Archive for the ‘Estate Planning’ Category

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How good is Do-It-Yourself estate planning?

Thursday, June 2nd, 2011

Clients have asked me why they should pay an estate planning attorney $2,000 to $4,000 or some similar amount to get their estate plans in order when Legalzoom.com offers a basic Will for $69.  What services is an estate planning attorney providing that Legalzoom.com cannot?  How complicated is a Will?

Using words to express a thought or to follow instructions is an inexact science.   How many people feel Help Manuals are easy to understand?  An estate planning attorney has to combine all the goals, objectives and philosophies of a client with all relevant state and federal law, including all applicable state and federal tax law, to create one document. The drafting of the Will is the simple part.  Understanding the law and it’s subtleties with respect to the wishes of the client can be quite complicated.  However, the most difficult part is providing sound advice, which requires both knowledge and experience. 

Legalzoom.com or other do-it-yourself websites require users answer a string of questions using a “decision tree” form of logic.    These sites do not offer assistance on a question that would be considered legal in nature.   Their documents assume a mother and father with illiquid assets, no special needs children, and harmonious heirs is the same as a mother and father with liquid assets (stocks and bonds), a special needs child and a highly combative family.  These do-it-yourself website tools treat all families and situations alike. 

Bottom line: Why would anyone be “penny wise and dollar foolish” on an estate planning document?  Mistakes can cost hundreds of thousands of dollars or more if the documents are drafted poorly.  An estate planning attorney has the ability to tailor estate planning documents to adhere to  a client’s unique circumstances, whereas, do-it-yourself websites, such as Legalzoom.com, are unable to  provide this level of customization or advice.

Always Asking, Never Assuming™

Christopher Holtby

Posted in Estate Planning, Investments, Legacy Planning, Retirement Planning, Taxes, Wealth Management | No Comments »

Estate Planning Mistakes Made By the Rich and Famous

Monday, May 16th, 2011

Howard Hughes, worth billions at his death, did not have  a properly executed Last Will and Testament.  Though there were 30 purported Wills offered for probate, not one of these Wills was actually admitted to probate.  As a result,  state law determined how the wealth would be distributed, costing his estate hundreds of millions in state and federal estate taxes, which could have been avoided.  Unfortunately, Howard Hughes’ beloved Howard Hughes Medical Institute was not a beneficiary of his estate, which could have allowed Hughe’s estate to pass estate tax free due to the unlimited charitable deduction that would have been available.

The late U.S. Supreme Court Chief Justice, Warren Burger, from the highest court in America, wrote his own Will in 176 words.  As a result, his estate paid a few hundred thousand dollars in additional taxes and probate costs.  Why?  Chief Justice Burger was a brilliant attorney, but did not master estate planning 101. 

Heath Ledger had a well drafted and  properly executed Will.  However, he forgot to update his Will after the birth of his daughter, Matilda.  Fortunately, Heath’s parents have assured she will be taken care of and under the law she will become a  pretermitted heir, which means that she will ultimately be a beneficiary of his estate.  However, Heath wasn’t able to establish the terms surrounding Matilda’s receipt of the money.  In addition, Matilda’s mother will most likely not be provided for since there are no legal provisions in place for unmarried partners.       

Michael Jackson’s Will paid an unnecessary $100 mm in taxes due to poor structuring of his assets and drafting of his Will. 

Bottom Line:  A Will encapsulates your legacy.  Cutting corners, not paying attention to the details, not reviewing it regularly and updating it when necessary, or doing it on the cheap may result in negative unintended consequences.

Always Asking, Never Assuming™

Christopher Holtby

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The step transaction doctrine

Thursday, June 17th, 2010

The step transaction doctrine collapses separate steps taken in tax or gift/estate planning as though they were a single transaction.  When the step transaction doctrine is applied, it is to the detriment of the taxpayer.

In recent cases, the Tax Court has applied the step transaction doctrine to gift and estate planning.  Historically, this doctrine applied to income tax planning.  In a recent case (i.e. Pierre v. Commissioner, T.C. Memo. 2010-106) the Tax Court “held that gifts and sales of interests in a single-member LLC to two trusts (12 days after the LLC was created) are treated for federal gift tax purposes as transfers of interests in the entity rather than as transfers of proportionate shares of the underlying assets owned by the LLC.” The net effect of the step transaction doctrine in this case was that the lack of control discount was reduced from 10% to 8%.  Though this was a small change, the fact that the Tax Court successfully used the step transaction doctrine raises worrisome issues for taxpayers and attorneys.  The reasons that the step transaction doctrine was applied in this case: 1) same day transactions; 2) no lapse of time between gift and sale transactions; 3) intent to make transfers without gift taxes, and 4) poor documentation (source: Steve Akers).  The Tax Court would have had a harder time if the taxpayer had had excellent documentation and economic reasons for this structure.

Bottom line: The U.S. government is hungry and looking for new revenue sources.  An attorney, Mil Hatcher, captures the essence of this case: “Pierre II has to be viewed as the proverbial camel’s nose under the tent.  Beware of what follows.”

Always Asking, Never Assuming™

Christopher Holtby

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Beschäftigen Sie Besitzrechtsanwalt

Thursday, December 31st, 2009

That is a long title, in German, for estate attorneys in the upcoming year (I spoke German growing up, as my mother and grandparents are Austrian).  The estate planning world is in a state of flux.  On 1/1/2010, the gift tax drops to 35% (it’s currently 45% and increases to 55% on 1/1/2011 based on current law).  The gift tax is calculated on the tax-exclusive basis, making it a more tax-efficient transfer process than waiting to pay the estate tax rate.   For taxpayers living more than 3 years from the date of the taxable gift, only the value of the interest transferred will be used to calculate the deceased’s taxable estate.  For taxpayers living less than 3 years from the date of the taxable gift, the gift tax paid will be included in the deceased’s taxable estate.  In both cases, appreciation in the value of the gift would not be included in the taxpayer’s adjusted taxable estate (source: Leimberg).  There are some additional benefits, subject to the facts and circumstances, such as valuation differences between assets transferred and the value of the interest itself.

As the weeks unfold (Congress reconvenes Jan 5, 2010), clients should be discussing with their estate attorneys how their current wills and wealth transfer strategies align with current rules that take effect 1/1/10 and potential new rules.  Many estate plans written over the last few years had flexibility added to documents using disclaimers, etc.  Clients should discuss the timing of pre-planned taxable gifts, the effects on children and grandchildren, GRATs, QTIPs, and CLATs.
  
Bottom line:  This is going to be a busy year for estate attorneys.
 

Always Asking, Never Assuming™

Christopher Holtby

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IRA rollover and spouse deferral

Friday, November 20th, 2009

IRA accounts can be a complicated area of wealth transfer planning.  There was a recent Private Letter Ruling (200938042) involving a deceased spouse who wanted his IRA to pass to the surviving spouse.  While the surviving spouse was not named the beneficiary of the IRA (a trust was), terms of the deceased spouse’s will made the surviving spouse the sole beneficiary of the IRA, and she was deemed the “distributee” or “payee” per Code section 408(d).

The deceased spouse’s will made a trust (testamentary) the beneficiary of his IRA.   The will had articles under the disclaimer sections giving the surviving spouse a renunciation power over the trust.  This power allowed the surviving spouse to make the trust void, which she did.   The IRA account needed a new beneficiary, which according to the will was the surviving spouse.  A transfer or rollover to her IRA was required to occur 60 days from the date the deceased spouse’s IRA  was distributed to the surviving spouse.

Bottom line:  If qualified plans, IRAs, or any other type of retirement account is a large or critical portion of your estate, be sure to have your estate attorney review your wills in light of this PLR. 

 

Always Asking, Never Assuming™

Christopher Holtby

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Potentially last opportunity for some estate planning techniques

Friday, October 23rd, 2009

[Disclaimer:  I am not an attorney.   Please discuss any concepts with your attorney.   I am not liable if any of these concepts are followed without consulting an attorney and turn out badly].   

An attorney friend of mine sent an e-mail outlining several estate planning techniques which, in his opinion, are at risk of being reduced or eliminated.  Here is a short re-cap:

1) Valuation discounts for transfers of certain entities between family members (i.e. FLPs and family LLCs) could be disallowed, either in whole or in part (for example, if, hypothetically, the discount goes from a current 35% to 10% after a tax law change, for a $10 million estate, an extra $2.5 million remains in the taxpayer’s estate and is taxed at the current 45% estate tax rate).

2) GRAT (Grantor Retained Annuity Trusts) terms for a period of less than 10 years could no longer be allowed (means if the grantor dies within those 10 years, the assets are brought back into the grantor’s estate).

Bottom line: Tax levels ebb and flow as with seasons.   Since we are heading toward higher taxes, you should plan accordingly and quickly in 2009.  

 

Always Asking, Never Assuming™

Christopher Holtby

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Mortality premium could become a mortality discount

Wednesday, September 2nd, 2009

In an age when tax rates are sure to rise, and deduction/exemption levels will decrease for income and estate tax planning, advisors/clients will be looking for straightforward above-board planning techniques to mitigate this trend.   There are wealth transfer planning techniques such as installment sales, private annuities and self-canceling installment notes (“SCINs”) which require a “mortality risk premium”.  This premium exists where future payments are based on the recipient not passing away.  This future payment will be, all things being equal, the present value of the future payments, which should be less than a non-contingent payment because of the risk that the payment may not be made.  What happens if all things are not equal, and contingent and non-contingent payments are valued using different interest rates?

For example, a goal of the SCIN would be to try to eliminate the gift tax with the present value of the future payments being equal to the “present consideration for those payments”.   Since there is the risk of death, which would eliminate those payments, they must be higher (e.g. mortality risk premium).  But, the Internal Revenue Code has different sections offering different interest rate requirements.  Perhaps a client situation would legally allow using these different interest rates such that a mortality risk premium could actually be a mortality rate discount? 

If a client has income-producing or appreciating assets and a goal of transferring those assets to the next generation, what are the wealth transfer methods to reduce, as legally allowed, the estate tax, gift tax and or income tax costs?   The trust and estate attorney industry uses software called NumberCruncher to assist in the numerical planning portion (estate, gift and income tax perspective).  Over the last year, users of this software have noticed instances where the mortality risk premium was negative.  This has been caused by differences in the interest rates required within the Internal Revenue Code (as applying to SCIN’s Sections 7520 and 7872) due to our current low interest rate environment.  

Bottom line:   If you have income-producing or appreciating assets that are part of your wealth transfer planning, discuss with your estate attorney the methods that are available for reducing, as allowed by law, the various taxes, including the issue of the different interest rates.  This planning should include your tax advisor as well as a discussion of the assumptions you apply to those assets.  Any executed plan is only as good as the monitoring and maintenance of such a plan.  

 

Always Asking, Never Assuming™

Christopher Holtby

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Estate planning complications for Blended Families

Friday, May 29th, 2009

A blended family is the result of an initial divorce and a subsequent remarriage of one or both spouses.  This poses challenges from a tax, wealth transfer, insurance and investment perspective.  Setting aside the psychological issues, below are some interesting points to consider when planning your affairs and coordinating between the various advisors (courtesy of Paul Hood):

a) How does an advisor represent both parties in blended family situation where there is large disparity in income, assets owned, one spouse is childless, one or both have a number of prior marriages, etc?

b)  How do wealth transfer strategies occur with multiple children on both sides of the new marriage where there are large disparities in income and assets owned?  (divorce rate for second marrriages is higher than 50%, which is the divorce rate for first marriages).   What are the pros and cons to leaning more on irrevocable versus revocable entity planning?

c) How does this new blended family select fiduciaries, executors, guardians, individual trustees (does a corporate trustee make sense?), and power of attorney (living wills, etc.)?

d) When should property vest, and what are the legal and tax ramifications for the vesting of property occurring after the death of the first spouse when the surviving spouse was not the creator of those assets, but he or she has children?

e) How do you manage and allocate liquid and illiquid assets between various wealth transfer entities when there is a large disparity of wealth in the new blended family, and both spouses have children from previous marriages.

Bottom line:  Over-engineering and boilerplate planning are both ripe for legal complications after the death of the first spouse in a blended family.  Humility, respect and kindness might save the day.     

 

Always Asking, Never Assuming™

Christopher Holtby

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Estate Planning Triple Witching Hour

Friday, May 15th, 2009

[Note: This blog is relevant for persons/entities falling under IRS jurisdiction.  Comments below should not be considered tax or legal advice.]

A triple witching hour describes a period occurring every three months when stock options, stock market index options and stock index futures expire.  A recent release from Keith Buck and Fred Chang of Pacific Life Insurance Company describe another triple witching hour for the estate planning world.

Currently there are rare events, when combined together, that make wealth transfer very effective for clients.  Interest rates are very low, asset values are very depressed and the government has hinted at limiting the valuation discounts in various entities. 

Many wealth transfer strategies require using an interest rate which is set by a government agency.  The rate, called the Applicable Federal Rate (“AFR”), was 0.72% for March.  This is considerably lower than the historical 11 year average for the AFR, which is 3.77%.  The AFR is used for GRATs, installment sales to defective irrevocable trusts, intra-family loan arrangements, just to name a few.  Such a low AFR hurdle makes the “cost” of implementing these strategies potentially more attractive.

Real assets (real estate or oil/gas), business assets, and/or marketable securities (stocks, bonds and mutual funds) have all experienced losses over the last 18 months.  This is a “blessing and a curse.”  If those assets are gifted or transferred within a wealth transfer strategy, the dollar amount of the taxable gift is reduced due to the depressed asset values.  The difficulty is modeling what the assets’ expected worth might be, and when those assets will reach the expected value required for the wealth transfer strategy to provide the outcome desired by the grantor and/or future generations. 

There is currently a House bill (H.R. 436) that would eliminate the minority discount for transfers to various entities.  There is a new Greenbook (actually is was pre-released to the ABA and the AICPA tax group in early April) which outlines further reductions to the lack of control and minority discounts used in wealth transfer strategies.  Current law (see Jane Z. Astleford v. Comm’r, U.S. Tax Court, T.C. Memo 2008-128, May 5, 2008; Huber v. Comm’r, 2006 Tax Ct. Memo LEXIS 97, May 9, 2006) “allows as much as 35% to 50% discounts when clients transfer certain types of assets.”  If these discounts were materially reduced, it would increase the taxes paid at the grantor’s death.

Bottom line: It is hard to think about transferring wealth when your asset values have decreased. Talk to your estate attorney, tax advisor and overall advisor (make sure they are in the same room or on the same call) about these issues as they relate to your legacy and consumption goals.

 

 

Always Asking, Never Assuming™

Christopher Holtby

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Planning for depreciated property at death

Friday, May 1st, 2009

The norm in estate planning, when considering transferring assets from an elderly person to the next generation, is to consider the age/health of the person, and the difference between the cost basis and the market value of the assets.  The older and less healthy the person, and the larger the difference between market value and cost basis, the greater rationale to wait for the step-up in basis occurring upon death.  For example, if the decedent had a house with a cost basis of $35,000 at death (assume no adjustments under IRC 1016) and a market value of $200,000, the beneficiary of that asset will have a new cost basis in the home of $200,000, which is called a step-up in basis.  This is a simple example; it can get more complicated with oil/gas properties, assets in various entities, etc.

In the opposite situation, where the older person in failing health has an adjusted basis greater than the current market value, the cost basis at death will be the lower market value.  Considering the facts and circumstances, and with proper legal and tax advice, it could make sense to sell the depreciated property before death.  For example, if the decendent owns a yacht with an adjusted cost basis of $150,000 and a market value of $110,000 at death, under normal circumstances, the beneficiary would have a new basis of $110,000.  If the numbers work relative to tax and estate planning issues, the older unhealthy person should sell the yacht during their lifetime.  

Bottom Line:  Apart from this rather morbid topic (for which I apologize), assumptions on estate planning need to reconsidered from start to finish. 

 

Always Asking, Never Assuming™

Christopher Holtby

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