Posts Tagged ‘inheritance’

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.

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.


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.)