Archive for the ‘Legacy Planning’ Category

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

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Gift tax: a wrinkle from the I.R.S.

Friday, September 3rd, 2010

A depressed asset (e.g. stock, partnership, real estate, private company) provides an opportunity to transfer (characterized as a gift) the value to the next generation.  This strategy is successful when the asset’s value appreciates and is worth more in the future. 

From the Chief Counsel Advice (CCA 201024059: Consequences of Gift Not “Adequately Disclosed”), per the IRS, gifts that are not “adequately disclosed” on a gift tax return provide the IRS the opportunity to assess the gift tax any time.  The IRS is not barred by the three year statute of limitations.   In a particular case, a taxpayer made a taxable gift of stock in a closely-held company.  Per the IRS, the gift tax return did not disclose “(1) any information with respect to the method used to determine the Fair Market Value of the stock; and (2) any description of the discounts used to value the stock that were in fact used to value the stock.”   The IRS differentiated between “adequately disclosed” and “adequately shown.”  There are numerous Internal Revenue Code and Treasury Regulations dealing with these differences.  If a gift tax can be assessed a long period of time after the actual gift has been made, penalties and interest can be added.  There are more moving parts, but that is the general gist of this issue. 

Bottom line:  If you are planning to transfer assets with temporarily depressed values, have your CPA and estate attorney understand the nuances found in Chief Counsel Advise 201024059.

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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IRS and FLPs – stick to the facts ma’am.

Friday, October 3rd, 2008

In the Fall 2008 issue of The American College of Trust and Estate Counsel (yes, I read even this stuff), there are some interesting articles on recent Tax Court and Court of Appeal cases on Family Limited Partnerships and Limited Liability Corporations. I thought it would be good to highlight some of the relevant cases, and pass on a few thoughts for you to consider in discussions with your estate counsel during your planning sessions.

Estate of Erickson v. Commissioner (T.C. Memo 2007-107)  There are a series of missteps during the formation of the FLP (created with a contribution) days before the grantor’s death, and post grantor’s death, there were self-dealing loans, sales and redemptions.    Bottom line: don’t try to be cute or fancy.  Focus on the facts as most recently outlined in Estate of Strangi v. Commissioner (T.C. Memo 2003-45). 

Estate of Rector v. Commissioner (T. C. Memo 2007-367)  Cash and marketable securities were placed inside a FLP when Mrs. Rector was 92.  OK.   She lived for two years after forming the partnership.  OK.   The judge found the partnership had “no business plan, no meetings, no investment strategy, no financial statements, no apparent purpose except to hold investments, make distributions, pay Mrs. Rector’s personal expenses and transfer assets to her sons as a testamentary substitute” (ACTEC Journal p. 34 Fall 2008).  Four years after the greatest estate planning case about FLPs, and this estate attorney makes mistakes that are clearly, distinctly outlined in the Strangi case.  Bottom line: make sure your estate attorney compares your FLP to the rules outlined in the maintenance and contribution into FLP section of the Strangi case (think “strangle your money by the IRS” to remember the casename).   

Estate of Mirowski v. Commissioner (T.C. Memo 2005-126) Mrs. Mirowski created an LLC and died 15 days later.   The judge allowed the contribution to stand to the disdain of the IRS.   Why?   The facts of her childhood and the joint management of her family’s business fostered cohesiveness; she was planned to be released from the hospital after the routine check-up with sudden complications; her late husband had developed a life-saving defibrillator (the asset in the FLP) which, if used in a commercial setting, would require active management where a single entity would open up investment opportunities, etc.   The LLC document followed the rules according to the standards of governing distributions in the operating agreement, and the grantor of the gifts did not have any implied right to income or control.   Bottom line: little details are critical when dealing with wealth planning.  Don’t be cheap and pay the extra money to focus on the details.  

Always Asking, Never Assuming™

Christopher Holtby

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The new world order for investments

Friday, September 19th, 2008

We are in a mess.  We will figure a way out.  It WILL be painful.  What does the new world order potentially look like for investment assumptions?  A few thoughts to consider in conjunction with your consumption and legacy goals:

1) Financial institutions will change to focus on sustainable and long-term business strategies.  This means the days of cheap money are gone and the most aggressive or dumbest guy in the class won’t succeed.  Therefore, less leverage in the financial system.

2) Regulation will bloom in the form of higher capital ratios, lower gross and risk adjusted asset ratios, and obviously, less leverage.  Politicians will be fighting amongst themselves to create the VERY austere rules.

3) Regulation and market discipline will cause core deposits at the new financial conglomerates to increase, and any financing of capital market activities not pinned against core deposits will go away.   The carelessness of investment banks being only risk producers and not risk holders will do a 180-degree change.  Financial innovation will mean that the risk producer and risk holder will share pain and reward.

4) The difference in yield between US Treasury bonds and corporate bonds will widen.  This will increase the business hurdle to finance new projects (same issue with individuals).   By lowering the ability to borrow money, growth will be lower, not negative, not slower, just lower.  Big impact for private equity investors and their sponsors.

5) Transparency will increase for all financial conglomerates.  This will fall between the regulators and accounting rules.  Congress will go too far trying to think of every future scenario.  From what we know about prisons, locking up a group of criminals does not stop their creativity and the strong flow of drugs into those prisons.  

Bottom line – the super debt/credit cycle is over.  This means returns will be lower.  Midland Asset Mgmt will be assuming a range of 6.5% to 7.5% for diversified global balanced portfolios.   Yup that is low.   You stay wealthy by avoiding being completely wrong, NOT trying to be absolutely right.  If our return assumptions are too low versus the actual results, are clients are huge winners.  If we are right, they will reach their multi-generational consumption and legacy goals.  Lowering return assumptions is one aspect of that philosophy.   Economic growth and investment returns will be distorted as the global financial system de-leverages.     

Christopher Holtby 

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Trustee diversification

Friday, September 19th, 2008

Traditionally, Uncle Bob or Aunt Hildred have been the trustee of choice.  The next choices, in no specific order, were Northern Trust, Bank of America, JP Morgan, US Trust and Merrill Lynch.  As of 9/15/08, there are only 3 choices for big corporate trustees – Northern Trust, Bank of America and JP Morgan.

A corporate trustee should really care and know the details of your family’s wishes, and not just mouth the corporate blah, blah, blah.   These new trust officers will handle 50 – 300 trust accounts each.  We all know that these remaining corporate trustees, especially Bank of America and JP Morgan, are financial conglomerates (aka shareholder value first, client needs behind that somewhere).  I believe that the results of a lifetime of work and potential decades of distributions should be given to more than a corporate hamburger flipper.

If you want to incorporate versions of unitrust distributions into the trust document, Uncle Bob and Aunt Hildred are removed from making subjective distribution decisions, which lessens the need for an individual trustee (you really need to drill on the details here with legal).  They will still have to hire a financial advisor, especially in these turbulent times.  Why not look for an independent  corporate trustee charging 0.15 – 0.35 % and use an independent fee-only financial advisor?   That is a winning combination.  If the total fees are 0.10 – 0.15% more than the Bank of America or JP Morgan total trustee and investment advisory fees, who do you think will put their heart in sole into your assets -  the hamburger flipper at the financial conglomerate?

Wealth is created by specialization.  Wealth is maintained by diversification.   An independent corporate trustee would ask the question, “Why?”.  Would Bank of America?

Christopher Holtby

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Charity mission drift

Wednesday, September 17th, 2008

When a family crosses the threshold to where their wealth can influence society, Mom and Dad need to ask themselves, “What is the purpose of this influence?”.  This influence can be local, regional, national or international (Bill & Melinda Gates level).   Sounds obvious?  You would think so.   Henry Ford II, the grandson of Henry Ford, resigned from the Ford Foundation in protest.  He was disgusted with the foundation’s activities, which he felt were anticapitalist and were an anathema to the free-market policies of his grandfather.   So what do you do?

As I have previously written, you can create a private foundation, or you can get experience by giving money through a donor-advised fund involving the whole family.   Following the walk before you run philosophy, this allows the family to get used to working together before being entrenched in a legal entity.  

If a family creates a private foundation, a breakdown in the communication between the foundation and the governing board of the charity are to be expected.  Historically, you would have the family oversee the activities of the charity (but not if it is the Red Cross-type size).  This could mean establishing the parameters for restricting funding and how the donor and the charity would work together.   This type of collaboration between the donor and the charity regarding its charitable activities, has the chance to set the tone of how the charity should behave once the donor dies. 

It is good to use a sniper approach to charitable-giving versus a shotgun approach. 

Christopher Holtby

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Efficient Philanthropy

Friday, July 25th, 2008

Walk before you run.  Giving away money is easy.  Giving away money successfully is hard. 

Most wealthy families don’t have a simple explanation of why and where they give to charity.  How purposeful and successful is your family’s charitable giving?

Charitable giving works in 3 ways: 1) give outright, 2) give to a donor-advised fund, or 3) give to your own private foundation.   Each have their own tax, flexibility and control issues. 

It has been my experience that beginning with giving outright is best.  Write a list of specific charities or charitable issues that are important to you, plus the overall charity allocation.  If someone calls about starving kids in Somalia, and that is not on the list, you say: no, that is not our charitable focus (some of my clients follow an “oh is that dreadful” charity allocation).   At the end of the year, you can look back and feel that your organized and structured approach was successful.   Once the family is organized about how to give, they can get more creative with a donor-advised fund or a private foundation.   More on that later.

Walk before you run.

Christopher Holtby

 

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Wisdom of Diversification

Tuesday, June 10th, 2008

“Rich people get rich by a lack of diversification. Rich people stay rich by diversifying.“  Dennis  Belcher

 The art of investing for the Ultra High Net Worth family is knowing when that single asset has reached its “ripeness” moment.  The only way to reach that conclusion is knowing beforehand two facts:

1. What are your consumption goals?

2. What are your legacy goals?

I exist for two reasons for clients – keeping them wealthy and organized.   Diversification from a single asset is based on goals.  Nothing more or less.

Christopher Holtby

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