Category: Estates & Trusts

2019 Year-End Estate Planning: The Question Is Not Whether to Gift, But How to Gift

Federal and Illinois tax laws continue to provide opportunities to transfer significant amounts of wealth free of any federal gift, estate and generation-skipping transfer (GST) taxes. However, because certain beneficial provisions “sunset” on January 1, 2026, now is an ideal time to revisit estate plans to ensure you make full use of this opportunity.

Current Exemption Levels

The federal gift, estate and GST exemptions (i.e., the amount an individual can transfer free of any of these taxes) are currently $11,400,000 for each individual, increasing to $11,580,000 in 2020. For married couples, the exemptions are currently $22,800,000, increasing to $23,160,000 in 2020. However, on January 1, 2026, the federal gift, estate and GST exemptions will be cut in half.

Federal and Illinois estate tax laws allow for a marital deduction for assets passing outright to a spouse or to qualifying trusts for the benefit of a surviving spouse. Thereafter, the federal estate tax rate is 40 percent. Illinois imposes a state estate tax based on a $4,000,000 threshold, which is not adjusted for inflation, at effective rates ranging from 8 percent to approximately 29 percent. (The Illinois estate tax paid is allowable as a deduction for federal estate tax purposes.) The only way to take advantage of the increased federal exemptions is to utilize planning strategies such as gifting in advance of the sunset date.

Gifting Options

Lifetime utilization of transfer tax exemption. A simple and effective planning opportunity involves early and full use of the high exemptions. Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings, unless the assets that have been transferred decline in value. As with any gifting strategy, all income and future appreciation attributable to the gifted assets escapes future gift and estate taxation.

Assuming that assets appreciate, the sooner a planning strategy is implemented, the greater the estate tax savings will be. On November 22, 2019, the IRS issued final “anti-clawback” regulations expressly acknowledging that, when the exemptions are decreased, gifts made using the current high exemption amounts and which are in excess of the future reduced exemption amounts will not be subject to any additional gift or estate taxation. Thus, now is clearly the time for a “use it or lose it” strategy.

Annual exclusion gifts. Making use of annual exclusion gifts remains one of the most powerful estate planning techniques. The “annual exclusion amount” is the amount that any individual may give to any other individual within a tax year without incurring gift tax consequences. This amount, indexed for inflation, is currently $15,000 per donee.

Married couples can combine their annual exclusion amounts when making gifts, meaning that a married couple can give $30,000 per year to a child without using any transfer tax exemption (although filing a gift tax return may be required in some circumstances). When the spouses of children are included in the annual exclusion gifting, the amount that can be gifted is doubled again, meaning that a married couple can give a total of $60,000 per year to a child and the child’s spouse without using any transfer tax exemption.

Annual exclusion gifts can result in substantial transfer tax savings over time, as they allow the donor to remove the gift amount and any income and growth thereon from the donor’s estate without paying any gift tax or using any transfer tax exemption. Annual exclusion gifts also reduce a family’s overall income tax burden when income-producing property is transferred to family members who are in lower income tax brackets and not subject to the “kiddie tax” or the 3.8 percent net investment income tax.

Tuition and medical gifts. Individuals can make unlimited gifts on behalf of others by paying tuition costs directly to the recipient’s school or paying their medical expenses (including the payment of health insurance premiums) directly to a health care provider.

Gifts to spousal lifetime access trusts. Most people consider $11,400,000 to be a very large gift and either cannot, or do not want to, give away that much, as they may need or want it for themselves. A gift to a properly structured “spousal lifetime access trust” lets an individual make a completed gift now, and use the temporarily increased transfer exemption, but allows the individual’s spouse to be a beneficiary of the trust and have access to trust assets if needed. If the spousal lifetime access trust is implemented properly, the assets of trust (and the growth thereon) will not be subject to estate tax at the death of the grantor or at the death of the grantor’s spouse.

Grantor trusts. When planning with trusts, donors have great flexibility in determining who will be responsible for the payment of income taxes attributable to the assets in a trust. As an enhanced planning technique, trusts can be structured as “grantor trusts,” in which the trust is a disregarded income tax entity and the donor—not the trust or the beneficiaries—is responsible for paying tax on the trust’s income. By structuring a trust as a grantor trust, a donor can make tax-free gifts when paying the tax attributable to the trust’s income. This technique promotes appreciation of the trust assets while simultaneously decreasing the size of the donor’s estate, producing additional estate tax savings.

Combining gifting and selling assets to grantor trusts. Additional estate tax benefits can be obtained by combining gifts to grantor trusts with sales to grantor trusts. Because the grantor is treated as the owner of the trust for income tax purposes, no capital gains tax is imposed on the sale of assets to a grantor trust. The trust can finance the sale with a promissory note payable to the grantor, which provides the grantor with cash flow from the trust. The growth on the assets that are sold would then escape estate taxation at the grantor’s death.

Considerations When Making a Gift

Use of trusts when gifting. As with any gifting strategy, assets may be gifted outright so that the recipient directly controls the assets, thereby exposing the assets to the claims of the beneficiary’s creditors. Alternatively, assets may be gifted in trust, which 1) protects the gifted assets from the beneficiary’s creditors, including the spouses of beneficiaries in the event of divorce, 2) determines the future use and control of the gifted assets, and 3) shelters the gifted assets from future gift, estate and GST taxes through the allocation of the GST exemption.

Valuation discounts and leveraging strategies in the family context. “Minority interest,” “lack of marketability,” “lack of control” and “fractional interest” discounts can still be applied under current law to the valuation of interests in family-controlled entities and of real estate and other assets that are transferred to family members. Such discounting provides for estate and gift tax savings by reducing the value of the transferred interests. Leveraging strategies (e.g., family partnerships, sales to grantor trusts and grantor retained annuity trusts) can also be utilized to advantageously pass tremendous amounts of wealth for the benefit of many generations free of federal and Illinois transfer taxes.

State of Illinois estate tax laws. Illinois continues to tax estates in excess of $4,000,000, which is not adjusted for inflation and not allowed to be “ported” to a surviving spouse. Given the disparity between the $11,400,000 federal estate tax exemption and the $4,000,000 Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois estate tax marital deduction. Otherwise, an estate plan that is designed to fully utilize the federal exemption can inadvertently cause an Illinois estate tax in excess of $1,000,000 upon the death of the first spouse.

The obvious and most direct strategy to address the Illinois estate tax is to simply move to one of the many states that do not currently impose an estate tax. In the event that a change of domicile is not possible or is not desired, all of the traditional planning techniques described above (in addition to others) are available to address this state liability. Because Illinois does not impose a gift tax, enacting gifting strategies will reduce future Illinois estate taxes.

Income tax basis changes. We continue to enjoy an income tax basis adjustment for assets received from a decedent upon his or her death (commonly known as the “step-up in basis,” although if values go down it can also be a “step-down” in basis). With the increase in the federal gift, estate and GST exemptions, and even with Illinois’ $4,000,000 exemption, transfer taxes are no longer a concern in many circumstances, and there is increased emphasis on income tax planning (specifically, planning with the goal of obtaining an income tax basis step-up at death). For many clients, it may be advisable, if possible, to “reverse” prior estate planning techniques, including trusts that were established on the death of a first spouse to die, to allow for a step-up in basis.

Traditional Estate Planning Still Matters

There is no time like the present to make certain that estate planning documents accurately reflect current wishes and make beneficial use of the federal and state transfer tax exemptions (to the extent not utilized during lifetime), federal and/or state marital deductions, and federal GST exemptions. Revisions may also be needed if family circumstances have changed since documents were originally executed.

Your estate planning goals may have changed. Many people no longer have taxable estates for federal estate tax purposes and may be able to adjust their estate plans accordingly, while others have existing plans that automatically adjust to the increased exemptions and do not desire more aggressive planning. Still others may want to take prompt action to aggressively utilize the new exemptions.

The above summary is not intended to enumerate all available estate planning techniques. Non-tax reasons to review and implement estate plans include:

  • Planning for probate avoidance
  • Planning for individuals with special needs (or who otherwise require specialized planning)
  • Implementing advance health care directives (such as living wills and health care powers of attorney)
  • Planning for incapacity
  • Planning for business succession
  • Planning for minor children and designating guardians
  • Planning for charitable giving

New Trust Code for 2020

On January 1, 2020, a new Illinois Trust Code will become effective, making many significant changes with regard to the administration of trusts. Of note:

Notice and designated representatives. Under the new law, for trusts that become irrevocable on or after January 1, 2020 (for example, a revocable trust becomes irrevocable upon a settlor’s death), the trustee is required to provide a copy of the trust agreement to all current and presumptive remainder beneficiaries. However, you can name a designated representative to receive such notice on behalf of any current and remainder beneficiaries.

Accountings. Under current law, a trust can be drafted so that accountings only need to be provided annually to current beneficiaries, not presumptive remainder beneficiaries. Under the new Illinois Trust Code, for trusts that become irrevocable on or after January 1, 2020, a trustee will have to provide annual accountings to current and presumptive remainder beneficiaries.

However, a trust agreement can be drafted to forego the requirement of providing the annual accountings to the remainder beneficiaries or potentially to provide that the accountings be provided to a designated representative for a remainder beneficiary rather than the remainder beneficiary himself or herself (although the remainder beneficiaries will be entitled to accountings when the current beneficiary’s interest terminates). This could mean, for example, that children who are remainder beneficiaries of a marital trust created under their father’s estate plan for their mother’s benefit will receive an annual accounting during their mother’s life unless they waive their right to receive it or the trust provides otherwise.

The Secure Act

Finally, pending in Congress is a bill known as the Secure Act. This legislation, if enacted in its current form, would push back the age of required minimum distributions from 70½ to 72 and eliminate the “stretch IRA.” If the Secure Act becomes law, we will send a supplement to this bulletin.

© 2019 Much Shelist, P.C.

More estate planning considerations on the National Law Review Estates & Trusts law page.

Of Passion, Prejudice And Punitive Damages

Addressing an issue of damages, the US Court of Appeals for the Ninth Circuit vacated the district court’s grant of punitive damages in favor of the plaintiff, finding “passion and prejudice” mitigated finding of “malice”. Waverly Scott Kaffaga, as Executrix of the Estate of Elaine Anderson Steinbeck v. The Estate of Thomas Steinbeck et al., Case No. 18-55336 (9th Cir. Sept. 9, 2019) (Tallman, J).

The lawsuit related to decades of litigation among the heirs to John Steinbeck’s registered copyrights to his works, including The Grapes of Wrath, Of Mice and Men, East of Eden and The Pearl. When Steinbeck died in 1968, he left interest in his works to his third wife, Elaine. Steinbeck’s two sons by a previous marriage each received $50,000. In the 1970s, the sons obtained rights in their father’s works when interests in works were renewed pursuant to US Copyright law.

In 1983, changes in the law prompted Elaine and the sons to enter into an agreement that provided each of them with an equal share of the royalties and gave Elaine “complete power and authority to negotiate, authorize and take action with respect to the exploitation and/or termination of rights” in the works. In 2003, Elaine passed away, and her daughter, Waverly Kaffaga, assumed the role of successor under the 1983 agreement. The sons challenged the validity of the 1983 agreement, and the US Court of Appeals for the Second Circuit determined that the agreement was valid and enforceable. Despite losing in court, one of the sons, Thomas Steinbeck, along with his wife Gail and Gail’s media company, filed a lawsuit in California asserting rights to the works that the courts had already told them they did not have. The district court held, and the Ninth Circuit affirmed, that the Steinbecks’ claims were barred by collateral estoppel.

Kaffaga countersued Thomas and Gail for their attempts to assert various rights in the works despite having no rights. Those attempts led to multiple Hollywood producers abandoning negotiations with Kaffaga to develop screenplays for the works. The district court granted Kaffaga summary judgment on her breach of contract and slander of title claims, citing many detailed facts it believed supported those claims. The district court let the jury decide on her claim of tortious interference. The jury unanimously found for Kaffaga and awarded $5.25 million in compensatory damages and $7.9 million in punitive damages, including $6 million against Gail individually.

On appeal, the Ninth Circuit found clear support in the record for the lower court’s decisions, save for one—punitive damages. There, the appellate court noted that although Kaffaga had the better argument, and although there was ample evidence of defendants’ malice in the record to support the jury’s verdict, triggering punitive damages, Kaffaga missed one key piece of evidence.

Under California law, there is a “passion and prejudice” standard that measures the amount of punitive damages against the ratio between damages and the defendant’s net worth. It is the plaintiff’s burden to place into the record “meaningful evidence of the defendant’s financial condition” to support a defendant’s ability to pay.” Thus, for the punitive damage award to stand, the record needed to contain sufficient evidence of Gail’s assets, income, liabilities and expenses. Here, Kaffaga failed. Although Gail testified that she received approximately $120,000 to $200,000 per year from domestic book royalties, Kaffaga introduced no estimate of Gail’s potential income from the four television series and six feature films in development, nor did she introduce an estimate of the total value of Gail’s other intellectual property assets. The Ninth Circuit found that Kaffaga failed to meet her burden of placing into the record “meaningful evidence” of Gail’s financial condition showing that she had the ability to pay any punitive damages award as required by California law. The Ninth Circuit therefore vacated the almost $6 million punitive damages award.

Practice Note: When seeking punitive damages in California, the moving party must place “meaningful evidence” of the non-moving party’s financial condition and ability to pay any punitive damages awarded, including their assets, income, liabilities and expenses. If there are problems obtaining such evidence during discovery, procedures such as a motion to compel or proposing an appropriate adverse inference instruction at trial are in order.

© 2019 McDermott Will & Emery

For more copyright inheritance, see the National Law Review Estates & Trusts or Intellectual Property law pages.

What is a Holographic Will?

When a loved one passes, questions may arise as to who possesses the Decedent’s Last Will and Testament. If a formal document exists that was validly executed and was drafted by an attorney, chances are that the document is a valid Last Will and Testament unless a challenge is levied against it. What may become problematic is when a handwritten document in the testator’s own handwriting is discovered. The question then becomes if this handwritten document is a valid Last Will and Testament of the Decedent. In general, a handwritten instrument of this nature is called a Holographic Will, and may be enforceable provided certain requirements are met.

Typically, Courts often do the best they can to accept as a Last Will and Testament a writing by the Decedent where it is clear that the Decedent intended the instrument to be their Last Will and Testament. That is because the Courts would rather enforce the wishes of the Decedent than to allow the document to be invalidated based upon a mere formality. Perhaps the least formal of all Last Wills and Testaments which may be admitted to Probate is a document called a Holographic Will. These documents are relatively simple and are akin to something that a Decedent wrote on a piece of notebook paper and signed. The requirements of a Holographic Will are set forth below.

In general, pursuant to New Jersey S.A, 3B:3-2B, a Will can be considered a Holographic Will and admitted to Probate if the signature and the material portions of the document are in the Decedent’s handwriting. The Holographic Will must have all material testamentary provisions in the handwriting of the testator and also must be signed by the testator. What this means is that the provisions in the Will which dispose of the Decedent’s property must be in their own handwriting and not the handwriting of another. Further, the Will must be signed by the Decedent and not another party. As noted, this is a very simple instrument and is akin to a piece of notebook paper upon which a Decedent described how to transfer his/her property.

Provided the Will meets the requirements of a Holographic Will, it may be admitted to Probate and the Decedent’s Estate may be distributed in this regard. Different things could occur if not all the Decedent’s property is disposed of pursuant to a Holographic Will, however, that is best left for another blog. The purpose of this blog is to merely highlight one potentially type of valid Last Will and Testament which is informal in nature.

COPYRIGHT © 2019, STARK & STARK

Article by Paul W. Norris of Stark & Stark.
For more on wills & testaments, see the National Law Review Estates & Trusts law page.

Securing Your Pet’s Future with Estate Planning

Have you thought about what would happen to your pet in the event of your death or incapacity? Approximately two-thirds of American households own a pet, and while we have many people in our busy lives, our pets have only us. Pet owners often lament that beloved animal companions don’t live as long as we do, but they still warrant consideration in our estate plans because we don’t know what the future will bring. This is especially true for animals with longer life expectancies or higher costs of care, such as dogs, cats, horses, parrots, turtles and animals with special needs.

Without provisions for your pet in your living trust, in the short term your pet could go days at home without food and water, and could feel panicked, distressed or abandoned. In the long term, your pet could end up with someone you don’t want them to end up with, or at a shelter where he or she could be euthanized. Contrary to popular belief, informal arrangements are generally not legally enforceable and simply adding your pet to your will often isn’t enough. Your pet will need care long before your will is probated, and wills offer no ongoing control or oversight for your pet, the caregiver or funds left for your pet.

Including the following documents in your estate plan can help to ensure that someone has access to your home and authorization to care for your pets in the short term, and can ensure that you decide who will ultimately care for your pets, and how they will be cared for, if you die or become incapacitated.

Pet Trust

A pet trust is a great way to ensure that your pet is cared and provided for after your death. The pet trust may be a part of your existing trust or may be a completely separate trust. It allows you to name the caretaker of your pets and creates a fiduciary obligation on the named caretaker to care for your pet in the manner described in your trust. You will provide money for your pet to be cared for, and the trustee of the trust will disburse funds to the caretaker or directly to a service provider to pay for your pet’s care. The trustee is similarly under a fiduciary obligation to ensure that the trust funds are used only for the purposes described by your pet trust.

A pet trust also allows you to name successive caretakers in case your preferred caretaker becomes unable or unwilling to take care of your pet, for example, if he or she has a change in life circumstances (e.g. medical concerns or new family obligations, among other reasons). Without a pet trust, on the other hand, your pet becomes the legal property of the person who assumes care of the pet, and the new owner may make decisions about the pet’s future that you might disagree with. If the new owner doesn’t make any formal arrangements, your pet’s future could be in limbo if something happens to the new owner. If you want to maintain control over the succession of caregivers for your pet, a pet trust drafted by an experienced estate planning attorney is crucial and affords the best long term protection for your pet.

Durable Power of Attorney for Pet Care

The Durable Power of Attorney for Pet Care allows you to authorize someone else to seek medical care for your pet and specify to what extent the agent may act on your behalf. This document can also be used by a pet caretaker while you are away on business or vacation. Alternatively, if your own Durable Power of Attorney is “effective immediately” rather than “effective upon incapacity” (sometimes called “springing”), provisions for your pet may instead be added to your own Durable Power of Attorney.

Care Instructions

Pet care instructions will accompany the instructions in your pet trust. It is important to have these as a separate document that will be incorporated into your pet trust by reference so that you can change your pet care instructions as your pet’s needs and tastes change without having to update your trust. The pet care instructions should be reviewed and updated frequently to ensure that food requirements, medical information and emergency contacts are up to date. It’s also a good idea to include information about what your pet likes and doesn’t like, any quirks your pet may have, and generally anything else you would want someone caring for your pet to know. This versatile document, like the Durable Power of Attorney for Pet Care, can also be left with someone caring for your pet while you are away on business or vacation.

Importantly, if your pet is ever in a situation where the pet will need to be adopted to a new family, these instructions provide valuable information to the agency that will assist them in making sure a first match is successful, rather than, for example, adopting your pet to a family with young children only to have your pet returned when it becomes apparent that your pet is fearful of children. An owner’s death is stressful for an animal, so ensuring a successful first match with an adopter is imperative.

Wallet Card

This extra protection will immediately notify someone that you have pets at home if you are found to be deceased or incapacitated somewhere other than your home. Similar to adding “in case of emergency” contacts to your phone, having information in your wallet about who should be contacted to quickly provide care to your pets in such a situation can be the difference between your pets being cared for quickly or being home alone for days without food or water.

© 2019 Varnum LLP

Article by Rebecca K. Wrock of Varnum LLP.
For more on estate planning, please see the National Law Review Estates & Trusts page.

California Estate Tax: Gone Today, Here Tomorrow?

California has no estate tax, but that could change in the near future. California State Senator Scott Wiener recently introduced a bill which would impose gift, estate, and generation-skipping transfer tax on transfers during life and at death after December 31, 2020.

California law requires that any law imposing transfer taxes must be approved by the voters. This means that, if the California Legislature approves the California bill, it will be put before the voters at the November 2020 election.

For a time, California imposed a “pick up tax,” which was equal to the credit for state death taxes allowable under federal law; however, federal tax legislation phased this credit out completely in 2005, effectively phasing out any California estate tax. California has not in recent memory, if ever, had a statewide gift or generation-skipping transfer tax.

Under the proposed California bill, like the federal regime, all California transfer taxes will be imposed at a 40% rate. The good news is that the taxpayer will be granted a credit for all transfer taxes paid to the federal government, so there will be no double taxation. The bad news is that, unlike the federal regime where the basic exclusion amount for each type of transfer is $11,400,000 and is adjusted for inflation, the basic exclusion amount for each type of transfer in California will be $3,500,000 and will not be adjusted for inflation. With the federal exclusion rates rising every year, advanced estate planning techniques to minimize such taxes have become something that fewer and fewer people have had to worry about. If the California bill passes, any person who has assets valued in excess of $3,500,000 could be subject to a 40% California transfer tax during life or at death. Moreover, with a full credit for federal transfer taxes, only estates between $3,500,000 and $11,400,000 will be subject to the California tax. Thus, a California resident with an estate of $100,000,000 would pay the same California estate tax as someone with an estate of $11,400,000.

As drafted, the California bill appears to have no marital deduction; however, this is most likely an oversight and should be corrected in future revisions of the California bill. The goal of the California bill is to impose transfer taxes on wealthy Californians equal to what they would have paid prior to the implementation of the increased exemption rates at the end of 2017.  As the marital deduction existed when exemption rates were lower, eliminating the marital deduction at the first death would not be aligned with the purpose of the California bill.

All transfer taxes, interest, and penalties generated by the California bill would fund the proposed Children’s Wealth and Opportunity Building Fund, a separate fund in the State Treasury, which will fund programs to help address socio-economic inequality.

 

© 2019 Mitchell Silberberg & Knupp LLP
This post was written by Joyce Feuille of Mitchell Silberberg & Knupp LLP.
Read more news on the California Estate Tax on our Estate Planning page.

A Cautionary Fairy-Tale – If Only Cinderella’s Father Had An Estate Plan

Ah, the tale of Cinderella, a classic childhood favorite. We all know it as the story of an orphan who is mistreated by her Evil Stepmother and, with the help of her Fairy Godmother, wins over the heart of Prince Charming.

Often overlooked, however, is how the story began. Cinderella’s Mother died when Cinderella was a child. Cinderella’s Father remarried and shortly after, he also died. Cinderella’s Evil Stepmother then stole Cinderella’s inheritance and enslaved Cinderella in her own home. Surely, Cinderella’s parents never planned on this future for their lovely daughter. But, you see, it was the parents’ failure to plan for the future that put Cinderella in this terrible predicament. With a little planning—estate planning, that is—Cinderella never would have endured such suffering.

Avoid the Stepmother Trap 

There are several ways a skilled estate planning attorney could have helped poor Cinderella, as we analyze author Charles Perrault’s beloved fairytale under modern-day Arizona law.

With no estate planning documents in place, Cinderella’s modern-day predicament would look like this: half of Cinderella’s Father’s estate would be distributed to Evil Stepmother, and half of the estate would be distributed to Cinderella, as a child of the father who was not also a child of Evil Stepmother. Being a minor, Cinderella’s half of the estate would be placed in one of two places.

The first place would be a Uniform Transfers to Minors Act (“UTMA”) account. An UTMA account requires a court-appointed custodian – presumably, Evil Stepmother – who should use those funds for Cinderella’s health, education, maintenance, and support. Unfortunately, with little oversight, we doubt Evil Stepmother would have complied with UTMA. Instead, Evil Stepmother likely would have used Cinderella’s share of the estate to benefit herself and her two biological daughters.

The second place the money might have been placed would be in a trust for the benefit of Cinderella. While the second option is the best option, someone (another family member, on Cinderella’s behalf) would have to petition the court to order that outcome, and it is unlikely that Evil Stepmother would do that for Cinderella.

Why Oh Why Didn’t Cinderella’s Father Create a Trust for His Precious Little Girl? 

What Cinderella’s Father should have done was create a Revocable Living Trust Agreement (the “Trust”). He should have created the Trust after marrying Evil Stepmother to ensure there was no pesky “omitted spouse” claim. The Trust should state that (1) certain assets, as set forth on an attached Schedule A, are the separate property of Cinderella’s Father, (2) certain assets, if any, as set forth on an attached Schedule B, are the separate property of Evil Stepmother, and finally (3) that certain assets, as set forth on an attached Schedule C, are the community property of Cinderella’s Father and Evil Stepmother.

To assist with the trust administration after his death, Cinderella’s Father also should have named a neutral successor trustee, such as a friend, fiduciary, corporate trustee, or perhaps the best choice of all, Fairy Godmother. The Trust should state that, at the death of Cinderella’s Father, the Trust will be divided into two subtrusts, commonly referred to as an A/B split trust.

Trust A (the Survivor’s Trust) would be allocated all of Evil Stepmother’s separate property as well as one-half of the value of the community property assets. Trust B (the Decedent’s Trust) would be allocated all of Cinderella’s Father’s separate property as well as one-half of the value of the community property assets. The Trust could provide that Evil Stepmother would be able to use the Survivor’s Trust assets as she pleases and can only access the Decedent’s Trust assets (other than perhaps receiving income, if so stated in the estate documents) if the assets allocated to the Survivor’s Trust were depleted or illiquid. Having a neutral successor trustee to either work with Evil Stepmother or to oversee only the Decedent’s Trust would ensure that Cinderella’s share was not being improperly raided and depleted. Then, at the death of Evil Stepmother, the assets in the Decedent’s Trust would be distributed to Cinderella.

Creative Considerations for Dear “Cinderelly”

Other provisions can be added to such trusts that ensure Cinderella’s interests are protected. For example, a provision could be added that gives Cinderella the ability to request funds from the Decedent’s Trust, as needed, for health, education, maintenance or support (payable on her behalf, as a minor, and to her, once she is of age). Another provision could allow Cinderella to receive a portion of the Decedent’s Trust at a certain age or upon her marriage to Prince Charming, prior to Evil Stepmother’s death. Finally, another provision could allow the successor trustee to create and fund a 529 college savings account using funds from the Decedent’s Trust.

There are other possibilities if Cinderella’s Father did not want to create a trust as described above because he was so utterly and completely in love with Evil Stepmother and wanted everything to be considered community property. In this case, he could have planned in some untraditional ways to still ensure Cinderella was cared for. For example, Cinderella’s Father could take out a million dollar term life insurance policy after his second marriage, naming Cinderella as the sole beneficiary and directing funds to be distributed to an UTMA account with a neutral custodian or to a support trust with a neutral trustee.

Cinderella Ultimately Inherited Litigation 

In our modern-day analysis, the only inheritance Cinderella’s Father left her was likely litigation. Although not ideal, in circumstances like these, litigation affords the child of a parent with no estate plan, or with a poor estate plan, the opportunity to recover all or some of the property the child is rightfully entitled to receive. Assuming Cinderella’s Father died intestate (without a will), half of his estate should have passed to Evil Stepmother and the other half to Cinderella. Assuming Evil Stepmother either adopted Cinderella or was her court-appointed guardian, conservator or custodian, Evil Stepmother would owe Cinderella a fiduciary duty to protect her share of the inheritance and should have prepared an accounting of the assets that existed at the time of Cinderella’s Father’s death.

Of course, in the original story, Evil Stepmother never protected Cinderella’s interests and instead pillaged all of the assets. Cinderella, therefore, would have had a cause of action against Evil Stepmother for breach of fiduciary duty and conversion, among others. Fortunately, children like Cinderella are not without a remedy. An experienced estate litigation attorney can assess each case and determine what causes of action exist, the expected cost, and the likelihood of recovery.

Your Fairy Godmother Equivalent

Luckily, Cinderella had allies in the form of her Fairy Godmother and her many animal friends. If you have questions about estate planning, trust administration, and estate litigation issues, there are many resources available to you. This includes the most powerful resource of all: calling upon an estate planning attorney to help you – and others – learn from the cautionary fairy-tale that is the Cinderella story.

Copyright © 2019 Ryley Carlock & Applewhite. A Professional Association. All Rights Reserved.

ABLE Accounts: What They Are and What They Mean for Your Family

Individuals with disabilities and their families have many options to set aside funds without jeopardizing eligibility for means-tested government benefits. However, until recently most of the available options require the person with a disability to lose control over his or her own money.  With the 2014 enactment of the Stephen J. Beck Achieving a Better Life Experience (ABLE) Act, people with disabilities can once again control some of their own money and retain a sense of autonomy. While ABLE accounts will not replace other forms of planning that are available to and recommended for people with disabilities, there are definite advantages to adding the ABLE account into an overall plan.

The Basics

ABLE accounts are tax-deferred savings accounts that are closely modeled on 529 education savings plans. While ABLE is a federal program, much like 529 education plans, each state is responsible for crafting and administering its own program. Some states only allow residents to enroll, while others welcome out-of-state residents. It’s important to consider not only whether an ABLE account is appropriate, but also which state’s program best suits your situation.

To be eligible for an ABLE account, a person must be diagnosed, before age 26, with a disability that would entitle him or her “to benefits based on blindness or disability under Title II or XVI of the Social Security Act.” Once eligibility is determined, the individual or a third party (e.g., the disabled individual’s parents, siblings, or friends) can establish and fund an ABLE account.

Contributions and Account Limits

In any given year, the aggregate cash contribution from all donors (including the beneficiary him/herself) cannot exceed the annual gift tax exclusion amount ($15,000 for 2018). ABLE accounts accept cash only. Stocks, bonds, investments, and real estate cannot be contributed.

In addition to the annual contribution limits, as of January 1, 2018, the Tax Cuts and Jobs Act of 2017 authorizes an employed ABLE account beneficiary to contribute an amount up to the lesser of (i) his or her compensation or (ii) the poverty line for a one-person household ($12,140 for 2018). In order to be eligible for this additional contribution the individual cannot also contribute to an employer-sponsored defined contribution plan, such as a 401(k). Since the earned income contribution can be made in addition to the aggregate cash contribution, the total possible contribution for 2018 is $27,140.

Starting this year, a new funding option is available that allows individuals to “roll over” assets from a 529 plan into an ABLE account. While this is certainly a boon for families who initially set aside funds in a 529 account for a beneficiary who cannot use it, the funds rolled over cannot exceed the standard annual ABLE account contribution limit, so depending on the value of the 529 account the rollover could take several years to complete.

One of the biggest differences between the various state programs is the maximum amount that may be held in the account. For New York plans, the limit is $100,000. In other states, the limits are significantly higher and are tied to the limits those states have imposed for 529 education plans. For example, Illinois plans have a limit of $400,000. So for people who plan to accumulate larger sums in an ABLE account, it is wise to shop around to different states.

Although ABLE accounts are generally disregarded as a resource when determining eligibility for means-tested benefits, there is an exception. The first $100,000 of assets held in the ABLE account will not count as a resource when determining Supplemental Security Income (SSI) eligibility. However, once the account balance exceeds $100,000, the individual’s SSI will be suspended until the balance is again below that amount. There is no impact on Medicaid eligibility regardless of how much money is in the account.

Growth and Distributions

Income generated on assets held in an ABLE account are not taxed. Disbursements made for qualified expenses of the disabled individual are also not taxed. If a distribution is made that does not constitute a qualified expense, the beneficiary will be responsible for both ordinary income tax and a 10 percent penalty.

Qualified expenses of the disabled individual that can be paid for from the ABLE account without incurring taxes or penalties include, but are not limited to, education, legal fees, financial management and administrative services, health and wellness, housing, transportation, personal support services, and funeral and burial expenses.

As of January 1, 2018, the designated beneficiary is permitted to claim the saver’s credit for contributions made to his or her ABLE account. The saver’s credit is a nonrefundable tax credit for eligible tax payers who make contributions to retirement savings accounts.  The maximum annual contribution eligible for credit is $2,000 per individual, and the amount of the credit depends on the taxpayer’s adjusted annual income.

Benefits Eligibility Tip: An important benefit of the ABLE account is that, unlike when payments are made from a Special Needs Trust, payments for the beneficiary’s housing and food are not viewed as in-kind maintenance support for the purposes of SSI, and the beneficiary will not suffer the usual reduction for payments made by someone other than the SSI recipient for those purposes.

Words of Caution

Although ABLE accounts can be a valuable tool, there are several pitfalls to consider before opening an ABLE account. As with any decision that may affect government benefits, it is always best practice to discuss the situation and your options with your attorney, as there are many issues to consider before adding an ABLE account to a beneficiary’s plan.

For example, an important thing to consider is whether the beneficiary is capable of managing the ABLE account. Since the beneficiary is allowed to manage the funds in the account, families should carefully consider the risks (e.g., making non-qualified distributions or risking abuse and undue influence by an outside person) of the funds being immediately available. While this risk can be mitigated in several different ways beyond the scope of this article, it is certainly a point worthy of consideration.

Additionally, ABLE accounts are similar to first party Special Needs Trusts in that, to the extent the beneficiary receives medical assistance funded by Medicaid after the account is established, any funds remaining in the ABLE account at his or her death will be used to pay back the state for benefits that are paid for the beneficiary. This is the case regardless of whether the funds originally come from the beneficiary or a third party.

Notwithstanding the limitations, ABLE accounts can still be a valuable addition to a carefully crafted special needs plan.

 

© 2018 Schiff Hardin LLP

Death and Taxes: House Bill Eliminates “Death” Tax in 2024

On November 2, 2017, the U.S. House of Representatives’ Ways and Means Committee released its proposal for tax reform via the Tax Cuts and Jobs Act. The House’s draft legislation contains a number of provisions that, if enacted, would significantly change the wealth transfer landscape, including the total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024.

Under the proposal, commencing on January 1, 2018, the individual lifetime gift and estate tax exemption amount will be doubled to $10 million ($20 million for married couples), indexed for inflation—$11.2 million per person in 2018 ($22.4 million for married couples). This increase in the exemption amount also applies to the generation-skipping transfer tax.

The draft legislation calls for a total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024, while preserving the ability of beneficiaries to obtain a basis adjustment as to inherited property. Although the gift tax is set to remain in place, a reduction in the rate from 40% to 35% is provided for. Similarly, the annual exclusion—scheduled to increase to $15,000 per individual in 2018 ($30,000 for married couples who elect to split their gifts)—looks certain to survive.

This post was written by the Tax, Estate Planning & Administration  of Jones Walker LLP., © 2017
For more Family, Estates & Trusts legal analysis, go to The National Law Review

The Best Housewarming Gift for the Unmarried Couple: An Estate Plan

“Thinking too long about doing something is often the reason it never gets done.” 
–Everyday Life Lessons

In recent years, a growing number of Americans are deciding to cohabitate instead of getting married or remarried. Often, individuals of all ages, state they do not need an estate plan, either because they are not married or because they do not have children. These are not reasons to avoid preparing your estate plan and, in fact, are often more reason to ensure your estate is in order. Although this article will not discuss everything that unmarried cohabitating couples should have in place, it is a decent starting point for a conversation with your partner and, eventually, an estate planning attorney.

Estate plans are important for a devoted unmarried couple, because without an estate plan, you have no input into major healthcare and financial decisions for your partner.

Medical Decisions

You have been together for years or even decades, but if you are hospitalized, can your partner speak on your behalf and make decisions for your care and well-being? Sadly, no. Failure to have a valid Health Care Power of Attorney in place may result in a courtroom battle between your partner and family. A Health Care Power of Attorney is a document whereby you name an Agent to act on your behalf if you are unable to make reasonably informed medical decisions for yourself. Undertake an honest discussion with your partner concerning your wishes. Topics to discuss include organ transplant during life, removal of life sustaining treatment, burial arrangements, organ donation and religious limitations. Your wishes will be explicitly stated within the Health Care Power of Attorney, which your named Agent must follow to the best of their abilities.

Real Property and Holding Title

Throughout your relationship, you may have purchased a home (or several homes, depending on your lifestyle). Consider this scenario: you both paid half of the down payment for the home, and you each pay half of the monthly mortgage payments, but because your partner had a better credit score, the home is only titled in his or her name. If your partner dies without a Last Will and Testament that leaves the property to you, that property is not yours, and unless you purchase it for fair market value, you will have to vacate the home. If your partner did have a valid Last Will and Testament, it could provide that the home be distributed directly to you. Other options include your partner recording a Beneficiary Deed, which states that when he or she dies, the property passes to you by operation of law; another option is that your partner could deed the property to be held in both your names, as joint tenants with right of survivorship. Be aware that such a transfer may have gift tax implications and may affect your mortgage. Discuss these matters with your attorney before proceeding.

Distribution of Your Assets

By living together, you have likely acquired mutual possessions and one of you may have supported the other for a period of time, e.g. during graduate school, through loss of employment or through a disability. Because of this, there may be assets that you both believe are shared, even if they are in the sole name of one partner.

estate tax planning non us citizensIf you do not have a valid Last Will and Testament, your estate is considered intestate. An estate that passes through intestate succession means your assets will be distributed according to Arizona law. In this scenario, the following persons will receive your assets: first your legal spouse, then your children, siblings, parents, grandparents and finally, if none of the foregoing are then living, to issue of your grandparents. If you want to leave anything to your partner, you must execute a Will that provides for the distribution of your estate to him or her. There are also other options you can discuss with your attorney, such as beneficiary designations and language that provides for transfer on death of the assets.

You may also want to consider leaving your partner as your beneficiary on a life insurance policy or on any retirement accounts. At the very least, be aware of who is named as your beneficiary on your policies and accounts and be sure those are your wishes.

Although seeking the advice of an attorney is important, start the conversation at home, informally.

How to Start

Have a casual conversation with your partner to discuss the basics.  These topics will likely require multiple conversations.  If you are not sure how to start, go straight to the source.  Many attorneys charge a one-time flat fee for an initial consultation. You will want to find an attorney with whom you are both comfortable and, preferably, that you will use in the preparation of your documents. When you are satisfied with your decisions, engage the attorney and get drafts started.  Review the drafts with your attorney in his or her office and then take the drafts home to read and digest alone. Take your time. Be sure to ask any questions and voice any concerns; this is why you are paying the attorney. Throughout the process, it is important to remember that most estate planning documents can be revised if your circumstances or living arrangements change.

If it is important to you, discuss your plan with your family so they do not feel left out of important decisions.

Acceptance by Family and Friends

There is a chance some of your family or friends may not agree with your lifestyle or the decision to live together. Attempt to inform your friends and family that your desire is for your partner to be the lead in making decisions on your behalf, and that the two of you have discussed it and made each other aware of your personal wishes. Doing so may also avoid potentially costly and time-consuming legal battles should you become incapacitated or die.

Take the first step and work your way through it. Although it may seem overwhelming initially, the process should only take a couple of months. Once finished, you will both be able to sigh with relief knowing these issues have been resolved.

This post was written by Amber Hughes Curto and Amy K. Povinelli  of Ryley Carlock & Applewhite, A Professional Corporation.

The ERISA Fiduciary Advice Rule: What Happens on June 9?

This is an update on the upcoming effective date of the “fiduciary rule” or “fiduciary advice rule” (the “Rule”) that was issued under the US Employee Retirement Income Security Act of 1974 (ERISA). The Rule was published by the US Department of Labor (DOL) in April, 2016. The purpose of the Rule is to cause a person or entity to become a “fiduciary” under ERISA and the US Internal Revenue Code of 1986 (the “Code”) as a result of giving of certain types of advice involving investment of assets of employee benefit plans, such as 401(k) or pension plans, or of individual retirement accounts (IRAs) and receiving compensation for that advice.

calendar hundred daysThe Rule was originally intended to become effective April 10, but in April the DOL extended (the “Extension Notice”) the effective date of the Rule for 60 days (until June 9), and provided for reduced compliance obligations under the Rule from that date through the end of 2017 (the “Transition Period”). The effective date for Prohibited Transaction Exemptions (PTEs), both new and amended, that are related to the Rule also was extended until June 9, and further transitional relief was provided with respect to certain of those PTEs.

In a May 23 Op Ed in the Wall Street Journal, Labor Secretary Acosta announced that the Rule would go into effect on June 9, as provided for in the Extension Notice, and that the DOL would seek additional public comment on possible revisions to the Rule.  He indicated that the DOL “found no principled legal basis to change the June 9 date while we seek public input.”  The DOL also published, on May 23, FAQs on implementation of the Rule and an update of its previously-issued enforcement policy for the Transition Period. Therefore, it is important to review the rules that will go into effect on June 9.

Under the Rule, fiduciary status is triggered by investment “recommendations.” It provides, in general, that if a person (1) provides certain types of recommendations to a plan or its participants and/or beneficiaries, or to an IRA owner (collectively, “Protected Investors”); and (2) as a result, receives a fee or other compensation (direct or indirect), then that person is providing “investment advice for a fee” and therefore, in giving such advice, is a fiduciary to the Protected Investor. Receipt of compensation tied to such recommendations by a person or entity that is a fiduciary could result in prohibited transactions under ERISA and the Code. Under the Extension Notice, the DOL provided simplified compliance requirements under the Rule for the Transition Period.

This post was written by Gary W. Howell, Austin S. Lilling, Gabriel S. Marinaro, Richard D. Marshall, Andrew R. Skowronski, Robert A. Stone of Katten Muchin Rosenman LLP.