Posted tagged ‘Estate Planning’

When Do I Get My Money?

May 9, 2013

 By Ashley Alderman

This question is often the first one asked by beneficiaries of an Estate after someone has passed away. They might ask it in a more tactful manner, but the general meaning of the question is the same: When do I get my money?

We’ve all seen the movies…grandfather dies, the family all gathers in the fancy, wood-paneled office around the large conference table, a lawyer begins reading grandfather’s will, and when he’s finished, he hands everyone an envelope with their check. Unfortunately, this scene is purely fiction. For many beneficiaries, however, the movies might be their only exposure to the probate process prior to the death of their loved one, thus creating expectations that the money will be readily available.

Managing the expectations of beneficiaries is one of the first tasks that should be undertaken by the Personal Representative after the Personal Representative is appointed by the Probate Court. In Georgia, the timing of distributions depends on many factors such as statutory notice periods, whether the estate has outstanding liabilities, whether the estate is subject to estate tax, and the terms of the will itself. I briefly address these factors below. Of course, every estate is different, and unique challenges may delay distributions for various other reasons.

After the decedent dies, Georgia law requires the Personal Representative to publish notice of the decedent’s death to debtors and creditors in the legal newspaper of the county of the decedent. The notice to debtors and creditors must be published within 60 days of the date of qualification of the Personal Representative, and must run once a week for four weeks before the Personal Representative can close the estate.

Under Georgia law, the Personal Representative is not required to pay the debts of the estate until six months from the date of qualification. Therefore, the Personal Representative has six months to determine the debts and expenses of the estate so that the Personal Representative may pay them in the correct order (as mandated by Georgia code), and ensure that all debts and liabilities are satisfied prior to making any distributions from the estate. During the course of the estate administration, the Personal Representative may decide to make partial distributions to beneficiaries prior to closing the estate, which may not present a problem as long as there are sufficient assets to pay the expenses and liabilities of the Estate. However, beneficiaries should not receive their final distributions until the Personal Representative has completely paid all taxes, liabilities, and expenses of the Estate.

If the decedent or estate owes any taxes, the payment of these taxes may prolong distributions to beneficiaries for a period extending beyond the Georgia statutory notice periods. In particular, under the Internal Revenue Code, if the estate has a gross estate value of $5,000,000, indexed for inflation (currently $5.25 million in 2013), then the Personal Representative must file a Form 706, Federal Estate Tax Return. This return is not due until nine months after the decedent’s date of death, and may be automatically extended for an additional six months. If there is a possibility that the estate will owe estate taxes, the Personal Representative should not make distributions prior to the payment of the taxes. If the Personal Representative makes distributions, leaving the estate insolvent or unable to pay the full tax liability, the Personal Representative may be personally liable for the underpayment of estate tax. The IRS generally has 3 years from the date of filing in which to audit the estate tax return, but if the IRS is not going to audit the return, it often issues a Closing Letter much earlier than three years after the filing date stating that the tax liability has been satisfied. I strongly encourage Personal Representatives not to make complete distributions of the Estate prior to receiving the IRS Closing Letter.

Finally, the Personal Representative must follow the terms of the Will when making distributions. If the Will contains contingency requirements or timing specifications, the Personal Representative must follow them when making distributions. For example, the Will might provide that a distribution should not be made until one year after the decedent’s death, or until a beneficiary graduates from college.

In summary, many different factors can affect the timing of distributions to an estate beneficiary. In a large, taxable estate, it could be many years before a beneficiary gets his money…a very different situation than depicted in the movies!

 

Modern Families – Estate Planning for Same-Sex Couples

May 17, 2012

 by David Kovsky

Although President Obama has recently come out in support of recognizing same-sex marriages, the law of the land from a federal tax perspective remains the Defense of Marriage Act (“DOMA”).  Under DOMA, the federal government will only recognize marriage as a union between one man and one woman.

To the chagrin of many same-sex couples, the definition of marriage under DOMA precludes the use of fundamental estate planning mechanisms such as the unlimited transfer of wealth between spouses during life, the deferral of estate taxes until both spouses die and, for 2012, the portability of the estate tax exemption.  In many ways, the tax code is structured to benefit married couples.  Nevertheless, married same-sex couples have some unique planning opportunities available to them specifically because the federal government does not recognize their marriage as valid.

Here are two planning ideas that are only available to unrelated parties but may be very effective wealth transfer strategies for same-sex couples:

1. Grantor Retained Income Trust.  This strategy involves transferring assets that the grantor expects will grow and appreciate over time to a new trust while retaining an income interest for a predetermined period of years.  The value of the gift to the beneficiaries is reduced by the value of the income interest retained by the grantor.  The goal here is to freeze the value of the assets at the time of the transfer while permitting the growth and appreciation to occur outside of the grantor’s estate.  Congress recognized the potential for abusing this type of transaction through the investment in non-income producing assets.  Accordingly, Chapter 14 of the Internal Revenue Code was enacted to provide that among applicable family members, the value of a retained interest for transfers in trust is zero, unless that interest is a “qualified” interest.  One such qualified interest is an annuity (hence the common usage of grantor retained annuity trusts).  Since DOMA does not recognize a marriage between same-sex couples, the limitation to qualified interests that is imposed on these types of trusts among family members is not applicable.  Instead, a lawfully married same-sex couple can utilize this very effective (and often overlooked) estate planning device.

2. Qualified Personal Residence Trust.  This type of trust is designed to transfer the ownership of a residence to the trust beneficiaries following the completion of a term of years during which the grantor is entitled to remain in the residence.  The value of the gift to the trust beneficiaries is reduced by the value of the grantor’s right to remain in the residence.  The concept here is to transfer the residence (including all of the appreciation over the term of years) to the trust beneficiaries at a discounted price.  However, when the beneficiaries receive the residence, they are subject to carry-over basis and may incur a substantial capital gains tax on the subsequent sale of the residence.  Had the grantor died owning the residence, the beneficiaries would receive a step up in basis to the fair market value as of the date of the grantor’s death.  Consequently, the subsequent sale would trigger little or no gain.  One way to ameliorate this planning hurdle would be to purchase the residence back from the trust and have it pass through the grantor’s estate.  However, Treasury Regulations governing the use of qualified personal residence trusts specifically prohibit the grantor from buying the residence back when the trust beneficiaries are members of the grantor’s family.  The same prohibition, however, is not applicable to same-sex couples because in the eyes of the government they are unrelated.  To take advantage of this planning opportunity, the grantor should purchase the residence back from the trust (at no gain or loss, due to the grantor trust rules) prior to the conclusion of the trust term.  The same “value” passes to the trust beneficiaries in the form of cash while the residence will ultimately pass through the grantor’s estate and receive a step-up in basis at his or her death.

With the recognition of same-sex marriage quickly becoming a buzz worthy campaign issue, it is possible that we may see the repeal of DOMA sometime in the next few years.  However, until that happens, it is important to advise same-sex clients to double-down on the government’s definition of marriage as the union of one man and one woman and to take advantage of the unique planning opportunities available to them as “unrelated” parties.

Facebook, Instagram and the Zuckerberg Estate Plan

April 24, 2012

 by David Kovsky

Forbes Magazine ran an article on March 7, 2012, explaining how Mark Zuckerberg transferred approximately $37 million, tax free, to unknown beneficiaries.  The author of the article speculates that the ultimate beneficiaries are Mr. Zuckerberg’s unborn children.  When this article ran, it generated a fair amount of buzz in the estate planning world.  Now, with the lightning quick acquisition of Instagram for a cool $1 billion barely in the rearview mirror, it is worth resuscitating the discussion of estate planning for young entrepreneurs.

In Mr. Zuckerberg’s case, the article points to his use of a specific type of a trust known as a Grantor Retained Annuity Trust.  Without getting into the mechanical details of this type of planning, the ultimate goal was to transfer the growth and appreciation in value of Facebook stock to the trust beneficiaries (assumed to be Generation 2), free of any wealth transfer tax, while retaining the original value in Mr. Zuckerberg’s estate.  The tremendous growth in value of Facebook over a short period of time made this an excellent vehicle for Mr. Zuckerberg.  Likewise, with historically low IRS interest rates (a Grantor Retained Annuity Trust must pay an interest factor to the Grantor), this is a great tool for more modest clients who expect a sale or strong appreciation within a defined period of years.

For young entrepreneurs who may not see an exit or rapid growth on the horizon, there are other techniques that should be considered.  To keep the planning straightforward, some of these clients may benefit from simply gifting a slice of their company to an irrevocable trust (it is important to not “over plan” young clients, so using a small but meaningful portion of a client’s business is advisable).  The trust assets may be held for the benefit of the client’s children.  If the client is married, his or her spouse may be a permissible beneficiary.  Of course, each dollar that is distributed back to the spouse is counterproductive from an estate planning perspective, but it gives the client the flexibility of having an “out valve” in the event the assets are needed at his or her generation.  This planning is especially important for young entrepreneurs whose financial wherewithal is much less certain than that of an elderly client.

For gift tax reporting purposes, the client’s company must be appraised to establish the value of the gift.  The general concept here is to leverage the low (or nominal) value of a client’s startup and allow all of the growth and appreciation to blossom outside of his or her estate.  Since the client will likely assert only a nominal value for the company on his or her gift tax return (and thus utilize very little of his or her gift exemption), pursuing this strategy in 2012 is advantageous.  If the IRS audits the gift tax return and asserts a higher value for the company (even substantially higher), the $5.12 million exemption for 2012 will serve as a cushion protecting the client from a potential gift tax liability.

Startups like Instagram and Facebook were unmitigated homeruns.  While few clients will have Facebook’s level of success, this type of trust and gift planning is a very effective early-stage estate planning strategy for entrepreneurs, with the potential to pay huge dividends in the long run.  If the company does modestly well, the client may save future wealth transfer taxes (at multiple generations).  Moreover, trusts for the ultimate benefit of Generation 2 and Generation 3 may be protected from creditors and divorcing spouses.  As a client begins to have a track record of success, the trust may also be used to facilitate angel investing in other startups (a common side project for many successful young entrepreneurs).  Alternatively, if the company goes belly-up, the client has incurred the legal expense of establishing the trust, but will have a vehicle in place to receive gifts of interests in future companies.

It’s often very difficult to get young clients to focus on estate planning.  At age 24 when the trusts were established, Mr. Zuckerberg should be commended for focusing on estate planning and having the wit to heed the advice of his counsel.

Do I Need Estate Tax or Asset Protection Planning?

March 2, 2012

 By James M. Kane

A difficulty for clients is how to decide what estate tax / asset protection techniques are realistically suitable or cost-beneficial, compared particularly to the super-wealthy who likely need virtually every technique available.

In other words, a client should gauge whether someone is merely trying to sell them a technique they really don’t need.   This is a legitimate question worthy of serious consideration.

Here are some key points to consider:

(1)    Don’t end up in a situation where the courts have to get involved because you became incapacitated or died without adequate documents in place. Simple examples are dying without a Will, failing to have named guardians for your minor children, ending up with a court-managed guardianship if you later become incapacitated (trusts can help eliminate these threats);

(2)   Keep an eye on your estate tax exposure. The federal tax law exempts a certain portion of your estate from estate tax. This is called the estate exemption amount. (Georgia presently has no death tax).  If your death occurs in 2012 the federal exemption is $5.12 million ($10.24 million combined exemption during 2012 for a married couple). This exemption drops to $1.0 million beginning for deaths in 2013 ($2.0 million combined for a married couple).

The tax law in most cases – combined with proper planning — allows a married couple to delay the day of reckoning for paying the estate tax until the surviving spouse’s death, regardless of the size of the couple’s estates. However, even with this postponement, the above exemptions for each spouse may require a level of estate planning in order to coordinate and make sure both exemptions are (or can be) fully used.

(3)   Asset protection is more subjective than items (1) and (2) above.  Whether you need asset protection depends on your exposure (particularly your occupation) and whether you will sleep better knowing you have in place techniques that better protect you and your family from lawsuits, judgments, creditors, and in some cases bankruptcy.  Thus, in this subjective situation an important cost-benefit factor is how much peace and repose you will experience if you put into place asset protection techniques for insulating you and your family from these types of potential threats and claims.

In reviewing whether items (2) and (3) above may warrant further action, my view is that the portion of assets a client expects to hold for the long-term, exceeding what the client likely will  spend during lifetime for food, shelter, necessities, school, vacations, medical, etc., should at least fall under consideration for potential estate tax and asset protection planning.

By contrast, for younger clients who are spending most of their income currently on raising young children, and so forth, the need for complex estate tax and asset protection planning may not be as important.  In these situations, if one spouse dies with young children the likelihood is much greater that most of the assets will be ultimately spent-down for the care of the surviving spouse and for the children while they continue to grow up and attend school, etc.   The assets ultimately may not be large enough when the surviving spouse dies to trigger estate tax exposure.  In this situation the planning might need to be minimal so as to prevent the courts from having to get involved in dealing with a spouse’s death or incapacity (such as dying with no Will).   Asset protection can also be minimal and directed at making sure a surviving spouse does not remarry and divert the assets to another spouse or children from someone else’s marriage (again, trusts can help eliminate these threats).

Intentionally Defective Budget Proposal: President Obama’s Attack on Grantor Trusts

February 21, 2012

 By Erica Opitz

On February 13, 2012, President Obama proposed the budget for 2013.  The budget proposal has been reported to be dead on arrival.  Notably, however, President Obama’s budget proposal went after intentionally defective grantor trusts, which is not a proposal that we have seen previously.  If this were to pass, the results would wreak havoc on a top estate planning tool. With the sun setting of the current estate tax code provisions at the end of this year, it is possible that President Obama’s grantor trust proposal will be used as a bargaining chip and could potentially reappear in future legislation.

Under the proposal, the legislation would only be effective for transfers on or after the date of enactment.  As a result, transfers to a grantor trust prior to enactment would remain outside of the grantor’s estate.  For this reason, it is important to take advantage of the grantor trust while the benefits remain available.

Current Law:

In an intentionally defective grantor trust, the grantor retains certain rights and powers over the property held by the trust.  For income tax purposes, a grantor trust is not a separate entity from the grantor, and as a result, the grantor pays all income taxes on the trust earnings.  Under the current regime, the assets placed in the grantor trust are held outside of the grantor’s estate.  The transfer of property into the trust is treated as a completed gift for estate and gift tax purposes.  As a result, future appreciation on the assets placed in the trust is not subject to estate or gift tax.  Furthermore, a sale from the grantor to the grantor trust is ignored for income tax purposes.

Proposed Law:

President Obama’s budget proposal would include the assets of the grantor trust in the grantor’s gross estate.  Additionally, any distributions from a grantor trust would be subject to gift tax as would the assets of the trust if the grantor ceased to be the owner of the trust.  President Obama’s proposal would apply income tax to a sale from the grantor to the grantor trust if the sale would be subject to capital gains tax if the sale was made by someone other than the grantor.  The Department of Treasury’s green book states the reasoning behind the proposal.  “Taxpayers should be required to take consistent positions in dealing with the Internal Revenue Service.  The basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s date of death.”

Income Tax Deductions for Estate Planning Costs

May 24, 2011

 By Rose Drupiewski

Proper estate planning may provide substantial benefits to a client in the form of tax savings, asset protection, and control over the distribution of assets.  While such goals are typically the intended benefits of estate planning, clients and their planners should also be aware of potential unintended benefits.  For example, income tax savings may be obtained through the proper utilization of Code section 212, which allows an income tax deduction for all ordinary and necessary expenses paid or incurred during the taxable year for: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for the production of income; or (3) the determination, collection, or refund of any tax (including estate and gift taxes).

The costs incurred by an estate planning client, which may include attorney and accountant fees, appraisal costs, filing fees, etc., may be deductible under Code section 212.  In general, costs relating to the preparation of wills, trusts, and other testamentary documents are not deductible for income tax purposes, but costs relating to estate and gift tax calculations, tax planning, and return preparation may be deductible.  See, e.g., Wong v. Commissioner, T.C. Memo. 1989-683. 

When an estate planning engagement involves transactions relating to a business, such as a closely-held corporation of family limited partnership, some consideration should be given to whether costs that might be deductible under Code section 212 are more properly deductible under Code section 162, which allows a deduction for ordinary and necessary business expenses.