds when he should. He understands the capital gains ramifications of his decisions, and knows what he wants to sell if he needs cash to pay larger or unexpected expenses that arise from time to time.

Diana has never been involved in any of those decisions. In fact, she enjoys the freedom of leaving these matters to Marcus. So guess what happens if Marcus has a sudden stroke and can’t carry out his normal duties anymore? Where does Diana turn? Who can step in and show her everything that Marcus knows so she can carry forward on her own? What costly mistakes might Diana make without Marcus’s guidance?

Next let’s consider Peggy the widow. After her husband died she actually did quite well for herself. She studied the markets and maintained her estate plan, read The Wall Street Journal regularly and managed her money quite conservatively. She didn’t see the need to employ a financial advisor or an attorney since things were working out quite well on her own.

But then Peggy became forgetful. The neurologist’s report indicated that she had some form of dementia.  Peggy already had a revocable living trust drafted online that named her daughter Ursula as the trustee. Peggy had the utmost confidence in Ursula, and explained everything that Peggy knew about investments and her intent to her. But Ursula was busy raising her children and had a busy career.

Managing her mother’s money and paying her bills became a much bigger job than Ursula anticipated, so as Peggy regressed into further dementia, Ursula decided to engage the services of a financial advisor on her mother’s behalf.

The recommendation was through a friend of a friend, and you can guess where it headed. The financial advisor didn’t do well at all, with Peggy’s portfolio suffering. It’s likely that had Peggy been well and was convinced that she needed a financial professional on her team, she would have chosen a more seasoned advisor to manage her money and perhaps even have reflected on the advantages of having a qualified estate planning attorney review her plan before it was too late.

In both cases, wouldn’t it have been better had the “do-it-yourselfers” engaged the services of a professional? That way the financial advisor would know what their client would do in a certain situation, and have knowledge as to the investment strategies followed, the unrealized capital gains that existed in the account, and a host of other facts that would likely result in a more successful outcome? And the attorney would be able to draft the documents that properly reflected and carried out Peggy’s intent.

One never wants to “transition in a time of crisis” and that’s exactly what happens in many do-it-yourself scenarios. There is no “spotter” there who can help with the heavy lifting if the do-it-yourselfer becomes too weak to act for one reason or another. When there is no spotter there’s always the danger that the weight of the job and responsibilities crushes the do-it-yourselfer or their spouse or adult children.

So if you see any part of yourself in these stories, please consider engaging the services of a professional that you take the time to interview and select. It will make life easier on you if anything should happen, and certainly will make life easier on your spouse or adult children who depend upon you to do the heavy lifting in your financial life.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Is Your Estate Plan a Contract or a Covenant?

When considering your estate plan, I ask this question: do you consider it a contract or a covenant? How you view your estate plan makes a difference in how you approach it and, ultimately, the results you hope to achieve.

Many consider the words “contract” and “covenant” synonymous; they’re anything but. A contract is defined as an exchange which is to the mutual benefit and self-interest of both parties. There are two types of contracts – a commercial contract and a social contract.

A commercial contract is where two parties agree to an exchange that benefits each financially. A social contract is where the individual cedes liberties to the king or the state in exchange for protection from external forces and the implementation of an internal rule of law. Three Enlightenment thinkers, Thomas Hobbes, John Locke and Jean-Jacques Rousseau, are credited with establishing a standard view of the theory of the social contract. A commercial contract creates the market while a social contract creates the state.

A covenant, on the other hand, isn’t like that. A covenant is more like a marriage than it is an exchange. A covenant is where two or more parties, each respecting the dignity and integrity of the other, come together in a band of loyalty and trust to achieve what neither can accomplish alone. A covenant isn’t about interests rather it is about identity. A covenant isn’t about me the voter or me the consumer, instead it’s about us. In a broad sense, a covenant does not create a market or a state, rather it creates a society. In relation to a family unit, a covenant frames core values.

Many describe a revocable living trust as a contract between the grantor of the trust – the person who creates the trust’s governing provisions – and the trustee of the trust – the person or party who is responsible for carrying out the trust terms. The interesting thing is that in a revocable trust the titles of grantor and trustee are often initially held by the same person. But when the grantor dies, the trust terms dictate to the successor trustee how the assets are to be used and enjoyed by the trust beneficiaries. So we do have two contracting parties, the deceased grantor and the trustee responsible for carrying out the deceased’s wishes. The beneficiaries’ enjoyment is subject to the contractual obligations between the deceased and the trustee.

The trust might be extremely liberal in the sense that the beneficiaries receive the trust assets outright and can do with them as they please, or it might be restrictive imposing many rules and conditions on the consumption and use of those assets.

But is it a commercial or social contract that we’re after? Most of my clients don’t like to think of the bequest of their hard-earned assets as a commercial transaction. It’s not “I’ll work hard for my entire life, deny myself certain luxuries, goods and services so you may lose your ambition, become an unrestrained consumer and live off the inheritance for the rest of your life.”

Nor do many of my clients believe that the inheritance they leave behind constitutes a social contract, although this is where many clients mistakenly believe they should go to avoid the feeling that their plan is nothing more than a commercial transaction. An estate plan with social contract elements might contain restrictive language where the monies can only be used for very specific purposes. Financial protection is offered but only under strict preconditions.

I believe that many desire something beyond a contract. We want to create a covenant between the generations. We want to instill a unique legacy. This is more everlasting than any transaction could be, and it speaks to clients’ core values. We hope that our progeny not only rise to what we ourselves have achieved, but also excel beyond our capabilities. We accomplish this, however, not by overly restricting our family’s direction, but by building a framework of love and trust.

Taking this to an estate planning context, what covenant do you wish to build within your family? What is it that each generation, fully respecting the dignity and integrity of the other, can come together in a band of loyalty and trust to achieve that neither can accomplish alone? What family core values do you wish to cultivate? Is it to produce highly educated, engaged members of society? Is it instead to continue an entrepreneurial innovative character whether in business or social works? Is the promotion of religious or spiritual aspirations important? Are there charitable or societal goals that you’ve achieved and hope your family surpasses? Such covenants can be built inside of an estate plan in such a way as to give each generation leeway to find its own path.

Ultimately it’s not about the interests of the individual beneficiaries; instead consider what language you’d like to include in your estate plan to foster the identity your family has spent generations building.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

The Perils of Joint Accounts

I hear this question all too often.  A client will come in, thinking they have a great solution, and propose, “Should I put my bank and brokerage accounts in joint name with one or all of my children?” In almost all cases the answer is an emphatic “No!”

First and foremost, when you title an account in joint name with someone else you are actually making a gift of half of its value. So if Ethel puts her brokerage account worth $1 million into joint name with her daughter Francoise, she just made a gift of $500,000 to Francoise (half of the value of the account).  Because the most anyone can gift tax free is only $15,000, titling an account worth more than $30,000 would require the filing of a federal gift tax return. In my example, Ethel would have to file a return that would either reduce her gift and estate tax exemption, or if she’s already used up her exemption she may actually have to pay gift tax.

Second, if Ethel’s daughter Francoise is experiencing any legal or financial problems, Ethel may have put her account at risk. If Francoise is going through a divorce, for example, a forensic accountant may discover the asset and it might be at jeopardy depending upon circumstances. The same holds true if Francoise has creditor or bankruptcy problems.

Third, titling the account jointly will likely thwart Ethel’s estate plan. Assume that Ethel has a will that says that upon Ethel’s death all of her assets are to be divided equally between her three children.  If the account is titled jointly with rights of survivorship with Francoise, Francoise would inherit the account outright despite Ethel’s contrary intention in her will. Even if the account is held jointly as tenants in common, Francoise owns half of it and the other half would be distributed in thirds according to Ethel’s will.

Francoise might be altruistic and wish to share the account equally with her siblings. But she might have a gift tax problem herself. If she tries to divide the account that she legally owns, she is making a gift in excess of the $15,000 annual gifts that she can give tax-free.

Fourth, accounts owned jointly do not enjoy the full “step-up” in tax cost basis that would otherwise occur. Assume that Ethel owns 1000 shares of ABC Company Stock that is worth $100 share but she paid $10/share many years ago. If Ethel sold all of her shares she would recognize a $90,000 capital gain. But if Ethel dies still owning the shares, her children inherit them at the date of death value for tax cost basis purposes. So if her beneficiaries sold the shares shortly after her death for the $100,000 there would not be any capital gain and therefore no capital gain tax to pay.

But if Ethel places the account in joint name with Francoise during Ethel’s lifetime, on Ethel’s death Francoise only gets a one-half tax cost step up. In this case, Francoise would recognize a $45,000 capital gain if she sold the shares for $100,000. ($100,000 sales price less $5,000 basis in half the shares and $50,000 basis in the other half of the shares).

Hopefully you are convinced that placing assets in joint name with children isn’t a good idea. So what should you do if you want your child to be able to transact business on your accounts – particularly if you become disabled and unable to manage your own affairs?

This is where revocable living trusts really shine. Ethel can create a revocable living trust and name herself as her initial trustee but also name Francoise as her successor trustee in the event of a disability. Francoise can then transact business on all of Ethel’s accounts that the trust owns. It is not a gift to Francoise since she is acting as a fiduciary for her mother. On Ethel’s death the trust avoids probate and rightfully distributes the accounts to all of Ethel’s children (if that is her wish).

Another alternative is a durable power of attorney. Ethel can sign a durable power of attorney that would name Francoise as her attorney-in-fact to transact business on all of Ethel’s accounts. You should know that the Florida law governing durable powers of attorney changed significantly back in 2011. If you have a durable power of attorney created before that date, you should consult with your estate-planning attorney to determine if yours needs updating.

The bottom line is that you shouldn’t put accounts and assets in joint name with your adult children. There are reasonable alternatives that don’t carry all of the disadvantages associated with joint accounts.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

New Tax Law Provides Estate Planning Opportunities

You may be aware that the Tax Cuts & Jobs Act was enacted at the end of last year, and that it provided certain income tax cuts to individuals and corporations. It also raised the federal estate tax exemption to more than $11 million per person. What you may not know is that this new law provides huge income tax planning opportunities that you can build into your estate plan, allowing for significant savings during your lifetime.

In order to understand the theory, you need to first understand what the federal estate tax is and how the transfer of assets into partnerships and trusts opens up opportunities for capital gains and income tax savings.

The federal estate tax is a transfer tax on the value of your assets at the time of your death. It is, essentially, a tax on your balance sheet. Your estate tax exemption however, is not just something that is available to your estate after your death. The estate tax exemption is also part of a gift tax exemption.

You can make $15,000 annual tax-free gifts to anyone that you choose. To the extent that you make gifts to anyone in excess of that amount, you must file a Federal Gift Tax Return Form 709 reporting the excess. You don’t actually remit tax to the IRS until you have consumed your $11+ million exemption. The exemption that you have remaining at the time of your death is what you can apply to your estate. If the value of your estate at the time of your death does not exceed the unused exemption amount, then there is no federal estate tax due.

So how does this provide you current income and capital gains tax planning opportunities? Stay with me here.

Because everyone has a large federal estate and gift tax exemption, this opens doors to creating trusts that sprinkle income among beneficiaries, even the grantor himself, without fear of actually having to pay any transfer tax. Suppose, for example, you have a family business and you wish to distribute some of its income to children or grandchildren.  You can create a trust that sprinkles the income among those beneficiaries who then pay the income tax at their lower marginal rates. The increase in the transfer tax exemption provides you the means to create trusts that accomplish just that, especially if the value of your estate is below the current federal threshold of $11 million.

Capital gains taxes are yet another consideration under the new law. Generally speaking, when I die, my estate achieves what is known as a “step-up” in tax cost basis equal to the date of death value of assets at the time of my death. The theory behind this is because there is an estate tax on that value then the capital gains should be eliminated.  The step-up doesn’t hold true for qualified retirement accounts, such as IRA, 401(k) and 403(b) accounts.

Because the federal gift/estate tax exemption is so high, taking maximum advantage of this step-up to eliminate capital gains is of paramount importance for our loved ones, especially in estate plans for married couples. Under the federal estate tax law of several years ago, dividing assets and using each spouse’s separate exemption was of primary importance. Now, for many married couples, it might be better to have inclusion of the assets in each spouse’s estate as he or she passes. This way, the family achieves a “double” step-up. As always, individuals should check with a qualified estate planning attorney to determine if their estate plans should be amended to take advantage of the new law.

Partnership tax law can also be used to minimize capital gains. Here, you might create trusts that benefit younger family members and gift low basis assets (those that have not appreciated greatly) to that trust. That trust then contributes those low basis assets to a LLC or to a partnership. You also form another type of trust funded with high basis assets (those that haven’t appreciated much). That trust then contributes those high basis assets into another LLC or partnership. A new general partnership is formed (call it the Parent Partnership) and both of the existing partnerships contribute their underlying assets into the Parent Partnership.

After the tax law’s requisite holding period, the Parent Partnership is dissolved and the assets are distributed to the various trust/partners and ultimately to the beneficiaries, except the low basis assets are distributed in the liquidation to the older generation. When the older generation dies the step-up in tax cost basis is achieved eliminating the capital gains on those assets. This is known as a “swap technique”. The new tax law opens the door to this and similar planning strategies.

These strategies are not without significant risks if improperly established. Failure to comply with the complicated partnership and income tax laws could result in a deemed sale, accelerating the very taxes that one is trying to minimize.

The swap technique is beneficial not only for wealthy retirees, but also for wealthy middle-aged individuals who have a living, cooperative parent. Assuming that parent doesn’t have a taxable estate (one that exceeds $11 million) then one could use that parent’s exemption and subsequent step-up at death advantageously, minimizing capital gains exposure during the lifetime of the middle-aged child.

The Tax Cuts & Jobs Act is scheduled to sunset on January 1, 2026. It may also be likely that Congress passes a Technical Corrections Act of some kind closing loopholes. Consequently, the application of any strategy should be carefully considered with your legal and tax advisors before jumping in.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Tax Reform Slashes State & Local Tax Deduction

Many of you have heard that the Tax Cuts & Jobs Act of 2017 that was signed into law just before year-end slashes the state and local tax deduction to $10,000. Many homeowners will pay far more in property taxes than they will be able to deduct on their federal income tax return. This includes many in Florida who own residences both here and somewhere else.

Is there anything that you can do? Actually, there is. I recently returned from the Heckerling Estate Planning Conference that is hosted by the University of Miami Law School. It’s a week-long conference that’s similar to attending one year of law school in about 40 hours. Top estate planning professionals from around the country attend this annually, picking up high-level continuing education credits. This was my 25th consecutive year of attendance.

Two well-known national experts on these subjects, Jonathan Blattmachr and Marty Shenkman, discussed the use of irrevocable trusts coupled with the use of LLCs to achieve the income tax deduction.  While the strategy isn’t for everyone, the theory goes that by contributing residences to an LLC that generates income (either from the rental of the property or from the contribution of other income-producing assets) and by having the LLC owned by a certain type of irrevocable trust, the property tax deduction limitations won’t apply.

The trusts must be drafted in such a way as to achieve the intended result, and every family will have different objectives and goals. Consequently, there isn’t a “cookie cutter” form that will get the job done. Instead, this is a true advanced estate planning technique that actually saves money for the family during the grantor’s lifetime.

Pretty cool — at least to a trust attorney!

There’s always a rub, as you might imagine. A technique like this would likely invalidate Florida homestead status and thereby remove the Save Our Homes property tax cap ceiling. But it could certainly work for northern residences that don’t have the homestead requirements that Florida law imposes.

An additional consideration rests in whether this law will remain in place for any period of time. The new tax act was passed by a thin margin, with no support from any of the Democrats in Congress. What happens in the next election is anyone’s guess — and the high tax states like New York, Massachusetts and Minnesota are unlikely to want this law on the books for very long.

Beware — undoing the transaction won’t be so easy or without consequence. Because the federal estate and gift tax exemption rose to $11.2 million per person, however, making intra-family gifts back and forth might be possible, which could mitigate that problem.

The new tax law sunsets, by the way, on January 1, 2026. You might remember that when George W. Bush was in office he signed into law tax reform that repealed the federal estate tax in 2010. That happened to be the year that billionaire George Steinbrenner died. Coincidence? In any event, that law sunset in 2011 and the estate tax returned. It seems that as the political pendulum swings, so does the tax law.

The new law provides all sorts of planning opportunities. With the estate tax affecting fewer people, those with large unrealized gains will be looking to plan their trusts to achieve maximum step-up in tax cost basis, minimizing capital gains for loved ones who inherit appreciated assets. The funny thing is, that in order to accomplish this the strategies run counter to the planning that one usually embarked on to minimize the estate tax.

Creative use of family partnerships during lifetime could also result in lower tax bills for many wealthy families. I plan to write about these strategies in future columns.

Just as they warn in those crazy television shows where people jump off mountains wearing flying squirrel suits — don’t try these strategies at home! There’s much to consider and one should consult a highly qualified professional well versed in these matters before diving in.

As one of the speakers at the Heckerling conference said, “They’re going to have to close the loopholes in The Cuts & Jobs Act. Once good attorneys help clients figure all of this out, the $1.5 trillion price tag the Congressional Budget Office predicted will be just a drop in the bucket to what this really will end up costing the government.”

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Secret Trusts

Many clients have expressed a desire to create trusts for loved ones, but to not let the loved one know that the trust exists, or, at a minimum, to not disclose the value of the assets held by the trust or the amount of income generated. I understand the goals typically include not sapping a beneficiary’s drive, protecting a surviving spouse from children’s or step-children’s demands for distributions, and even to protect a beneficiary from himself.

The challenge one faces when attempting to hide trust information from beneficiaries is state law. In Florida, like most other states, a trustee has a duty to annually account to “qualified beneficiaries.” The annual accounting requirements don’t usually apply in revocable trusts until the grantor of the trust dies. When the grantor dies, the trust typically becomes irrevocable and may continue on for a spouse, children or other loved ones. An income, principal or remainder beneficiary of a trust then becomes “qualified” and consequently entitled to receive the trust information.

At that point the trustee, under state law, must provide the beneficiaries a copy of the trust as well as annual information relating to the amount of assets owned by the trust, capital gains and losses realized, income earned, distributions made, expenses paid as well as other “significant items” as defined under the law.

If a trustee fails to provide this information they could be removed for cause, sometimes under the terms of the trust instrument itself if not under state law. Further, the trustee can be held financially liable for transactions that ultimately aren’t prudent or reasonable once discovered. So it is in the trustee’s best interests to act transparently and provide ongoing information to the beneficiaries. When a trustee so acts, state law also provides a mechanism that can limit a beneficiary’s time to file a lawsuit against the trustee for items properly disclosed. The trustee’s attorney typically invokes this mechanism with the annual accounting.

The reason for these laws becomes evident when you consider that a trustee is not governed by a court. A major reason one might create a trust is to avoid the time and expense associated with court approvals, accountings and oversight with a guardianship in the event of a client disability, or a probate in the event of a client death. When a trustee has no court oversight and does not have to account to beneficiaries, negligence and fraud could go unchecked. That’s one reason it becomes so important to name the right party as your trustee in the event you can’t serve for yourself.

Assuming that a client still wants a secret trust, how does he achieve his goal?  The answer lies in finding a state that allows for nondisclosure. A variety of states meet this bill, including Nevada, Alaska and others. I have drafted Nevada trusts for my Florida clients who wish to hide trusts and assets from beneficiaries, and in this discussion will use Nevada as my example. The process to create a secret trust is more complicated, and requires a trustee in that state to serve. We also get a Nevada attorney to review the trust for state law sufficiency and in the best circumstances the Nevada trustee has more than simple administrative powers. They usually also must have discretionary distribution powers for the trust to have the teeth that it needs to achieve the stated goals.

No two secret trusts are drafted the same. The provisions are usually crafted to meet the specific criteria that the grantor of the trust wants. Moreover, the entire revocable trust need not be a Nevada trust. If Martha, for example, has three children, only one of whom she wants to hide information from she can craft a separate trust share for that specific beneficiary. There are numerous details to work through so one would only travel down this path if there were extremely important reasons to do so.

If creating a secret trust is important to you, seek out a qualified estate planning attorney who has experience drafting and implementing a secret trust, and be prepared to specifically describe your situation, reasons for creating the trust, and goals you would like to achieve.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.