Midland Asset Management

Estate planning is more art than science, and it would service economists well to learn this.  A revocable trust can be altered or terminated during the lifetime of the person who contributed the assets into the trust (called the grantor).  Since the trust can be changed by the grantor during his/her lifetime, it is included in their estate.  Assets in the trust are passed to beneficiaries at the grantor’s death, and then the revocable trust becomes irrevocable.  

Revocable trusts offer a variety of different solutions.  The selection and implementation of a revocable trust, while working with your estate attorney, involves considering some of these issues, though there are many more: Does the surviving spouse or beneficiary(s) want total control or protection advantages? Is income tax savings for the surviving spouse relevant for the revocable trust?  What assets and beneficiary designation situations the should the client consider?   

A revocable trust’s structure will vary depending on whether the grantor is a single individual, whether the ultimate goal is asset protection and whether the grantor(s) is married.  Married couples have a variety of different revocable trusts at their disposal such as “Complex Joint Lock-up Trusts” for all assets, “Separate Trust for Each Spouse”, “First Death Lock-up Trusts”, etc.  

Bottom line: As with everything, always ask about and understand what the upsides and downsides are to the structure of a particular type of revocable trust, and what administrative headaches, if any, can the trust cause my estate post-death. 

Always Asking, Never Assuming™

Christopher Holtby

Sorry, I couldn’t resist.   Within the wealth transfer planning realm, there are strict rules governing what happens if the person transferring or shifting wealth to entities or the next generation passes away before certain time periods.  We are all aware that life insurance companies employ armies of actuaries to calculate death rates for the life policies they underwrite.  What is less well known is that there are companies that can assist wealth managers and trust and estate attorneys in estimating the time range during which a person might pass away.

This is relevant to those transferring large sums of money in latter years or those with certain ailments, both of which can pose a potential life span problems.  The general rules affect existing life insurance policies, transfers into life insurance trusts, and the various versions of GRATs.  If the transferor or grantor passes away within certain time limits, the assets (including death benefits) are added back to the deceased’s estate.  This would negate all the tax and wealth transfer planning which was done, most likely at a high dollar and time cost.  There is a new industry that has been created, unfortunately for life settlement policies, that can calculate a very accurate life span for the insured.  

There are a few companies (21st Services, Fasano, AVS, EMSI and ISC Services) in this industry that provide this service.  The process utilizes medical records, family history, social habits, etc. to calculate a timetable.  Unfortunately, there are no typical mortality tables, as the government produces four types with age dispersions of 6.3 years.  

Bottom line:  This is a rather morbid topic.  But, if you are transferring material amounts of assets to reduce estate taxes (in light of the current administration), using rough estimates of your mortality might be unwise.

Always Asking, Never Assuming™

Christopher Holtby

There was a recent case involving an estate worth about $14 million.  In the Estate of Marjorie deGreeff Litchfiled v. Commissioner, the IRS did not prevail on their arguments for lowering the marketability and lack of control discounts.  Why?

The estate owned either directly or indirectly through a Q-TIP trust, a large percentage of stock in a private corporation which owned farmland and marketable securities (stocks, bonds etc.), and another percentage in a corporation owning just marketable securities.  The estate wanted to take lack of marketability discounts ranging from 36% to 30% between the two corporations and the IRS argued for 18% and 10%, respectively.   The estate wanted lack of control discounts of 15% and 12% between the two corporations and the IRS argued for 10% and 5%, respectively.  There was also a large discrepancy regarding the built-in capital gains discount, which had a similarly large disparity between the two arguing parties.

The judge ruled that using the weighted average for the corporations was more appropriate (used by the estate) than using a straight average (used by the IRS) with regard to the lack of control discount.  The judge, in considering the appropriate lack of marketability discount, cited the estate appraiser, who used a different discount for a similar asset one year prior to this case. He used this information to lower the discount for marketability, even though it turned out to be higher than the IRS number.  

Bottom line:  When using appraisers to value assets, it is critical to understand the consistency of their methodology and how the results of their past analyses compare to their current results, as this information could be used in a court of law. 

Always Asking, Never Assuming™

Christopher Holtby

Asset protection planning is a complicated, grey and messy process.  It starts with properly titling assets, and using pension assets and life insurance policies as a first line of defense.  The next level is the creation of flow-through entities (S corps, family limited partnerships, etc. ), trusts and eventually asset protection trusts.  People wanting to use asset protection trusts can use offshore jurisdictions (following IRS rules) or the four states in the U.S. offering domestic asset protections trusts: AK, NV, SD and DE.  

If you transfer money into an asset protection trust, you, the settlor/grantor, have to give up certain rights/control to avoid creditors accessing those assets (there is a litany of rules of when you transfer regarding how much, etc.).  The question becomes: If you create a trust in any state, where should the trust have situs (residence) to provide the most protection?  It is trick question because there is no definitive answer.  What are the facts? – where are you a resident, where does the trust have situs, what state could a lawsuit/creditor originate from, etc?  However, for out-of-state residents, there are no currently existing trial court, appellate court or U.S. Supreme Court cases clarifying whether their out-of-state asset protection trust will provide protection from an out-of-state lawsuit.  There is also no clear guidance in a situation where a CA judge uses CA laws and the trust is based in SD, over whether the SD courts can decide the CA laws are not relevant because the trust has SD situs. 

Bottom line:   Good lawyers know and tell their clients that the law begins and ends with – it depends.   Asset protection trusts are good tools that create a lot of brain damage for the other parties.  Nothing is bullet-proof.  If you want bullet-proof, I have great ocean-front property in the TX panhandle for sale. 

Always Asking, Never Assuming™

Christopher Holtby

To my international readers, this posting applies to those individuals falling under the U.S. estate tax rules and also as a warning to make sure your assets do not unnecessarily fall under the jurisdiction of US estate tax rules.

An estate attorney shared with me an idea regularly presented to clients who are in the “gifting” mood.  As a recap, each U.S. individual has a $1 million gifting limit (married couple can give upto $2 million in combined gifts or at death).  The cap does not relieve filing a gift tax return for ALL gifts – annually (excludes the current $12,000 per annum).   It makes sense to gift assets during your lifetime, so the potential appreciation of those assets occurs outside your estate (means your estate’s death tax is lower).

Right now people own assets (real estate, businesses and/or stocks) where the values are way down.   After discussing the details with your estate counsel, you could transfer those assets to a family limited partnership in exchange for limited and general partnership interests.  Once the entity is funded, you would begin to gift limited partnership interests to your intended beneficiaries, rather than gifting the real property/asset itself, allowing you to transfer a significant amount of wealth (and all growth on that wealth) while maintaining control over the assets (limited partners exercise no control over the assets in the FLP).  There are a lot of required steps to create AND, most importantly, to maintain the integrity of that FLP on an ongoing basis.   If the amounts to your intended beneficiaries will be substantial, it is beneficial to gift the limited partnership interests to a trust for the benefit of the ultimate beneficiary rather than making the gifts outright.   Why?  One extra step results in a significant amount of protection for the second generation from creditors, potential ex-spouses, estate/GST taxes, etc. 

My talks with the attorney confirmed that FLPs are not a one-size-fits-all wealth transfer idea.  The devil is in the details.  Please explore the case of Strangi v. Commissioner on the importance of detail regarding the creation and monitoring of FLP’s.  Those with the time and the intent to take advantage of the disconnect between future values versus current values and wanting to make gifts a FLP structure might make sense.  Talk to your attorney.   Focus on the details.  Leave your comments below.

Always Asking, Never Assuming™

Christopher Holtby

I run a boutique wealth management firm. Though the capital markets are adjusting to a new de-leveraged financial structure there are other issues to consider. As my father-in-law (former NBA coach with two Championship rings) taught me indirectly (best way isn’t) great head coaches focus not just on offensive and defensive strategies and tactics but on the fundamentals. In the middle of a storm or heated moment it is the fundamentals that keeps one focused and calm. Thanx Jack.

Just as a refresher, in Texas, Florida, and a few other states, you can homestead your primary residence. Even if you steal, lie, cheat etc., your primary house cannot be taken away from you. So what happens in the event of your death?

In an interesting case in Florida, Cutler v. Cutler dealt with a homestead property, debt and death. The summary is that Edith Cutler intended for her daughter to get the homesteaded primary residence, and her son to get the vacant lot. The Florida Third District Court felt that, according to the facts, circumstances and will, those assets were subject to the will’s directive of paying off all debts. Ah, not good. What happened?

Edith Cutler left two properties in a real estate trust – her homestead primary residence and a vacant lot. The daughter would receive the homestead property and the son would receive the vacant lot. Mrs. Cutler’s will stated this, and allocated the homestead and vacant lot following the trust documents. The problem is that the will included instructions to satisfy all debts, whether part of the residual estate or part of the real estate trust. Mrs. Cutler died, debts exceeded the residual estate, and her son requested that the debt be repaid pro-rata from ALL assets. Her daughter did not agree, stating the primary property was homesteaded. I guess they didn’t like each other.

So the fight was on, and they went to court. Throughout the process, the court found that Mrs. Cutler did state the homestead property should be used to satisfy debt. The case has many references to Florida law. I would suggest to people who are leaving their primary residence property to heirs, that they consider this case, the state law where they reside, the instructions of the will, and the nature of the trust versus their intent.  Texas residents should not, basically, leave primary residences in a trust since Texas statues protect that primary residence already.

Always Asking, Never Assuming™

Christopher Holtby