Posts Tagged ‘finance’

Providing Flexibility by Adding Trust Protectors to Your Estate Planning

May 2, 2011

Trust protectors (aka Trust Advisors) have long been used in British Commonwealth countries, originating with offshore asset protection trusts.  With these trusts, their role was limited mostly to overseeing the foreign trustee and to make sure the trust maker’s intent was fulfilled.

Today, trust protectors are increasingly being used with trusts that are located here in the U.S. And, while their main job is still to oversee the trustee and make sure your intentions are followed after unforeseen changes in the law and other matters, they can be given additional duties that will provide you and your beneficiaries with added flexibility, security and peace of mind.

What is a Trust Protector?

A trust protector is someone you name in your trust document to oversee your trustee and make sure your trust carries on in the way you intended. This should be a trusted friend or advisor, someone who knows and understands your motives, family values and desires when you created your trust. In the case of a trust that will last many years, like a multi-generational trust, a trust protector is often an institution rather than a specific person.

A trust protector can begin to act immediately (for example, if your trust is irrevocable), or can take an active role only under certain circumstances (for example, at your incapacity or death).  Think of your trust protector as your substitute, someone who can speak for you if there is uncertainty in interpreting your trust’s instructions or the law changes and that change affects your trust.  Your trust protector also can provide guidance for the trustee and protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching, or is unresponsive.

How Much Power Should You Give Your Trust Protector?

The trust protector’s duties and powers are defined in the trust document, and can range from extremely limited to extremely broad.  How much power you give your trust protector is completely up to you?  Traditionally, the trust protector’s role has been a defensive one: to ensure that the trustee carries out the grantor’s wishes and to protect the beneficiaries from an under-performing or over-reaching trustee.  But if you give your trust protector more power, the role can become a proactive one, allowing your trust protector to act before wrongs occur.

Some of the duties and powers you can give your trust protector include:

Oversee, Remove and Replace the Trustee

Your trust protector can oversee your trustee, providing guidance in interpreting your trust’s instructions and holding the trustee accountable.  You can also give your trust protector the power to remove and replace the trustee.  This authority can be restrictive, limited to specific bad behavior by the trustee that can include being unresponsive to the beneficiaries, not providing acceptable record-keeping, reporting and tax filings, or charging too much for services.  The authority can also be extensive, allowing the trust protector to remove and replace the trustee for no specific reason (without cause).  Usually potential replacements (successor trustees) are named in the trust document, but it may also be possible for the trust protector to select a successor trustee.

Just having these oversight provisions in place is often enough to keep a trustee in line.  And if it does become necessary to remove a trustee, it is much easier for the trust protector to do this (because he or she already has the authority) than for the beneficiaries to reach an agreement and ask for court removal, which is a time-consuming, expensive and unpleasant procedure.

You can also allow your trust protector to control spending by the trustee, and even limit the trustee’s compensation, which can go a long way toward preventing disputes.

Resolve Disputes

You can also make your trust protector the mediator if disputes should arise between co-trustees, between the trustee and a beneficiary, or even among beneficiaries.  Having the trust protector as the final arbiter in disputes over interpreting the provisions of the trust document can sometimes avoid costly and unpleasant trust litigation.

You could even give your trust protector the ability to sue or defend lawsuits involving the trust assets.

Modify Your Estate Plan

You may also want to allow your trust protector to actually make some changes to your trust.  For example, you could allow your trust protector to change the situs (location in which the trust is regulated) to a state that has more favorable asset protection or income tax laws, should the need arise.

You could also give your trust protector the power to amend or revoke the trust agreement, in its entirety or in part; to add or delete specific beneficiaries or classes of beneficiaries; to change the terms of distributions to beneficiaries; even pour into another trust for the same beneficiaries, if your state allows that.  These powers may be extremely beneficial to the trust’s ability to follow your intentions as tax laws change, as well as to protect the assets from potential predators and creditors.

Delegate Responsibilities among Advisors

Traditionally, and still with many trusts, the trustee handles everything – record-keeping, tax returns, distributions, investing, etc.  But over time, people have discovered that it is beneficial to allocate some of this responsibility to different parties that have different strengths.

Consider giving your trust protector the ability to appoint, oversee and substitute other professionals. For example, the management of your trust could be divided like this:
• An Administrative Trustee maintains trust records, accounts, and tax returns. If the trust is governed by laws in a different state (often for tax or asset protection reasons), the administrator will usually be a local institution or professional.
• A Distribution Trustee or Adviser that has discretion and can make or withhold distributions from the trust to the beneficiaries.  Typically this will be an objective third party, which insulates the trustee from pressure and liability associated with the power to distribute trust assets.  This is especially important if a beneficiary’s creditor tries to force distributions from the trust.
• An Investment Trustee or Adviser oversees or directs trust investments, and may be granted specific powers, including:  to hold, maintain or cancel life insurance; to direct the sale or exchange of property; and to open, manage and close accounts. A general trustee is held to the prudent investment standard because of its fiduciary duty and, as a result, has restrictions on the investments it can make.  Having an investment advisor that is not bound by the prudent investor rule or held to the same standard will provide more flexibility in investments.
• The “General” Trustee handles everything that is not delegated.

Who Should Serve as Trust Protector?

Ideally, your trust protector should be someone who knows you, your motives, desires, and intentions when you established your trust.  It cannot be you or a family member who is a beneficiary of your trust because of possible tax complications.  An unrelated third party – a family friend, an advisor, the attorney who drafted your trust, or your family CPA – is often the best choice.  They obviously must be willing to serve in this capacity, and your trust document should specify if they are to be paid for their services.

Planning Tip: There is currently very little case law on trust protectors, and they are not required by law to be fiduciaries, as trustees are.  Your trust should clearly state whether you want your trust protector to act in a fiduciary capacity and be held to a higher standard, or not act in a fiduciary capacity.

Who Should Have the Power to Remove or Replace the Trust Protector?

This probably should not be you, unless the replacement is explicitly limited in the document to someone who is not related or subordinate to you.  You could possibly give this power to the beneficiaries or an unrelated third party.  Leaving this decision to the courts would be time-consuming and costly.

Planning Tip: If your plan has asset protection elements, no beneficiary should have the power to remove or replace the trust protector. Doing so could cause your trust to be under the control of a beneficiary and that could put the entire asset protection part of your plan in jeopardy.


The use of trust protectors is an excellent way to provide added flexibility, security and peace of mind in trust planning, especially since you can control how much power the trust protector is given.  If you would like to discuss adding a trust protector to your estate planning, please call our office. We are ready to help.

Test Your Knowledge

1. Using a trust protector is a new concept in estate planning.  True or False

2. A trust protector’s main job is to keep the beneficiaries in line.  True or False

3. How much power you give your trust protector is up to you.  True or False

4. A trust protector can only remove a trustee for very bad behavior.  True or False

5. A trust protector is never permitted to make changes to the trust document.  True or False

6. A trust protector is a good choice to be a mediator between the trustee and the beneficiaries.  True or False

7. Your trust protector should be someone who knows and understands your motives, family values and desires when your trust is created. True or False

8. A trust protector can protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching or is not being responsive.  True or False

9. The trustee is required to handle all administrative and investment duties of your trust and can never delegate to others.  True or False

10. You can be your own trust protector.  True or False

Answers: 1, 2, 4, 5, 9 and 10 are false.  3, 6, 7 and 8 are true.

A Unique Opportunity

December 23, 2010

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.


Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.


The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.


There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).


The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.


The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.


I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

Eldercare Locator – A Free, Public Service For Connecting Older Adults and Caregivers with Community Resources

October 27, 2010

The Eldercare Locator is a service of the U.S. Administration on Aging.  It’s been around for nearly 20 years.  Its toll free number is 800-677-1116.  Its website is  It  provides information about long-term care alternatives, transportation options, caregiver issues and government benefit eligibility.  This information is also available in Spanish and other languages.  There is an extensive database of links, publications, and other resources.

Qualified Disclaimers

October 22, 2010

Whether in the context of gift and estate tax planning or probate and trust administration, we have been talking with our clients about qualified disclaimers more than ever.  It is an effective planning technique, but it must be implemented carefully.  The biggest hurdle is that the person making the disclaimer cannot take any benefit from the property to be disclaimed.


Estates & Trusts is one of the leading magazines in this area.  The following is a recent article on qualified disclaimers:


Qualified Disclaimers in 2010

Use this simple and unique solution to add flexibility in dealing with estate tax uncertainty

By Joe Luby, founder and manager of Jagen Investments, LLC in Henderson, Nev.

What a remarkable time to be in the business of advising wealthy families on financial, tax and estate issues!  It’s remarkable both in terms of the changes and significant developments in the field, as well as for the opportunity afforded us as advisors to set ourselves apart and proactively solve client concerns.  Many practitioners are hamstrung this year with indecision, worry and fear about what may or may not happen with income taxes, estate tax, generation-skipping transfer (GST) tax, etc.  It’s unfortunate for their clients because we’re situated in the perfect tsunami of wealth transfer opportunities.  Asset values are way down, tax rates are the lowest they’re going to be in most of our lifetimes and interest rates are near zero.  Wealth transfer strategies should be on the top of advisors’ minds right now.

As of this writing, it doesn’t look like Congress will act anytime soon on estate tax reform legislation.  Common expectations in the industry expect Congress to eventually enact some version of the law we had in 2009, perhaps with some minor variations.  No one knows for sure, but that seems to be the consensus lately.  One fear commonly expressed by practitioners nationwide is that Congress could try to enact retroactive legislation and thereby disrupt any transactions put in place today.  For example, if they retroactively raised the gift tax to 45 percent or 55 percent from the current 35 percent, then gifts made today become more expensive.  The same fear applies to a retroactive GST tax, which could create a double whammy for gifts made in 2010.

Simple Solution

There’s a simple but unique solution to these concerns: the qualified disclaimer (QD).  In short, to be a QD under Internal Revenue Code Section 2518(b), the QD must:


  • be in writing; and
  • be made within nine months of the date of gift or the date the recipient reaches age 21, whichever is later.


Additionally, the recipient may not have accepted the gift, used the gifted asset(s) or benefited from them.  The recipient may not direct where the gifted asset(s) goes upon receipt of the QD (that is, the gift either reverts back to the giver or to the next designated beneficiary, if applicable).

Most of us think of QDs for post-mortem planning opportunities.  For example, the primary beneficiary of a retirement account may use a QD to redirect the funds to the contingent beneficiary for a variety of reasons.  Or, a surviving spouse may use a QD for all or some of the assets in a disclaimer trust,” which specifically incorporates the QD as part of the upfront planning.

In 2010, clients can use QD planning for lifetime gifts to add flexibility and a solution to the issues described above.  Taxable gifts made between now and Dec. 31 are subject to the current gift tax rate of 35 percent under 2010 law.  If we wait to see whether Congress acts retroactively with an increased gift tax rate or GST tax, we will wait ourselves and clients right into 2011 when we know the rate is scheduled to go up.  The time to act is NOW.  Clients can use the QD procedure to undo the gift later, should Congress enact a retroactive tax increase.


Take the following example: Tom Clark would like to gift $2 million of marketable securities to his son Bill.  He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent.  The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio.  The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand.  Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary.  The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses.  And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.

The same set of circumstances applies to gifts made to grandchildren in the event a retroactive GST is enacted.  Grandparents can use this opportunity to shift significant wealth using the reduced gift tax rate in effect for 2010 and no GST tax, while still retaining flexibility in their planning if necessary to undo the gift.

Additional opportunities are present when using QD planning this year as well.  Assume Congress doesn’t act retroactively and thus the current 2010 gift tax rate of 35 percent applies.  However, Tom’s $2 million portfolio suffers significant losses and drops significantly.  The QD option allows the family to reconsider whether paying the gift tax on $2 million (even at the lower rate in 2010) is really the best strategy.  It may make sense to undo the gift via QD and structure a new gift of the now devalued assets, even though the nominal tax rate may be higher in 2011.  If the assets are depressed in value already due to market turmoil over the last few years, the reverse may apply.  If the $2 million portfolio recovers significantly in value, the family wins by having locked in the gift now in 2010 at the lower value and reduced gift tax rate.

Discounted Value Assets

Lastly, any gifting strategy using QDs can be greatly enhanced with the use of discounted value assets.  The net after-tax impact of the gifting strategies described above is even higher when the asset gifted is subject to valuation adjustments.  Examples of such assets are fractional real estate interests, closely held business interests and private investment funds. For example, an asset subject to a 30 percent discount results in a net effective federal gift tax rate on the full asset value of less than 25 percent.  So not only can the client lock in 2010’s lower gift tax rate with the flexibility to undo the transaction later, but also he can even reduce the effective rate via proper advanced planning.


May is National Elder Law Month

May 7, 2010

It’s a good opportunity to share some information I’ve come across that you might find helpful.

Retirement planning calculators can be misleading
How much do you need to save for retirement? You can get an idea by using any of the dozens of retirement calculator tools offered for free on the Internet. But a recent study by actuarial experts on retirement forecasting shows that many popular calculators have serious flaws. These problems could lead to serious miscalculations when you’re plotting your retirement. The report by the Society of Actuaries analyzed 12 retirement calculators created by financial services firms, software companies, nonprofits, and government for consumers and financial planning pros. All but one of the six consumer calculators were free, but they had a host of problems. “These tools take a project that is fairly complex and boil it down to something simple,” says John Turner, an economist and co-author of the report. “They don’t ask you to consider a lot of important variables.”

It’s important to be aware of these variables when it comes to online retirement calculators.

2010 Cost-of-Care Survey
Genworth Financial has released its 2010 annual survey of the cost of various long-term care services around the country, including average costs of home care providers, adult day health care facilities, assisted living facilities and nursing homes.


Long-Term Care Services National Median Increase over  2009 5-Year Annual Growth
Homemaker Services (Licensed)

Provides “hands-off” care such as helping with cooking and running errands. Often referred to as “Personal Care Assistants” or “Companions.” This is the rate charged by a non-Medicare certified, licensed agency.

Hourly Rate $18 3.0% 2.4%
Home Health Aide Services (Licensed)

Provides “hands-on” personal care, but not medical care, in the home, with activities such as bathing, dressing and transferring. This is the rate charged by a non-Medicare certified, licensed agency.

Hourly Rate $19 2.7% 1.7%
Adult Day Health Care

Provides social and other related support services in a community-based, protective setting during any part of a day, but less than 24-hour care.

Daily Rate $60 12% Data not available
Assisted Living Facility (One Bedroom/Single Occupancy)Provides “hands-on” personal care as well as medical care for those who are not able to live by themselves, but do not require constant care provided by a nursing home. Monthly Rate $3,185 12% 6.7%
Nursing Home (Semi-Private Room) Provides skilled nursing care 24 hours a day. Daily Rate $185 5.7% 4.6%
Nursing Home (Private Room) Provides skilled nursing care 24 hours a day. Daily Rate $206 5.1% 4.5%

A nifty clickable map allows a snapshot look at state averages.

New Wisconsin law increases penalties for swindling seniors
A new state law gives tougher penalties to those caught swindling money from the elderly. The law allows double the punishment and higher restitution payments for those who con victims 65 and older. Patricia Struck of the state Department of Financial Institutions says up to half the securities fraud cases it investigates now involve older victims. Last year, all but 10 of the agency’s 27 enforcement orders were for cases involving victims older than 65. Going into this year, the department had 93 investigations still pending.  Struck says many older investors are worried that they’ll outlive their retirement savings – and swindlers prey on those people.

Estate Tax Problem… no laughing matter

May 5, 2010

Bloomberg BusinessWeek has published an interesting article titled “Mind the Estate Tax Gap.” The article focuses on some of the significant carryover basis issues under current law, suggesting that allocation questions fall to personal representatives and trustees, who face potential lawsuits from disgruntled heirs and penalties from IRS. Also, as has been said for some time, this presents a record-keeping nightmare. Imagine trying to track capital improvements to a home or determine all the stock splits that occurred in a stock over 50 years.

People have been making morbid jokes about bumping off their rich relatives in 2010, a year that has no federal estate tax, but few are laughing about it now. The tax is set to return, at a 55% rate, on January 1, 2011. While heirs of the ultra-rich who die this year may enjoy an estate tax break, this gap year is having unintended consequences. Far larger numbers of affluent families who suffer deaths this year could wind up paying stiff capital-gains taxes on inheritances. That’s because of the disappearance of what’s known as the “step-up” in basis, which allowed assets to be revalued to fair market value for income tax purposes at the time of death. Many people are going to be worse off than before.

Under last year’s rules, estates below $3.5 million (or $7 million for a couple) were exempt from the estate tax; people above those limits were hit with rates as high as 45%, but assets were revalued at the time of death, and “stepped up” to their full current value and not subject to capital-gains tax on past appreciation. When the estate tax went on hiatus, the “step-up in basis” rule for valuing assets went, too, so heirs are suddenly liable for capital gains on the past appreciation of assets they inherit and sell. For those who are bequeathed homes that have grown in value, family businesses that have expanded, or stocks that have risen in price, the old “step-up” rule let them start with a clean slate, owing no capital-gains taxes when they sold the assets. Not anymore.

A copy of the article can be found here.

Planning may help prevent family feud

April 28, 2010

The only good legal battle is the one that never happens.

I was just sent an interesting article by Claudia Buck of the Sacramento Bee, which addresses some of the practical reasons people should do estate planning. The story speaks for itself:

“Family, money and death are a combustible combination,” said Toronto-based attorney Les Kotzer, who co-authored a new book — “Where There’s an Inheritance …” — a compilation of 80 real-life vignettes taken from his law practice and radio-show callers.

Some of the tales are horrifying. Many are heartbreaking.

“A lot of time they will spend more on lawyers than the value of items they’re fighting over,” said Kotzer, who said he wrote the book to warn families about the perils of family feuds. “Once you send a lawyer’s letter to your brother, the relationship will never be the same.”
Those who witness the ugly aftermath say many of the situations could have been avoided with a properly executed will or trust.
“Generally, parents are the glue that holds a family together and by the time estate-planning blunders become apparent, the glue is gone and the family can fall apart,” said Trudy Nearn, a longtime Sacramento, Calif., estate-planning attorney.

The recession has apparently kept even more Americans from completing any basic estate-planning documents — a will, trust or financial/medical powers of attorney, according to a December survey by Only 51 percent of adults reported they had such estate-planning documents, compared with 64 percent in 2007. Most cited their need to focus on paying bills and other “essential” money priorities, the survey said.

Amid all the distressing tales, there are some lessons to be learned:
Too many families get torn apart by who-gets-what disputes: who gets Mom’s china, who keeps Dad’s signed Joe Montana football, who gets the lawn furniture.

It’s often stuff that’s not even particularly valuable, says Sacramento estate-planning attorney Michelle Goff. She had clients who argued for years over their mother’s personal effects. It finally got resolved around a lawyer’s conference table where the disputed items, many with their JC Penney’s and Kmart price tags still attached, were spread out. Taking turns, each sibling got two minutes to pick two items, until the table was emptied. But that was only after three years and $15,000 in legal fees.

Kotzer recalls a sister who was incensed that a crystal vase she’d given her mother was to be divvied up in the estate, rather than handed to her outright. Her angry solution: smash it to smithereens in the parking lot “so nobody will get it.” A better solution: Ask your kids if there are things they’d like after you’re gone. Type up a list designating who gets important items, like wedding rings, silver, family mementoes.

“If parents make the list, the trustee is obligated to follow (it). It removes the emotional battle,” Goff said. Sacramento estate-planning attorney Mark S. Drobny said he’s had families whose list has only three items on it; others run 30 pages long, “down to the socks in the drawer.”

Deciding who will handle your affairs after you’re gone can be tricky. Lawyers say parents often select their oldest adult child, but that’s not always the person best equipped emotionally or organizationally to handle the task. And it can create resentment among other siblings. Similarly, naming all your children as co-executors can result in deadlocks.

Every family is unique and parents should consider their choice thoughtfully. Sometimes an outsider — a trusted family friend or a private fiduciary (an individual licensed in a county to act as an executor or estate trustee) — is preferable.

Beware of unintended consequences. Drobny had a client who set aside $75,000 in her will for friends, family and charities, with the remainder going to her only child. But when she died, the value of her assets had plummeted so significantly that once the $75,000 was disbursed her daughter received almost nothing.

In another case, Kotzer recalls a client who had dutifully taken care of her mother for years, while her sibling was largely absent. The mother wanted to leave nothing to the absentee daughter, but was persuaded to give a token 5 percent. The arrangement backfired. The devoted daughter, who was executor of her mother’s estate, became shackled financially for years to her resentful sister, who disputed every financial decision. In that case, Kotzer said, the mother’s wishes would have been better served by specifying a small, set amount for the distant daughter.

To ensure there’s something left for everyone you care about, be specific about your bequest; i.e. the charity will receive “the lesser of $75,000 or 20 percent of the estate.”

Many parents build incentives into their trusts for their children’s inheritance: reaching a certain age in adulthood, completing college, mandatory drug/alcohol testing in cases of substance abuse. Those can be worthwhile goals that keep young — or even adult — children from squandering their parents’ bequest.

But some take it too far, says Drobny. He had clients whose will stipulated that the first son to provide them a grandchild would get $1 million. The sons, both in their 50s, soon sired children. “Neither son had any business becoming a parent at such a late age, let alone ever,” noted the attorney, who said he tried talking the parents out of it, but they were adamant. The sons subsequently left the mothers of their offspring.
In another case, a local elderly woman had set aside part of her estate to care for her beloved pet dog until its death, when the remainder would go to her brother, a retired policeman in Ohio. The brother subsequently contacted Drobny’s office to discuss his sister’s money and property. When the attorney explained that there was no estate to settle while the dog was alive, the brother declared the unthinkable: “He said he’d taken the dog out in the country and shot it.”

In their book “Trial & Heirs,” Danielle and Andrew Mayoras, Michigan-based husband-and-wife estate attorneys, chronicle the lessons learned from notorious estate battles of Hollywood celebrities, rock stars, athletes and political figures. Like the years of costly lawsuits stemming from rock guitarist Jimi Hendrix’s death in 1970 at 26, without a will. With his father and half-siblings locked in disputes over his multimillion-dollar legacy, it took 34 years, many court proceedings and several million in legal fees to sort it out.

All of it could have been avoided, say the authors, if Hendrix had left a simple will.

Poor estate planning can drain families emotionally and financially. A little prevention — good planning, thoughtful choices and a clear discussion among family members — can sidestep an ugly aftermath.

As the Mayorases put it in their book: “The only good legal battle is the one that never happens.”

(A printer-friendly pdf version of this article can be found here.)

A Burning Issue . . .

April 8, 2010

“The fault of most men is not that they aim too high and miss, but that they aim too low and hit.”   – Michelangelo

An article in the Sunday edition of the Milwaukee Journal Sentinel addressed an issue that is particularly relevant in our area. For some time it has been fairly common for owners of tear-downs to make a charitable contribution of the house to their local fire departments for a tax deduction. The fire department burns it down for practice. Lately that strategy has been under attack by IRS.

This is something that has been done for a long time, but IRS is looking at it differently now. For years, IRS allowed deductions for homes donated to fire departments, based on a 1973 court opinion interpreting the IRS code written in 1968. But the tax code changed in 1969 to specify that donating anything less than the entire interest in a property, such as its use, is not deductible as a charitable contribution. Around 2004, IRS started disallowing deductions for homes donated for fires.

The heart of the issue is the value of the house. Usually when you give to charity, you can deduct the fair market value of the property that is gifted. In this case, what is the value of something that is going to be destroyed anyway?

This article tells the story of a Chenequa couple that bought an old house on Pine Lake in 1996. In 1998, they let the Chenequa Fire Department burn it down and claimed a charitable deduction of $76,000. Replacement value was about $235,000. IRS disallowed the deduction, saying that because the home was going to be torn down anyway, it had negative value, or was worth approximately $1,000 if someone was willing to move it. The owner decided to fight the case. It was argued before a tax judge in 2005, but they’re still waiting for a decision.

If the U.S. Tax Court agrees with IRS, the decision will likely end the symbiotic relationship between owners of tear-downs and their local fire departments.

Estate Tax Reform Update

April 6, 2010

You may be interested in the April 1 AALU Bulletin (No: 10-37), Update on Estate Tax Reform: Developments and Dynamics, which states that three factors shape the ongoing environment for the federal estate tax:

  1. A packed congressional schedule;
  2. A focus on deficit reduction; and
  3. The upcoming mid-term elections.

The AALU concludes that we may have a clearer picture once Congress returns to session this week but that the Senate may be hesitant to pass a reconciliation bill (which could include the estate tax) because of the recent health care reconciliation bill. If it is not included in a reconciliation bill (which requires only 51 votes), 60 votes would be necessary to pass estate tax legislation:

“The difficulty in finding 60 votes may lead to either (1) reversion in 2010 to a $1 million exemption and 55% rate or (2) a short-term extension of tax cuts, including the estate tax on a two-year basis at $3.5 million exemption and 45% rate, possibly during a lame duck session (when Congress returns after November elections).”

A copy of the complete bulletin is available online here.

IRA Conversions

March 4, 2010

With Congress in a stalemate, it looks like tax uncertainty will be around for awhile.  There was a good article in the Wealth and Personal Finance section of the New York Times on February 18.  A copy of that article can be found here.

One of the strategies covered in the article, which I have been recommending to my clients, is converting traditional IRAs to Roth IRAs. This results in the recognition of income and the payment of tax. This strategy requires some analysis to make sure it works for you, but later distributions from a Roth IRA are not taxable income and there are no minimum required distributions to worry about in retirement.

The greatest obstacle to this strategy in Wisconsin has been that Wisconsin law differs from federal tax law. Wisconsin law does not permit IRA conversions, which leads to problems like being subject to an excise tax.
The good news is that the Wisconsin legislature has passed a law conforming Wisconsin law to federal law. It is waiting for the governor to sign it. He said that he would. I will let you know as soon as he does.

There are ways to supercharge an IRA conversion. Split your IRA into separate IRAs according to investment type before doing the conversion. That is, create an IRA for your large cap investments, a separate one for  mid-caps, and so on. That gives you a right to a “do-over” depending on the performance of the investments.

For example, a taxpayer has two mutual funds in her IRA. One is a large cap fund and the other is an emerging growth fund. She splits the IRA into two IRAs. One holds the large cap mutual fund and the other holds the emerging growth fund. By converting the $100,000 large cap IRA in 2010, she will recognize income of $100,000 and pay tax on that amount (if no other tax planning is done). The same is true of the $50,000 emerging growth IRA. The taxpayer, however, has the right to re-characterize her IRAs by the due date of her tax return including extensions (October 15, 2011).  She can change back to a traditional IRA and recognize no income. So if the large cap fund declines in value to $60,000, she can re-characterize and not recognize $100,000 of income.  Then she can start all over again and convert her IRA in 2011, but at the lower value of $60,000. None of this affects her emerging growth IRA which doubled in value during the same period and which she wants to keep in a Roth IRA.

Good move. Who would want to re-characterize and then recognize more income in a later conversion?