Campfire Estate Planning Chat

 

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Lead Article Title: Things to think aboutSummary: Summer at the beach, barbeques, flying kites and S’mores. What you need to keep the young ones smiling is some good estate planning chatter. Hopefully the following estate planning tidbits will make you the hit at the next campfire.
■ FLP discounts: – The IRS is continuing its onslaught against partnership discounts. The latest salvo will be regulations negating discounts on FLPs/LLCs (perhaps only on those not operating an active business) what should you be doing? Well, it depends. If discounts are nixed and your estate is under the federal exemption amount, you might do a happy jig! Why? Because the IRS will have done most wealthy, but not ultra-wealthy, taxpayers a favor. You may have created an FLP or LLC to achieve valuation discounts. But now, most wealthy people’s estates are below the $5,430,000 (2015) estate tax exemption amount. So you’re not subject to estate tax. Absent the IRS regulatory change the IRS could argue that the FLP/LLC interest must be discounted so that the assets in your estate will not receive the same quantum of basis step up. With a regulation prohibiting discounts your estate might get a bigger basis step up (less capital gains to heirs) at no estate tax cost. Thanks Uncle Sam!
■ Administration: You have to meet regularly with all of your advisers after completing a complex/large transaction in order to properly administer that plan. Most folks seem to feel that once the documents are signed their good to go. But it just isn’t so. Every plan must be administered. A few of the myriad of vital steps folks so often get wrong include: missing note payments, missing GRAT or CRT annuity payments, paying fees from the wrong entities/trusts, monitoring defined value mechanisms, not issuing Crummey notices, not monitoring trust termination dates, and more. If you meet your wealth manager semi-annually, at least one of those meetings should have your CPA and attorney in attendance. Few plans will have much chance of success without periodic professional involvement.
■ Basis: Estate planning has taken on a new focus on the search for basis, i.e., maximizing the assets included in your estate (or others you select) so that the tax basis on which gain or loss is increased on death to the fair value of those assets (i.e., capital gains are eliminated). While there is lots of talk about this how much cost and complexity are you willing to tolerate to accomplish this? What techniques do you have the comfort to agree to? Have you reviewed with your professional advisers all the myriad of issues that might arise using these techniques? For example, one technique is to give someone a general power of appointment over a trust. That means they will be given the right to designate who will receive the assets of the trust. Are you really comfortable doing so? While layers of limitations can be placed on such powers they do bring increased layers of complexity. Another common basis maximizing technique is to borrow money on appreciated assets and gift the borrowed funds away. This is particular useful to avoid tax in a decoupled state that has no gift tax (e.g., New Jersey). Example: You have a highly appreciated stock portfolio worth $6M. You might choose to retain those stocks in your estate so that on death the significant appreciate is eliminated by a basis step up. If you borrow $3 million using the highly appreciated stock as collateral, you can gift the $3M to a grantor trust. You will grow the value of those assets outside your estate, you’ll pay the income tax on trust income reducing your estate, and your estate will be reduced by interest charges. This might well help whittle your estate down over the years to below the inflation adjusted federal exemption. However, there are risks. What if interest rates on the loan increase? What if the securities the trust invests in with the fund borrowed plummet in value? Maximizing basis and minimizing estate tax can all be accomplished but you have to weigh the cost, complexity and economic risks of any technique you consider.
■ DAPTs: With the general demise of the estate tax for most wealthy clients asset protection planning has assumed a more important role in planning. Domestic asset protection trusts (“DAPTs”) are trusts that you set up (you’re the settlor) but you are a beneficiary of, called “self-settled” trusts. Although there have been a number of court cases suggesting that self-settled trusts might not work, the facts on all of those cases have been pretty ugly. That might mean that proper planning should work just fine. Also, the number of states that permit self-settled trusts has grown over the years and is now 15. Other states permit self-settled-like trusts (you can set up a marital trust for your spouse and on his or her demise the assets come flow into a credit shelter trust that you are a beneficiary of). All told there is a significant number of states that permit self-settled trusts.
There are also a host of modifications or precautions you can consider: defer your right to receive any distributions for 10+ years (the bankruptcy laws permit a trustee in bankruptcy to set aside transfers to self-settled trusts with 10 years); instead of having yourself listed as a beneficiary let a trusted person acting in a non-fiduciary capacity (i.e., not a trustee or trust protector) have the power to appoint descendants of your grandparents. Thus, you are not a beneficiary when the trust is created, so arguably the trust is not a self-settled trust. Should years in the future you need access to trust funds the trusted person might add you as a beneficiary.
■ Decanting: It is now permitted in 22 states. This creates interesting planning opportunities, but it might also create a new risk for trustees. If you’re a trustee of an irrevocable trust, and the trust agreement is not optimal, in the past it might have been presumed that “it is what it is.” But now, do you have an obligation to use decanting to improve the provisions of the trust? Might a disgruntled beneficiary argue that merely administering the trust you have, without addressing the potential for modifying that trust, isn’t sufficient? How will the cost and complexity of trust administration change if you as a trustee cannot assume that the governing instrument can be relied upon as the governing instrument? If decanting makes sense, pay careful attention to the statutory requirements under which the decanting is achieved. One common restriction on decanting is not adding new beneficiaries, as confirmed in a recent case. In re Johnson, 2015 NY Slip Op 30017 (N.Y. Surr. Ct., 2015).
■ Aging: Alzheimer’s affects 47 percent of those over 85. How can you not plan for the risks of aging? Addressing the issues of an aging are critical for many. Taxes, while unquestionably an exciting cocktail party topic, are just not as important for many folks as more complex fuzzy personal topics. Planning for the inevitable of aging is emotionally difficult to face. Practical steps such as consolidating assets, organizing and computerizing records, involving children or others who will serve in fiduciary capacities so that they are aware of their roles, and more, is essential. Yet many people are uncomfortable and unwilling to address these matters. While everyone complained that taxes were complex and costly to address (and they still are), they were emotionally neutral. Everyone wants to save taxes. What can be done to get you comfortable taking steps that are vital but which you and your loved ones find unpleasant to consider?
■ Powers of Attorney: Powers of attorney are ubiquitous in estate planning. Most individuals and even many professionals assume they are standard fare. That can prove to be a dangerous assumption. A recent New York case demonstrates the magnitude of problems that can be created. The agent under the decedent’s power closed out multiple Totten trust accounts (so cash deposited in the decedents name passed under the will to different beneficiaries), sold property that was specifically bequeathed under the decedent’s will, paid for the renovation of one of the agent’s homes, and paid themselves compensation as agents. As a result of the actions of the agents, more of the decedent’s estate went to the accounting party. While the court noted that that an agent must act in the utmost good faith and undivided loyalty toward the principal, and must act in accordance with the highest principles of morality, fidelity, loyalty and fair dealing, not all actions of the agent were undone. The cost in terms of legal fees and destruction of relationships of this case were not noted but must have both been significant. In the Matter of the Accounting by Joan K. Conklin, as Attorney–in–Fact For Julius Gargani, Deceased, No. 2010–363395/E, March 31, 2015, 2015 N.Y. Slip Op. 25094. While you may not wish to incur the additional cost and steps of using a fully funded revocable trust, and may object even more to naming an institutional trustee (or co-trustee), those steps may ultimately assure that your wishes are carried out, legal fees minimized and family relationships are preserved. Sometimes giving up some perceived control (e.g. involving an institutional trustee) can in the long run assure you greater real control.

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Checklist Article Title: Swap Powers

Summary: Swap powers have proliferated like Tribbles (you are a Trekkie aren’t you?). Most trusts that are created are structured to be grantor trusts so that the income is taxed to the settlor creating the trust. That continues to reduce your estate by the tax you pay on income inside the trust. Grantor trusts often include a swap or substitution power that permits you to swap cash into the trust for appreciated trust assets. Swaps are a key to obtaining the new tax planning holy elixir of basis step up because the trust assets swapped back into your estate will, on your death, have their tax basis increased to the fair value of the assets. This will eliminate any capital gains. But alas, like so many planning techniques, once the magic lingo is included in the documents most folks don’t give it the attention it deserves, or many simply ignore it.
√ Example: You set up an irrevocable grantor trust in 2012 and made a gift of $5M of cash. If most of that cash was invested in equities (likely because the growth would be outside your estate, you’re sitting on some mega appreciation. What have you done about swapping the most appreciated assets out?
√ Monitor: How do you see swap powers monitored and administered? Too many wealth managers generally ignoring these and not monitoring them which is a great concern.
√ Credit: Proactively creating lines of credit or other steps to facilitate the quick exercise of a swap power if necessary. Otherwise how will you find the cash, especially if the swap has to be done quickly?
√ Documents: Have your attorney prepare templates of documents to be used to effectuate a swap now. The most likely time to try to exercise a swap power is just prior to death. Illness and other challenges, or an unforeseeable accident, might all make it a time sensitive situation. If you have the requisite legal documents ready in the on-deck circle, you’ll have a much better shot at completing the swap in time.
√ Reporting: Should you report the exercise of a swap power on a gift tax return? Arguably no, there is no gift, but if the value of what was swapped is not equivalent if it is not reported the
√ Appraisal: If you’re swapping Apple stock in the trust for cash you can look up the stock value. There should be little risk of not assuring equivalent values. But if the trust holds 25% of the stock in your family Widget Corp. what is the real value? You should consider having an independent appraisal completed and using the value of that appraisal to corroborate that the cash you swap into the trust for the stock is really of equivalent value. Sometimes folks try to save a buck by using an old outdated appraisal, or tinkering with some numbers on their own. The consequences of a bad appraisal can be worse than just the difference from the real value to the value used. The “bad” swap might taint the entire transaction. If the cash you put into the trust for the trust asset you swap out is substantially less the IRS (and creditors) might argue that you really retained control over all of the trust assets and so all of those assets remain in your estate.
√ Defined Value Mechanism: If you’re going to swap a hard to value assets such as real estate or a family business, consider including a defined value mechanism so that only the interests (e.g., LLC units) equivalent in value to the cash you swap in will be distributed to you. This might avoid violating the equivalency requirement.
√ Disability: Who can exercise your swap power if you cannot do so? While on death the swap power terminates along with the grantor trust status of your trusts. But what occurs if you are incapacitated? The stats are that about 50% of those 85 and older have some degree of cognitive impairment. Who will exercise the swap power? Don’t jump to conclusions that the agent under your power of attorney can do it. Perhaps, but it is the terms of your trust that control. What does it say? If the trust says that the agent under a power of attorney can exercise the power if you cannot do so, see the next planning tip below. If the trust document designates a successor does that person know they are so designated? Will the effectiveness of the swap power be adversely impacted by a designated third party exercising it on your behalf? Does this third party know they are in line for this important power?
√ Power of Attorney: While the general powers given to an agent under your power might suffice to exercise a swap, will they? What if the agent needs to borrow $5M to swap for $5M of appreciated trust assets? Consider updating your power to expressly provide that the agent has authority to exercise any power given under a grantor trust and to borrow funds to facilitate the swap.
√ Person Exercising Should be Non-Fiduciary: Some trusts name the same person in several capacities: the trust protector might also be a successor holding the swap power, etc.
√ Voting Stock: Watch out for IRC Sec. 2036(b). If you can swap cash you hold for voting stock held in the trust will that trigger estate inclusion? While there are different views among the tax gurus, some do believe that this is an estate planning “no-no.” Some trusts are intentionally prepared forbidding a swap for voting stock. If that is the case how will it affect assets in the trust? What can be swapped? Are their options?

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■ Not So Crummey Planning: You can make a gift of up to $14,000 (2015) to any person (done) and it should qualify for the annual gift tax exclusion and not use up any of your exemption. If you make the same gift to a trust it may not qualify unless express steps are taken to make that gift qualify as a gift of a “present interest.” That means that the beneficiary can access the funds immediately. The means to accomplish this is to give beneficiaries a right to withdraw the money gifted to the trust for a period of time. That right is known as an annual demand or Crummey power. A recent case approved a trust that had 60 power holders. The gifts qualified even though the property in the trust was not liquid. Some power holders were minors, others spouses of descendants. There was even a funky forfeiture clause. Yet the Court blessed the gifts as qualifying. Do the math: 60 x $14,000/year. That amount could be doubled of the spouse joined in the party (called “gift splitting”). Think of how much money could be transferred over several years. Mikel v. Commissioner, T.C. Memo 2015-64, Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). If your estate is taxable a smile trust with lots of Crummey power holders might solve your tax problem. Why bother with complex GRATs and other planning acronyms? But just like the Sham Wow late night cable infomercial, “There’s More!” Let’s say your estate is $5M, under the estate tax exemption, but you live in a high tax state like New Jersey that only has a $675,000 exemption. If you made gifts to such a trust you won’t save federal estate tax, but you could drastically cut state estate taxes with this simple technique. But “There’s More!” What if you don’t even face an estate tax? Most folks don’t now that the federal exemption for a married couple is $10,860,000 (2015). Why would you set up such a trust (assuming o helping your lawyer’s retirement fund wasn’t a good enough answer)? You can give an elderly relative with a small estate to have a general power of appointment over the trust (see the lead article). In this way all asset in in your trust will get a step-up in basis on the death of that elderly poor relative, eliminating capital gains taxes on your assets. What if your spouse and descendants are all beneficiaries of the trust? Could you move assets out of your estate, preserve your estate tax exemption, eliminate capital gains, and indirectly benefit by the trust making distributions to your spouse.

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■ IRA Protection: Ian inherited IRA (by other than a spouse) is generally not protected from claimants. Clark v. Rameker. However, state law might provide to the contrary. If so, then the IRA should not be reachable in bankruptcy. 11 U.S.C. §522(b)(3)(A). A recent state case held that an IRA inherited by a New Jersey debtor from his parent was excluded from his bankruptcy estate under Bankruptcy Code section 541. In re Andolino, Case No. 13-17238 (RG) (2/25/2015). A handful of other states (Ohio, Alaska, Texas, Florida, Arizona, North Carolina)
■ Politically Correct Planning Won’t Work: While it’s a sad statement about our country, the reality is that different assumptions about longevity have to be used for certain clients. “…we are headed toward a one percent phenomenon, with only the very wealthy able to afford the cutting edge healthcare that adds meaningfully to life… higher-income white-collar workers outlive blue-collar workers by 2.5 years, on average, from age 65…Other research points to a sizable longevity gap by educational attainment and race.” Can you really plan for life insurance, long term GRATs, private annuities, and other transactions using general demographic data about life expectancy? Miller, Mark “Why Cutting-Edge Healthcare Will Help The Rich Live Longer,” Reuters, May 8, 2015.
■ Clean-up: Your estate planning transactions may evolve over time. A loan used by a trust to purchase assets might be repaid or modified. If the loan was supported by a guarantee or other security documents, were those ancillary documented modified or terminated to be consistent with the loan changes? Trusts might be decanted or trustees changed. If you sent a stock certificate to the institutional trustee for a dynastic trust that was given stock interests, did someone retrieve that certificate and forward it to the new trustee for safekeeping? If the trust protector on a trust died, was a document signed indicating that the new protector accepted the position? When beneficiary addresses change was the trustee notified so that the trustee can appropriate issue reports or other communications to the beneficiary? Housekeeping is vital to the success of your planning, but it requires regular and proactive attention.

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Lead Article Title: Planning for the Single SeniorSummary: While most estate planning articles focus on nuclear Cleaver-like families (Mom, Dad, 2 kids, and apple pie) such anomalies comprise only about 20% of Americans. A common scenario, and one that will be increasing as our population ages, is the very single individual – no spouse/partner, no kids, and no siblings. When you’re single and have no immediate family, or if there is some family they live too far away or perhaps are just too whacky (yes, as hard as it might be to believe, some family members are simply too whacky to rely on!) typical planning won’t suffice. Planning for someone without the usual cast of characters that can be tapped to serve as fiduciaries presents unique challenges. How do you protect and safeguard someone who really doesn’t have people to name as fiduciaries? Planning and legal documents need to be “tweaked” to make it work.

■ Goal: A primary focus of singles planning is to provide protection to you for the future years or decades of your life. In light of the fact that your safety net is limited, planning must create non-typical mechanisms of protecting you should a health issue, disability or other problem arise. Ideally this type of planning should be done well in advance of a need so that you have opportunities to “kick the tires” before the safety measures are really needed. For the Single Senior you typical internet forms won’t cut the mustard.
■ Institutional Trustee Relationship: If you have a long time relationship with a bank or trust company that has the full array of fiduciary services, an expanded version of that relationship can serve as the keystone of your safety net. The gist of the planning will be to create a structure so that if you should become incapacitated a reputable bank or trust company will be in a position to assist you with many aspects of your finances from bill paying, credit cards, your home, and more.
■ Power of Attorney: Everyone knows that a power of attorney is perhaps the most important document. In it you name an agent to manage your financial, legal and tax affairs if you are incapacitated. To make this vital document viable it must be “durable” meaning that it remains valid even if you become incapacitated. The practical issue is who would be an agent for a Single Senior? Naming a long-time friend might be dangerous if their age puts them at risk. The real issue of naming a friend or more distant family member is the risk that their loyalty might prove to be more towards their pocket then to your needs. It is no secret that elder financial abuse is spreading like Tribbles (if you don’t know what a Tribble is then ask you friendly Trekkie). Abusing powers of attorney is a favorite tool of many scammers. So what might the Single Senior do? Change the typical estate plan by relying primarily on a revocable trust for managing your affairs during incapacity instead of a durable power of attorney. Using a revocable trust you can name a bank or trust company as co-trustee or successor. While banks generally won’t serve as agents under a power of attorney, if that same bank is the trust under your revocable trust, they might be willing to serve as agent under your power of attorney for the limited purpose of transferring assets to your revocable trust. Restructure the typical power of attorney by carefully crafting a limited set of powers that your chosen institutional trustee finds agreeable. This might require a good bit of surgery on the typical power of attorney form, but it can provide an incredible backstop should you need it, and it certainly trumps having a court appoint a guardian for your property to address issues because of a gap in your planning. This is an important part of your safety net because you cannot ever be assured that all assets are in your trust. Retirement assets are not transferred to revocable trusts to avoid the risk of trigging income tax. If a lawsuit arises after you are incapacitated you won’t be able to handle it, and the trustee won’t have authority if it is a claim outside your trust. Other lose ends can pop up that make having a power of attorney a necessity even with a fully funded revocable trust.
■ Power of Attorney Implementation: Everyone thinks once you sign your documents you’re good to go! Nope. Your planning should include simplifying all your financial matters to minimize the need for any actions to be taken by the bank under your power of attorney. Further, the more of your assets you consolidate at that same institution, the easier it will be that bank to step-up to the plate to help. For example, you should consider transferring checking and other accounts, and all non-retirement accounts, to the name of your revocable trust. In this way it will be much easier for the bank to step in to assist in an emergency. If the same bank issues credit cards, consider switching to credit cards issued by that bank in the name of your trust for the same reason. Each of these steps should make it safer, quicker and less costly for the bank to assist you in an emergency. “Passing the baton” from you as initial trustee to the bank as a successor trustee will be more secure.
■ Involve a CPA Firm: Single Seniors need a CPA more than most others. The CPA industry promotes CPAs as the “trusted adviser,” and they really can be. Create a relationship with a CPA firm even if for now they provide no more than a simple tax return preparation. Should you ever become incapacitated, having an independent adviser to serve as a monitor of the work done by the bank could be quite important. CPAs have the training and experience to serve in a monitor role and if you have no one to rely on, creating checks and balances with different advisers is a key to your security. Have the CPA monitor the bank investment and payment activities. Begin developing such a relationship now, well before you should require it. You might even mandate in your revocable trust that the trustee pay an independent CPA to maintain books and records of your entire financial life. That should not be particularly costly or difficult, but can prove to be an invaluable safeguard.
■ Home Sweet Home: If you own a home, the bank may be uncomfortable holding it in the trust, especially if the bank is based in a different state then where your home or vacation home is. A single member limited liability company (LLC) could be formed to own your home so that it is deemed an intangible asset, rather than real property subject to the laws of a state other than where the bank is based. Since a single member LLC is disregarded for tax purposes this will have no negative income tax impact (but check with your local property tax authorities as it might disqualify you for senior citizen property tax breaks).
■ Just Do It: That famous Nike slogan was actually part of trust lexicon for nearly a century. Some folks when they set up a revocable trust list assets on the last page of the trust. That page has been required since biblical times to be labeled “Schedule A.” If you have specific assets to list on Schedule A of the revocable trust (brokerage account, house, etc.) list them. However, what you should really do is property transfer those assets into the trust and not just rely on the mystical powers of “Schedule A.” Filing in Schedule A should not be viewed as a substitute for properly changing the title of each asset to the trust. This will require a deed for your home (you must hire real estate counsel), etc. Just do it!
■ POLST: This acronym stands for a Physician Ordered Life Sustaining Treatment. This is a medical order prepared by your physician addressing end of life treatments. An advantage that it affords is that it is an actual medical order included in your patient chart. It is also binding on emergency medical workers, such as ambulance personnel, which a lawyer prepared living will is not. For the Single Senior this documents affords the important advantage that it is effective once done and does not require the decision making of an agent you might not feel comfortable designating. So if you don’t have anyone closer than Linda Blair to name as agent, opt for a POLST.
■ Living Will: This is a statement of your health care wishes and while not a substitute for designating a health care agent, it can provide valuable insights as to your wishes as to your medical care and other matters (e.g. funeral services, etc.).
■ Professional Health Care Surrogate: If your state law permits you could contractually designate a professional paid health care agent to act on your behalf. If you do this, your revocable trust could direct the successor trustee to pay for the professional health care surrogate to carry out your wishes as specified in your living will.
■ Care Manager: Consider mandating that the trustee of your revocable trust have an independent care manager conduct an evaluation annually (or more frequently if called for) and report to the trustee and perhaps another independent person. This is a great way to have a skilled professional see you in your home/living environment and to identify care, lifestyle or other issues or concerns that a bank or trust company does not have the expertise to observe.

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Checklist Article Title: Worries

Summary: Alfred E. Neumann, Esq.’s famous quote “What me worry?” proves that he might have been as Mad as a tax adviser! Here’s a few items Alfred is worrying about today.

√ Valuation Adjustment Clauses: Some use a defined value clause with the excess passing to a GRAT. One sharp cookie suggests that the initial value that passes to a GRAT is ultimately returned to the donor/seller (that’s the way a GRAT works economically) and that “feels” like a “Procter” issue. Procter was a landmark case that said you cannot transfer something (e.g. to a trust by gift) and say that if the IRS increases the value above what you intended to make as a gift, that excess value is returned to you thereby rendering the IRS audit superfluous. One pundit indicated that he is aware of at least one audit in which the IRS is making this argument. If you already structured a sale with a valuation clause spilling into a GRAT there is not much you can do. If you are planning a new note sale with a valuation spill over charities are the best option but the reality is most folks are not comfortable with that. Using a spill over to a marital trust might be better (might) but if you’re single then the only option left might be a GRAT. Lots of other pundits believe the spill-over to a GRAT is just fine. What me worry?
√ Note Sale Danger: In the Estate of Woelbing the taxpayers consummated a note sale to a grantor trust. Sold $60M of stock for a note to a grantor trust. The trust has many hallmarks of good planning: seed assets in excess of 10% of the value of the note and a guarantee. The IRS is arguing that the value of the shares transferred was $116M not $60M, it was not a sale but a transfer to a trust with a retained interest and that was not a “qualified retained interest” so it was deemed a transfer of the entire interest, the value definition clause should be disregarded and the shares should be included in the gross estate. If the transfer is included by IRC Sec. 2702 and 2036 it could be a double whammy. Other than keeping your fingers crossed if you’ve done these deals review every nuance to be sure all formalities are shipshape. The fact remains, however, that zillions (I counted them all) of estate planners have done oodles (yes, that is a number too) of these deals. What me worry?
√ Maximizing Basis: Rickey Henderson certainly has some record on maximizing bases. But when estate planners grant general powers of appointment to say elderly not-so-wealthy family members to have trust assets included in their estates to garner an estate-tax-free step up in income tax basis, do they really know the infield isn’t a minefield? Does the person holding a general power have creditors that might access the assets? Might the power holder exercise the power in a manner that circumvents the trustor’s intent? Might the powerholder take on debts so that ‘creditors of the estate” has real meaning? What me worry?
√ Transfer to a Terminally Ill Spouse: If one spouse is terminally ill the other spouse could transfer all appreciated assets to the ill spouse. If the ill spouse survives for a year and the assets are bequeathed back to the well spouse, they will obtain a full basis step up on the death of the ill spouse. IRC Sec. 1014(e). If the ill spouse does not survive for a year, then the basis step-up won’t be realized. But might it be worse? Might an agent under the ill spouse’s durable power of attorney be able to exercise the power in favor of someone other than the intended transferor? What if the ill spouse’s will bequeaths assets to children from another marriage instead of back to the transferor well spouse? What of the ill spouse revises his or her will? Might the ill spouse have creditors that are overlooked? What me worry?
√ Trust Distributions: So give an independent person the right to distribute appreciated assets out of a bypass trust to the surviving spouse so that they will be included in that spouse’s estate and be stepped-up on death. Who will actually make the distribution? How can he make sure to act before the death of the surviving spouse? Can he verify that there are no creditors of the surviving spouse? Can he obtain the information as to the exact exemption remaining? Can he be certain that the surviving spouse won’t give or bequeath the assets to others? What me worry?
√ Swap Powers: So your estate planning drafted a great trust giving you a swap power to pull appreciated assets back into your estate for a basis step up. Whose watching your trust assets to see if that power should be exercised? If you use a sophisticated trust company to manage trust assets they may be on the ball (may is not a month), but if not who is keeping an eye on this? What me worry?

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■ Passive vs. Active: Whether an activity is characterized as passive or active can have significant income tax implications. Losses from a passive activity cannot be used to offset income earned from an active endeavor in which you materially participate. IRC Sec. 469. All these rules have new importance in light of the 3.8% tax on net investment income. IRC Sec. 1411. In a recent Chief Counsel Advice the IRS explained that a real property broker/agent who brings together buyers and sellers of real property can be a real estate professional who is engaged in a real property brokerage business under IRC Sec. 469(c)(7)(C) of the passive activity loss (PAL) rules. CCA 201504010.
■Settlement Agreement: The New Jersey transfer inheritance tax must be calculated pursuant to the terms of the decedent’s will, not based on the terms of a later settlement agreement. 35-5-5621 De Rosa v. Dir., Div. of Taxation, Tax Ct. (Bianco, J.T.C.).
■Trust Sale: The sale of a farm owned by two trusts to a partnership owned by a beneficiary won’t result in a loss of a GST tax exemption. It will also not be treated as a transfer subject to gift tax for the trust beneficiaries. Private Letter Ruling 201509002.
■Insurance Trust: The Court held that a trustee has a duty to act in good faith and in the best interests of the beneficiaries concerning trust owned life insurance. This may include maintaining trust owned life insurance. That duty cannot be waived by a provision in the trust agreement absolving the trustee of responsibility. Rafert v. Meyer, ___ N.W.2d ____, 290 Neb. 219, 2015 WL 832590 (Neb. Feb. 27, 2015). The moral of this story is clear and is consistent with warnings many insurance professionals have been sounding for years. Laypersons serving as trustees of insurance trusts should take their duties seriously and should consult with insurance experts about insurance decisions and with counsel concerning trust matters.

Potpourri ½ Page:
■ Gifts under Amanuensis Rule: Say you want mom to make gifts to save estate tax but her power of attorney doesn’t contain a gift provision. The tax authorities may disregard the gifts and bring those intended gifts back into the estate. There may be an option. If you sign documents in your mom’s presence, at her direction, your act of signing may be characterized as a ministerial act permitted under the “amanuensis rule,” rather than an act by you as an agent. Restatement Third of Agency Sec. 3.02 (comment c). If your signature is a mere mechanical act for mom, and not an exercise of your judgment as an agent, it is a gift by her. Your mom’s directions to you to act on her behalf should suffice to make the action hers, such as a gift by her, rather than a gift by you as agent on her behalf. See In re Estate of Stephens, 2002 CA 6749 (CA 2002). For a detailed discussion see http://www.amazon.com/Powers-Attorney-Martin-Shenkman-ebook/dp/B00TWDZZ4M
■Doc Knows Best: So before a recent surgical procedure I had to sign a “General Consent” at the hospital. I LOVED the following phrase: “I understand that no guarantees have been made to me about the outcome of this care. I understand that if I leave the hospital against the advice of the physician and/or fail to carry out the suggested follow-up medical care I do so at my own risk and release my physicians and their employees an agents from all responsibility.” Every estate planning client should sign a similar release. There is rarely, if ever, sufficient certainty for most estate planning to provide any type of guarantee. And it seems that most clients don’t heed the advice of their advisers as to annual reviews, following up with ancillary professionals, like having life insurance reviewed every few years, rebalancing portfolios quarterly, holding annual meetings for entities, and more. That certainly is identical to failing to carry out the suggested follow-up estate planning/medical care.
■ Springing Powers: A springing power of attorney is one that becomes effective when you become incapacitated. Some states don’t recognize them, but even if your state does, is it prudent? How will your agent demonstrate incapacity? What about the gray shades in between capacity and incapacity? Should your agent really have to wait until you are incapacitated to act? Review your existing power and consider what might be practical? A funded revocable trust with a successor trustee might provide a better option?

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Lead Article Title: Estate Planning MistakesSummary: While estate planning might be one of the most important financial steps anyone can take, it just doesn’t make it to the front burner for many. The result is that most estate plans suffer from a host of shortcomings. Here are some of the common mistakes made in estate planning. Some of these are quite simple and apply to all wealth and age ranges, others are more specific. Call any of your advisers and make a New Year’s resolution to protect yourself and your loved ones by address whatever mistakes that are on your list.
■Mistake #1: “Do what?” The number one mistake is easy and obvious – people don’t address estate planning. The consequences: family fights, significant probate costs, the wrong people inheriting, avoidable tax costs, and more. ■Why do so many people avoid dealing with estate planning? Likely the unpleasantness of dealing with issues is an incredible turn-off. No one wants to focus on issues of death and disability, the realities that you might run out of money if you continue current spending patterns, deciding who will raise your children if you are not hear, and so forth. ■The reality is simple as each of your advisers will assure you. If you deal with potential issues proactively you are far more likely to have a better result. So pull up your socks and, in the words of the famous Nike add “Just do it!”
■Mistake #2: “Estate planning = a will.” It is not only about a will. ■Most consumers think an estate plan means a will, but for most that is not the most important document or step. Pension assets and life insurance, which for many people may be the lion share of their estate, pass by beneficiary designation. Your will may be irrelevant to the disposition of these important assets. (Note that it might make sense to create a special trust for your pension assets under your will and direct via a customized beneficiary designation that retirement assets fund that trust). Other assets, e.g. a house or brokerage account that is owned jointly, pass outside of your will to the joint owner. Many people use pay on death (POD) and similar accounts. Those too are governed by the title to the account and not your will. Estate planning can never be only about a will. ■Anytime you change investment firms, or buy a new house, purchase additional life insurance, you need to review the estate planning implications. ■Even for those meticulous people that put together a will and coordinate beneficiary designations and title to assets, after a few years’ time, the plan can shift out of sync and if not revisited and adjusted can undermine your intent.
■Mistake #3: “It is planning for death not life.” Not so, it’s the opposite. ■If you’re a baby boomer that has retired you have good odds of living three more decades. Shouldn’t you be focusing on planning to be safe and secure for those 30 years more so then focusing on planning to pass assets when you die? ■Perhaps the number 1 planning issue for boomers is having sufficient cash flow for those future decades. Constructing a budget, coordinating your investment planning with that budget, and monitoring it on a regular basis is vital. ■This planning needs to be coordinated with your estate planning. Which trusts, personal accounts, retirement accounts or other “buckets” should assets be held in? Coordinating the income tax and other consequences across this spectrum is vital to achieving planning goals. ■Aging generally is accompanied by decreasing physical ability land mental acuity, and increasing prevalence of age related health challenges. Creating a structure to safeguard your finances, you personally, and your loved ones in advance is a key to planning. ■A funded revocable trust, consideration of professional wealth management and trust services, integration of a care manager into the planning team when appropriate, are all steps to protect you while you are alive. That should be a major focus of all of your planning. ■Too many advisers still think of living trusts as a limited tool to avoid probate. They’re missing the boat and you could end up in the surf! Fully funding the trust, getting a trust tax ID number from inception, having a professional successor trustee or co-trustee, can all provide an incredible security net if Alzheimer’s disease or another challenge strikes. ■Perhaps recasting estate planning with a focus of planning for life, more so than planning for death, will help you get past Mistake #1.
■Mistake #4: “It’s a standard form.” Unless your last name is “Standard” whatever documents you get, and however you get them, they need to be tailored to your personal circumstances. ■There is no such thing as a “standard” estate planning document. No form, or plan, is standard. While standard provisions and planning “building blocks” can be used to craft almost every plan, it is the creative and tailored use of those standard steps that will give you the result that works for you. View estate planning as a Lego set. You can creatively assemble standard blocks into tailored plans that meet your goals. ■That is very different then “I have a will.” ■Living wills, which are a statement of your health care wishes, are a great example. You can find free simplistic forms on line. But will they work for you? Most of the generic forms violate the tenants of every major faith. So if you sign a “standard” living will, you are almost assuring a violation of your fundamental beliefs, and wreaking havoc as your loved ones try to sort out the inconsistencies. ■Powers of attorney, which designate an agent to handle financial and legal matters if you cannot do so, are ubiquitous in planning. But “standard” is a dangerous word. ■Most form powers of attorney include gift provisions permitting agents to make annual gifts. In 1987 you could gift $10,000/year and the lifetime exemption was a mere $600,000. Gifting was real important then. ■But in 2015 the annual gift exclusion is $14,000 but the federal exemption is $5,430,000. For the vast majority of even wealthy Americans annual gifts are passé. ■But using a “standard” power of attorney with a broad gift provision could expose you to elder financial abuse. Perhaps most powers should prohibit gifts. ■On the opposite end of the wealth spectrum if you are an ultra-high net worth family you might want a broad gift provision permitting gifts of any unused exemption to capture the annual inflation increases. You might also benefit from express powers to your agent to exercise a swap power you hold under a grantor trust. So “standard” is pretty dangerous.
■Mistake #5: “Only very wealthy people need planning.” Another favorite is “My estate is too small/simple to need planning.” Not true. Everyone needs planning no matter how rich or poor, you just need the planning appropriate for you. ■If you become disabled in your 40’s from a work related injury, skiing accident, or debilitating disease, what is simple? Someone who is very wealthy might have adequate resources to fund living expenses. Few people, especially at a young age, have adequate resources to fund decades of living expenses. Having a disability income replacement policy, a buyout agreement for your business and other steps is vital for most people. ■If your resources are limited at any age and you don’t have the appropriate documents in place to address the issues that will arise, a court appointed guardian may be necessary. That can be a costly procedure and may not result in the person you want controlling your personal or financial decisions. ■So, if you have more modest means, having a durable power of attorney, health care proxy (medical directive) and perhaps a revocable living trust, a financial plan to provide a framework for your fiduciaries, etc. is vital. It is more vital perhaps then for someone of substantial means who may have an army of advisers that can assist the family (the ultra-wealthy need this planning too, just different). ■It is often a fallacy to think that having less money makes your estate plan simpler. “I don’t need trusts, we don’t have that much money.” For a wealthy family there is ample money to cover college, medical, and new home costs for all. For a family of lesser means, parsing the myriad of options, and prioritizing limited resources, in a cost effective manner is far more of a challenge then completing a $5 million transfer to a GST trust for a very wealthy person. Sorry, StarKist is not looking for estate plans with good taste but rather for estate plans that actually work. Wealthier families can easily hire a major trust company to invest family resources and use their 100 years+ of experience to distribute funds in a rationale manner to accomplish family goals. Families of more limited means may have to rely on unskilled family members to handle these delicate Solomon-like tasks. ■Folks that feel they aren’t wealthy enough to undertake appropriate planning often have misconceptions of wealth. Wealth can be relative. Someone with $10 million of net worth may not feel particularly wealthy because they are paupers by comparison to their even more affluent neighbors. You’ve heard of “affluenza!” Compared to 99% of the population this same person might be in the financial stratosphere. ■Someone with $5 million of wealth might have $2 million in their home and $3 million invested. If 4% were a reasonable withdrawal rate for that person, they would have to live on $120,000/year. Unlikely to be sufficient given the costs of maintaining a $2 million home no matter how frugal they are otherwise. Planning is critical for those who aren’t wealth, those who are wealthy, and especially for those who are misinformed on what their wealth status really is.

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Checklist Article Title: Trust Tips

Summary: Trusts, just like your estate planner, need regular TLC. Here’s a few tips:
√ 5/5 Power: Spousal Lifetime Access Trusts (SLATs) are quite a popular planning tool. Husband sets up a trust for wife and descendants and wife sets up a similar (but not reciprocal) trust for Husband and descendants. One of these trusts might include the common estate planning tool of granting the spouse/beneficiary the right to withdraw in her discretion the greater of 5% of trust principal or $5,000/year (called 5/5 power). This is the greatest withdrawal right that can be granted without causing estate inclusion. However, there are consequences to this power. If the money over which the power is exercised each year is not distributed to the non-grantor spouse/beneficiary it could be considered as if he/she made a contribution to the trust and that could make the trust a partially self-settled trust. If that trust is in a state that permits self-settled trusts (e.g., NV, AK, SD, DE) the problem may be mitigated. If the trust is in a state that does not (e.g., NY, NJ) might the trust corpus be exposed to claimants of the spouse/beneficiary? Included in his or her estate? Thanks to Kristen Simmons, Esq. of Oshins & Associates, P.C., Las Vegas.
√ Don’t Pay Your Trustee Bill: Many trust companies send bills for their trustee fees and other charges to the grantor/settlor of the trust. This might be a result of state law, or trust company policy. These costs in many cases should be paid directly by the trust, not by you the grantor. The payment by the grantor may constitute an additional gift with gift and GST tax consequences, trigger the need to file a gift tax return, etc. If the amount is paid by someone other than the grantor it could create worse complications. Before paying trust bills consult with your tax adviser. If your trust company can put trust charges on auto-pilot and deduct them from the trust, even better.
√ QTIP ESBT: When a Qualified Terminable Interest Property (QTIP) marital trust owns stock in an S corporation special precautions must be taken to protect the tax favored S-election. Historically most QTIPs would elect Qualified Subchapter S Trust (QSST) status. The requirements for both QITP and QSST of passing income to the spouse/beneficiary are consistent. However, it might be more advantageous in some instances when the trust and spouse are in the maximum income tax brackets to have the QTIP elect Electing Small Business Trust (ESBT) status. If the trustee is active in the S corporation business, and the spouse is not, this approach might avoid the 3.8% Surtax year after year.
√ Divorce Planning: Most estate plans endeavor to address the risk of an heir divorcing. A key to protecting gifts and bequests is for them to be held in trust to protect a beneficiary. But merely using a trust will not assure the desired level of protection. The trusts must be formed and administered properly. If you have separate/immune assets held in a trust but pay the income tax triggered by the trust out of marital property, that may weaken the protection the trusts affords. If you commingle trust and marital assets you may undermine the trust plan. While trusts can provide substantial protection, failing to monitor the details of operation of the trust may be fatal.
√ Life Insurance Trusts: If you have an insurance trust, or if you are serving as trustee, the trust, life insurance and overall plan is unlikely to succeed unless you periodically (every 2 years) have an insurance expert review the life insurance held in the trust to confirm it is performing adequately, that the insurance carrier remains sufficiently strong, the coverage meets current needs, and so forth.
√ Complex Trust Distributions: Many modern trusts are structured as grantor trusts, with the grantor paying all income tax. Many trusts are structured as “simple” trusts which means they are required to payout income annually. Other trusts are “complex” trusts in that there is discretion to pay out income. If income is paid out generally the beneficiary will bear the tax cost. If it is not the trust will pay the tax cost. Since trusts hit the maximum income tax bracket at about $12,000 of income paying out income to lower bracket family members can save income tax, avoid the Medicare 3.8% surtax and might save state estate tax depending on where beneficiaries reside. Year end planning coordinating your estate planner (to determine what the trust provides and to consider non-tax factors), your wealth manager (gain harvesting) and your CPA (income taxes) is a must. This planning can have more pronounced benefits than in the past so be sure your team is geared up for the new paradigm. Be sure to authorize and insist that your advisers collaborate to get the best result.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Tax Figures: Why do all your rich neighbors live in Miami? ■The NYS estate tax exemption is being phased up to the federal exemption amount in 2019. In April 2015 the exemption will be $3,125,000. But be wary, exceed that by 5% and the exemption is phased out. This gem is affectionately referred to as the NY “cliff.” Don’t fall off! ■The NJ exemption remains at $675,000. If a NJ taxpayer moves permanently to NY might the tax savings pay for the cost of that that NYC apartment? ■CT remains at $2,000,000. Be wary, however, CT has a gift tax, and NY during its phase in of the exemption may recapture gifts in the calculation. ■Other new figures for 2015: The top tax bracket of 39.6% for married taxpayers kicks in at $464,850 in 2015. The Personal Exemptions Phase-out (PEP) begins at $309,900. Itemized deductions are phased out by 3% of adjusted gross income (AGI) over the PEP amount or 80% of itemized deductions reducing the benefit of state taxes, mortgage interest and contributions. ■Trusts and estates hit the maximum bracket of 39.6% at a mere 12,300. The annual gift exclusion is $14,000/done and $147,000 for a non-citizen spouse.
■ Stored Reproductive Material: A recent NY law highlights the growing impact of reproductive technology on estate planning. Reproductive material might include sperm, eggs or embryos stored by a someone, for example, prior to undergoing chemotherapy. One of the controversial issues this material can raise is should a child born from such stored material, especially after the donor/parent’s death, be entitled to inherit. If the material is used years after someone died, and without their knowledge, should that child be a beneficiary of a trust the deceased donor/parent created? NY has endeavored to provide some clarity and parameters to these issues. If you store material you have to authorize its use after your death in writing and you must designate an agent to make decisions concerning its use. For a posthumous child to inherit the agent you appoint must give notice to your executor within seven months of the executor’s appointment. The child must be in utero within 24 months of your death or born within 33 months.

Potpourri ½ Page:
■ Succession planning is vital for every closely held business owner. For many estate plans it might be the single most important economic decision you will ever make. You should consider all your strategic options. ■ Transitioning a business to children or other heirs is certainly an option, but realistically, it is not always viable. ■ Should you take some money off the table now by selling part of your company or partnering with another entity. This might be a larger entity looking for a strategic value in your company or a financial investor. It might also be a competitor, a supplier, another company looking to enter your market, etc. ■ To succeed you must consider more than just having a qualified heir or the right legal documents. If you don’t think the plan through with investment bankers or business consultants, the best laid plans may not suffice. Some markets, like retail, are facing greater competition from the internet and it is affecting their viability. So the time to plan is now, not tomorrow. Also, addressing succession without a strategic plan may be of little practical value. Other markets, like those focused on a new technology, may be experiencing explosive growth. For these companies, the transition process may require an infusion of capital or additional expertise to succeed. Merely handing off a family business to the next generation, even if they are capable, may not suffice. ■ Another point needs to be addressed. Too often succession planning hinges on the readiness of the Patriarch or Matriarch to undertake the requisite steps. But that alone is too narrow a perspective. The business itself may have to be groomed for some transition options. Does your business have the right financial reporting and internal control systems? Too many closely held businesses run like a family pocket book – kids on the payroll, personal expenditures booked as business travel expenses, personal use cars paid for by the business, etc. Some close businesses hide profits in inventory. If you want to show the company to a larger suitor you may need to clean up lose practices and recast the earnings so that the company can be presented in the optimal light. ■ You cannot always control succession on your time table. It can be advantages to engage a consultant in advance and groom the company to keep your options open even if you have not yet committed to the transition. Thanks to Michael Richmond, of the DAK Group, Ltd., Rochelle Park, NJ.

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[Laweasy.com Category: Trust Don’t Ask Don’t TellShhhhh! Is your Trust Quiet: A “quiet” trust is one for which disclosures of information concerning8 the trust don’t have to be made. Why might you want a trust to be “somewhat” quiet? You might not want your Millennial kids seeing a statement that reflects the many millions of dollars you have in a trust while you are hoping that they learn how to become financially prudent and begin saving for their retirement. Seeing big numbers might well dissuade them from getting on the financial path you feel in their best interest. But just like the three bears, you want the porridge to be just right, not too hot and not too cold. Many states have enacted laws permitting silent trusts. Often when these are done disclosures are limited until a beneficiary attains a specified age. The Uniform Trust Code Sec. 813 requires keeping qualified beneficiaries reasonably informed and Sec. 105(b)(8) prohibits waiving the duty to inform qualified beneficiaries over 25 years of age.
■ Shocker: Many folks find the entire idea of notifying beneficiaries of a trust surprising. But that may be due to the fact that many people think of individual family trustees who tend to ignore many trust formalities, including communication with beneficiaries. ■ Individual Trustee Warning: The biggest issue is what liability the legions of individual trustees may have to beneficiaries they’ve kept in the dark without a documented basis for doing so. If you’re an individual trustee and have not reviewed with trust counsel the disclosures you are making to beneficiaries this one landmine justifies a meeting yesterday. ■ Institutional Trustee Warning: Trustees who simply send every name possible trust statements and disclosures may be overboard. In their zealous pursuit of less liability exposure perhaps they might actually be increasing it. The Restatement Third Sec. 82 provides: …because of differences in truest and beneficiary circumstances preclude imposing precise, universal rules in all of these matters, the trustee’s duty is to exercise reasonable judgment in deciding when, about what, and to whom information is required to be provided.” Professional trustees should not blindly ignore beneficiary circumstances and the totality of the trust instrument in favor of mass mailings.
Which Beneficiaries Might Get Notice: While the concept of a quiet trust sounds great in theory, too much of a good think may be rather dangerous. If no one who has an interest in the trust is getting disclosures, who will be watching the cookie jar? That trust porridge is too cold. On the opposite extreme, some institutional trustees take the position that, unless the trust provides limitations and state law permits it, they will send a statement of all trust assets to every beneficiary and every person named in the trust. Who might that include? Potentially a lot of people. Modern trust drafting favors listing all descendants as beneficiaries in many types of trusts A broad pool of beneficiaries gives the trustee wider latitude to distribute trust funds for whoever might be in need. Also, having a large pool of beneficiaries gives the trustee more options to spray income to beneficiaries in lower tax brackets, thus saving income tax every year. But every one of those beneficiaries may not be on the list to receive a copy of the trust financial data.
Title 12 Sec. 3303a Says you can delay for reasonable time, say age 25 under UTC. US Trust will accept trusts drafted to withhold until age 25. If not drafted that way all current beneificiaries 18 and above and first line presumptive remainderman (ie vested remaindermen if no power of appointment). Law doesn’t differentiate concept of a SLAT/DAPT which clinet intends to keep. If trust specifically prohibits to age 25 they will do so. They will address one-off situations and send statement to parents or give on line access for short term period. They know beneficiary knows of trust and can get statement eg in pending divorce. Client has to communicate the one-off statement exception. For example, a common one-off is not sending a statement to a child in college so that a statement is not sent to a dormitory. For example send statement to parents. They would revisit this each year. Request has to come from beneficiary. US trust believes that at age 25 the beneficiaires have a right to know. They view core duty the requirement to keep beneficiary informed. Even if there is a primary beneficiary e.g. spouse, they will still send to

Use spouse as only beneficiary subject to lifetime power to appoint so each year could sprinkle income out. This could be a more cumbersome than a ready made class.

They view a core fiduciary duty to disclose. So won’t accept a protector directing to send or not send statements.

They won’t respect letter of wishes that contradicts this.

Example estranged child listed in trust. Parents don’t want kid to get benefit of trust, but institutional trustee will disclose.

How can you have Crummey notice recipients have to send at age 18 at which point a beneficiary could ask for trust and statement.

Who Else Might Get Notice: But, just like those great late night TV infomercials, there’s more! Many modern trusts will include a number of provisions to assure that the trust is characterized as a grantor trust for income tax purposes. Common provisions to achieve that status are to give a person the power to loan the settlor (the person who set up the trust) money from the trust without adequate security. Another common technique is to give a person the right to add a charity to the class of beneficiaries of the trust. Many modern trusts include a position called a trust protector. This is a person often granted a limited but important list of powers, such as the right to replace an institutional trustee, change the situs and governing law of the trust, and so forth. All these persons may also be on the trust company list for receiving a full disclosure of all trust finances. That trust porridge is not only un-quiet, but way too hot for most!
Middle Ground: The best approach, so the trust porridge is “just right” seems to be to find a workable middle ground that meets any trustee’s reasonable desire for protection, does not mandate disclosures that might actually harm a beneficiary, but nonetheless assures responsible and interested persons have information necessary to monitor trust performance.
Delaware: Delaware is a leading state for trusts and is often on the forefront of trust law. In McNeil v. McNeil, 798 A.2d 503 (Del. 2002) surcharged the trustee for failing to inform a current beneficiary of that status. In McNeil a beneficiary sought but was denied information even as to his status as a beneficiary. The McNeil court seems to have mandated disclosure but in that case there appears to have been a clear bias and damage to the beneficiary involved. The Court found a “pattern of deception and neglect over the span of many years.” Further, McNeil does not seem to require disclosures to non-beneficiaries. The Delaware statute was amended following the McNeil case. § 3303 Effect of provisions of instrument “(a) Notwithstanding any other provision of this Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts and trust administration, including, but not limited to, any such laws pertaining to: (1) The rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary’s interest for a period of time.”
Steps You Might Take: What if your trust is not quiet enough for your comfort? What might be able to do? ■Might an institutional trustee be comfortable making disclosures to an individual trustee and/or trust protector to suffice? If the trust protector is expressly stated to be acting in a fiduciary capacity might that be viewed as a reasonable means of protecting beneficiary interests? Even if the trustee won’t accept that as a blanket basis not to disclose, if there is a beneficiary in difficult circumstances, might disclosure to a trust protector in a fiduciary capacity during that crisis suffice? Might a trustee be taken to task in such a situation for making disclosures that cause harm to a beneficiary instead of relying on a reasonable alternative? ■ The trustee may have the power, by a separate acknowledged instrument filed with the trust records, to amend the administrative provisions of the trust instrument to achieve the desired level of disclosure. ■ The trust protector may have sufficient power under the current document to take an action to modify the trust administrative provisions or clarify the trustee’s duties to disclose. ■ If the trust provides for a distribution trustee or committee the powers provided for that function might be useful to narrow disclosures. ■ If there is no mechanism under the trust and state law that will address the issue the trust itself may have to be changed. In these instances it may be possible to decant the trust into a new trust that addresses the disclosure issues and that is formed under a state whose laws permit non-disclosure. ■ If the trustee has to take a role in the modification or decanting of the trust provisions concerning disclosures that trustee might be less inclined accept the limitations imposed by the process. After all, if the trustee modifies the trust, or consents to a decanting, that gives it the power to disclose, the beneficiary or other person not receiving disclosure might well argue that the trustee created the non-disclosure situation so that no protection should be afforded to the trustee for what it created. Thus, if a decanting or other measure is taken, a new trustee might be necessary.
Possible Mechanism: Consider the following possible approach. Grant the trust protector, the following power: “The power to direct the Trustee as to which beneficiaries, fiduciaries or other persons holding powers hereunder (whether or not in a fiduciary capacity) (individually or collectively “Notice Persons”) shall or shall not be entitled to receive information concerning this Trust, including but not limited to statements and other notifications. While either Grantor is alive and not disabled no such notifications shall be given to any Notice Persons hereunder other than the Grantors and the Trust Protector unless the Trust Protector authorizes same. No trustee shall be liable for notifications following Grantor’s disability until such Trustee has actual knowledge, or receives written notice from the Trust Protector, of Grantor’s disability.” While the approach to be used could vary depending on the circumstances the objective of this sample mechanism is to provide some limitations on disclosures but to endeavor to assure that someone interested in the trust is receiving information. Be careful conditioning disclosure on standards such as the beneficiary “not using drugs,” and the like. Proving when and if such criteria are met can be difficult.
Education: For those concerned about beneficiaries learning of wealth held in trust, the best answer in many cases will be to proactively endeavor to educate the beneficiaries about financial matters, and as they gain knowledge and maturity disclose increasing information about the trust. Many institutional trustees have great programs designed specifically to do just this. Education is best because regardless of legalities if a sibling is getting information and distributions, how long do you think it will be before the younger sibling learns all. If statements are sent to your home, do you think that kids will never see them when visiting?

Directly Restrict Trustee: Direction Not to Inform or Account to Discretionary Beneficiaries. During the shorter of Grantor’s lifetime or a judicial determination of Grantor’s incapacity, no Trustee shall be required to inform any beneficiary who is not entitled to a mandatory distribution of income or principal from the trust on an annual or more frequent basis of the trust or the court in which the trust is registered and the Trustee’s name and address. In addition, during the shorter of Grantor’s lifetime or judicial determination of Grantor’s incapacity, no Trustee shall be required to provide any beneficiary who is not entitled to a mandatory distribution of income or principal from the trust on an annual or more frequent basis with a copy of the terms of the trust and shall not be required to provide a statement of accounts of the trust. The Trustees and the Trustees’ officer, agents, and employees, if any, shall be indemnified out of and held harmless by the trust estate from any and all liability to any beneficiary for any loss of any kind that may result by reason of any action or non-action taken by the Trustees and the Trustees’ officers, agents, and employees in accordance with the directions in this paragraph.###########

Education: For those concerned about beneficiaries learning of wealth held in trust, the best answer in many cases will be to proactively endeavor to educate the beneficiaries about financial matters, and as they gain knowledge and maturity disclose increasing information about the trust. Many institutional trustees have great programs designed specifically to do just this. Education is best because regardless of legalities if a sibling is getting information and distributions, how long do you think it will be before the younger sibling learns all. If statements are sent to your home, do you think that kids will never see them when visiting?

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Checklist Article Title: Save Money on Your Estate Plan

Summary: So you want to save money on your estate plan. That’s a reasonable goal, but most folks go about it the wrong way. There are smart ways to keep costs down, and there are ways that, depending on your circumstances might be worthwhile or perhaps not. Then there are ways you can save money but only to the detriment of yourself or those you are trying to protect.
√ Ways to Save Money That Won’t Adversely Affect Your Plan: ■ Prepare ahead of time. Put together all the background information your advisers need before anyone turns a clock on. You can easily assemble lists of family members and other key people and their contact data, copies of beneficiary designations, and so forth. The more organized your data not only the less costly the process, but the better the result. ■ Web meetings. While nothing can substitute for a face to face meeting to establish a relationship, or to address really tough decisions, some meetings, such as reviewing a draft document can be most efficiently handled by web conference. This will be quicker than an in person meeting since so many of the social conventions aren’t necessary. ■ Ask the planner you hire what steps might be reasonable to save money without jeopardizing your results. Most will be pleased to make recommendations. ■ Meet regularly. Boy that sounds like a sales pitch. But keeping planning current and cleaning up the inevitable lose-ends will save money in the long run, maybe even in the short run. Small problems are much easier to correct before they become big problems spanning many years. ■ Make up your mind. Changing the name of your executor or guardian at every meeting adds up to extra costs that can be avoided if you evaluate key personal decisions before and after your introductory meeting.
√ Ways that Might be Worthwhile to Save Money but Evaluate Them Carefully:■ Not having all your advisers at a meeting. Some complex situations require having your CPA, trust officer, wealth manager, estate attorney, and others at a sit down. It will be costly, but essential to achieving the results you want. However, in many cases having your estate planner call your CPA and wealth manager might suffice. Another cost effective approach is to let your advisers have a web or phone conference without your involvement. In that way they can talk in technical terminology that is the most efficient. ■ Use less comprehensive or less tailored documents. This can be disastrous in some situations, but might be palatable in others. A young couple with a modest estate likely can use more standard documents than someone much older with a larger estate. But it is important to bear in mind that in some cases it is well worth the extra cost to have a document tailored to your specific needs. For example, when you are young with a smaller estate you might use a standard power of attorney form. When your estate grows and circumstances become more complex you might instead rely on a form tailored to your circumstances by an attorney. As you get older or health issues develop you may choose to rely on a fully funded tailored revocable living trust that is merely backstopped by the power of attorney. Saving money is good, but picking the level of planning and cost appropriate to meet your goals is much better. ■ Ask if there is a simpler less costly way to achieve close to the result you want. Frequently, unusual bequests or other specialized provisions that sound simple are actually quite costly to translate into formal language in a document that will be effective. Many times using a simpler approach can get you 90% of what you want for lot’s less. Ask!
√ Ways that Will Save Money to Your Detriment: ■ Hiring the least costly adviser (attorney, CPA, etc.) is never the way to go. That doesn’t mean you have to hire the most costly either. Try to find the adviser best suited for your needs. Most people handle this by asking what the hourly rates are. That is not particularly informative. A smarter approach would be to ask prospective advisers if you can briefly describe your circumstances so that they can tell you if you and the adviser are a match. For example, some planners will prepare documents with a modicum of planning as their standard level of service. Other advisers may charge substantially more but their standard level of service may include a much longer more comprehensive meeting, a detailed memorandum, and more. Picking the right advisers will get you the best result for the least cost. Ask “How often do you handle estates my size? How often do you deal with [explain] issues?
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■ Succession Planning: If you really implement a succession plan and bring Junior into the family widget business, can you still be viewed as being actively involved? This has a wide range of important tax implications. If you can still be “active” after turning over much control to Junior your estate may qualify to defer estate taxes over 14 years under IRC Sec. 6166. If you are sufficiently active you may be deemed to still “materially participate.” That can have a profound impact on how earnings or losses you realize from business operations are treated for purposes of the passive loss runes under IRC Sec. 469. If you can still be deemed to be active you may avoid the dreaded (and insanely complicated) 3.8% Medicare tax on passive income. In a recent case the Tax Court found that even though the parent turned over many management responsibilities in the family business to his son, the father remained an active and material participant in the business. Wade, TC Memo 2014-169. See also Treas. Reg. Sec. 1.469-5T(f).
■ Bailout While you Can: A great planning technique is to donate stock in a closely held business to a charitable remainder trust (CRT). You can get a juicy tax write off. Later when the business is sold the portion of the capital gain realized by the trust is not recognized immediately but rather comes out to you as annuity or unitrust distributions are made from the CRT to you in future years. This might help you avoid the Medicare Surtax of 3.8% if in those future years your income is under the Surtax limbo bar. This cool technique is affectionately called a “charitable bailout.” Proposals by Camp’s would prevent you from deducting the fair market value of capital gain property like a close held business (a few exceptions are provided for, e.g. publicly traded stock). The proposal would limit your deduction to your adjusted basis in the stock. For most closely held businesses that is zippo. Moral of this tax tail, bailout while you can!

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■ Trust: Home State versus Delaware: Most folks (and lawyers) tend to set up trusts in the state where they live and their lawyer practices. While this might seem logical, and it’s what has been done for a zillion years, it may not be the grooviest approach. Compare NJ to Delaware.
■ Delaware has a directed trust statute, NJ does not. So in Delaware the trust document can name an adviser or committee to direct the trustee on investments. Delaware has had this for over 100 years. This can be critical to holding a closely held business or other unique asset in a trust and still securing a top tier trustee.
■ DAPTs or self-settled trusts which is a trust you set up and for which you are a beneficiary. Delaware has permitted DAPTs since 1997. About 1/3rd to ½ of new Delaware trusts are some type of asset protection trust.
■ Silent trusts are not sanctioned by statute in New Jersey (so if you’re a trustee in NJ have you been disclosing all to the beneficiaries?) In Delaware if the governing instrument says that trustee does not have to notify beneficiaries of interests in the trust the trustee can honor that. If the document is silent then Delaware trustees have to provide notice under the McNeil case which requires current beneficiaries to get notice.
■ Perpetual trusts are allowed in Delaware. NJ also allows perpetual trusts. Score one for the Garden State! But has your state jumped on the perpetuities bandwagon? NY hasn’t.
■ Pre-mortem validation of a trust is feasible in Delaware. NJ does not have a statute for this. In Delaware the trustee can send notice as to what the trust says to a beneficiary and then the beneficiary has 180 days to contest. If she does not do so that beneficiary is precluded from challenging it later. The more substantial the planning done in advance of the notice the better. So if the trust is not funded, e.g., trust only had $100, then after death $100M pours into it, the courts might not uphold it.
■ If you fund an irrevocable trust in Delaware during lifetime then your probate estate won’t pay the NJ estate tax. Think if the savings by funding a DAPT today!
■ Delaware offers more flexibility in drafting. Example, you can set up a trust that instructs a trustee not to diversify portfolio.
■ Delaware updates its trust laws more frequently.
■ Income taxation of trusts is more favorable in Delaware. If a NJ resident sets up irrevocable non-grantor Delaware trust (DING) it will avoid NJ capital gains tax. NY has restricted this technique.
■ NJ is one of only 3 states to tax charitable remainder trusts (CRTs) at the trust level. So if setting up a CRT set it up in Delaware not in NJ.
♥ Home may be where the ♥heart is but Delaware (and a few other choice states) is where the trust is. Thanks to Dick Nenno, Esq. of Wilmington Trust.

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Lead Article Title: CCH Editorial Advisory Board

Summary: Commerce Clearing House (CCH), is publisher of some of the best known tax and financial planning materials. Recently I had the opportunity to participate in their annual Advisory Board Meeting which is a conference call of professionals in different disciplines from around the country. Following are some of the many comments and planning tips distilled from that three hour conference. The hugs were my idea.

Funhouse Tax Mirrors: How has the planning environment changed? While readers of the Practical Planner have seen these comments before, they warrant repeating because the change in the planning environment is so radical from a mere two year ago and simply too few people have taking action to update their planning. ■ Aging clients’ needs must be addressed. This will require much more than the tax planning that has traditionally been the focus of estate planning. ■ A high $5 million inflation adjusted permanent estate tax exemptions ($10,680,000 for a married couple in 2014), permanent top estate and gift tax rates of 40%, permanent portability of the estate tax exemption, have all transformed planning. Most wealthy Americans will no longer face a federal estate tax. ■ The flip side of the tax coin the higher income tax rates, Medicare Surtax, phase out of exemptions and itemized deductions, in aggregate result in income tax rates much higher than they had been for years. ■ Most significant, the relationship of estate tax rates and income tax rates has profoundly changed with income tax rates exceeding estate tax rates for most taxpayers. That turns a lot of prior planning on its head. Bottom Line – if you haven’t retooled your planning get moving!

Hug your CPA: ■ The effective income tax rate can be 39.6% (ordinary income tax rate) + 3.8% (Medicare surtax) +2% (phase out of deductions). The marginal tax bracket on investment income can be as high as 45%. If you add state income taxes, the marginal rate you might face could exceed 50%. ■ Tax rate bracket management to capture income in lower bracket buckets should be considered in your income tax planning. You want to try to smooth income to minimize the income taxed at higher brackets. Plan the realization of income, to the extent you can (e.g. a sale of appreciated stock, a bonus from a controlled corporation), to avoid that extra income pushing you up the income tax bracket ladder. ■ Statutory tax shelters (life insurance, annuities, Roth conversions) should be considered to minimize income taxes. ■ Oil and gas investments may be more tax-advantageous. ■ A two year installment sale strategy may be fun too. IRC Sec. 453. If you sell assets to say your child, and she sells more than two years later, her sale should not accelerate your gain under the installment note.

Hug your Financial Planner: ■ A more holistic approach to investment planning which integrates income tax considerations, and estate planning issues, as well as investments, is the standard to demand. Advisers that can integrate all of this and work in the team environment will provide the most benefit for their clients. If your advisers won’t play nicely in the sandbox with each other you’ll lose out. Insist on open communication. ■ Retirement planning is important given longer life expectancies and higher health care costs. It is not only investments but withdrawal strategies, risk tolerance, and cash flow needs, that must be factored into your analysis. Many assume that you can safely use a 4% withdrawal rate. New studies are suggesting that may not be the case. Consider that for a 65 year old married couple retiring today at least one of them will be alive in 30 years! Planning to assure adequate financial resources over that long time frame is critical. If you assume the wrong withdrawal rate and don’t regularly monitor it you may run out of resources too soon. On the flip side if you want to maximize your later years, limiting your spending too much could inhibit travel or other pleasures. Just like with the three bears you need to get your financial porridge “just right.” ■ Reality check: it is incredibly difficult to plan because of: changes in tax residency, divorce, other family status changes, complex asset allocations, the volatile economy. Regular reviews so you can modulate spending, asset allocations and more is therefore important.

Hug Your Estate Planning Attorney: ■ A team approach is required. You cannot effectively engage in estate planning in isolation as had been common in the past because of the income tax, retirement and other complexities. ■ It is almost impossible plan with clients not coming in annually. It is critical for CPAs and financial planners who do meet with clients annually (or more frequently) to push their clients to coordinate with their attorneys. Given the uncertainty and more complex planning environment projections to ascertain steps to take, like portability of the estate tax exemption to the surviving spouse, should be considered. ■ Family limited partnerships (FLPs) and limited liability companies formed to generate discounts can be transformed into income shifting strategies subject to the IRC Sec. 704(e) family partnership rules.

Hug your Pension Consultant: ■ Review plans to see if you can save more dollars in qualified plans. ■ Defined benefit plans may increase the amounts that can be saved in a short number of years. ■ Cash balance plans, 401(k) plans, and so forth, can often be used in combination to give a business owner a great opportunity to deduct more significant contributions to tax favored retirement plans. ■ Withdrawal strategies are key. What are your needs? What is your tax status? If income is changing due to age, or you are transitioning between careers, etc. then multi-year planning may be beneficial.

Hug Your Insurance Consultant: ■ With permanent estate tax exemptions so high what happens to existing insurance plans? ■ When the estate tax exemption was $600,000 funding estate tax with insurance was more common. Now people are redirecting their insurance dollars towards income tax savings, investment diversification as an asset class, and more. ■ No surrender, no commission charge, insurance products are now available.

Congress-Speak: ■ When you say “permanent” you mean in Oldspeak ideas like carved in stone, not changing, etc. When those folks in Washington say “permanent” tax change, they’re talking that special political lingo of Newspeak which means, …, well whatever they or the next Congress want it to mean. While most advisers seem kinda confident that the high estate tax exemptions might be permanent, what is “permanent”? Some even suggest that the estate tax may still be repealed. So few tax returns are filed and the cost of administering the system seems significant. But if you repeal the estate tax and the gift tax there will be a movement of assets from high bracket taxpayers to lower bracket taxpayers. Without a gift tax to back stop the income tax, the income tax system will be jeopardized. ■ But on the flip side President Obama has proposed rolling back the transfer tax system to 2009 rules meaning a $3.5 million exemption and a $1 million gift tax exemption and a 45% rate. ■ The bottom line is if you have a large estate, asset protection, or divorce concerns, plan now. Don’t wait. Example: You’re a physician worried about malpractice claims. You have $3 million in non-retirement assets you might wish to protect. If the gift exemption is lowered to $1 million as the President has proposed several times, you’ll lose out on the ability to better shelter more assets. Besides, if you have no claims or issues today, why wait. Strike while the litigation iron is not hot!

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Checklist Article Title: Trust Trends

√ State Income Tax: State income taxation of non-grantor trusts have been favorable with some states being limited from imposing income tax unless the nexus to the trust.
√ Note Sales to Grantor Trusts: Woelbing v. Commissioner (No. 030261-13) is a case in Tax Court in which the IRS challenged a sale of asset for a note to the seller’s intentionally defective grantor trust. The conclusion of this case could be significant to planning. In the meanwhile, one lessen to learn is to pay careful attention to details and formalities of these types of transactions.
√ Decanting: About 22 states now permit decanting. The IRS is still looking into the tax consequences of the process so tax uncertainties remain, but that does not seemed to have dampened the growth in the number of these transactions as those involved seek to improve old trust arrangements. Decanting is a process where a trustee transfers assets of an existing trust to a new trust. This is permitted if the trustee has discretion to make distributions of income and principal.
√ Same-Sex Marriage and Trusts: 19 states allow same-sex marriages, 31 states ban it but 12 of these 31 states have overturned the laws and are on appeal. The numbers keep changing and the trend is quite clear. The Windsor case said that the definition in DOMA, that marriage is between a man and women, violates constitution. Windsor did not address the legitimacy of state laws that ban same-sex marriage. Perhaps one of the pending cases will force that issue. Significant opportunities for same-sex couples to plan now exist unless the Supreme Court upholds as constitutional state statutes banning same sex marriages. The final resolution of this is uncertain in that the Windsor case was a close call with a 5-4 vote. The outcome of a challenge to state law bans is uncertain. Same-sex couples now need prenuptial agreements and all the planning married couples need to address. This means trust planning for same-sex couples must be reviewed, rethought and likely revised.
√ DAPTs-Self Settled Trusts: 15 states now permit self-settled trusts. Several bad cases, Battley v. Mortensen, Adv. D. in Alaska, and Waldron v. Huber (In re Huber), BK.W.D.Wa. in Washington, have had planners rethinking how to best utilize this planning technique. Some planners have dismissed the idea entirely, but not all is bleak. The facts in these bad cases all had fraudulent conveyance concerns. Transfers to a DAPT that can be considered a fraudulent conveyance can be voided. The Bankruptcy Act provides that a transfer to a self-settled trust or similar device the bankruptcy trustee can voided. One of the steps those with existing DAPTs, as well as those planning new ones should consider, is creating a stronger nexus to the state where the DAPT is located. The more assets that are there and the more ties the better you can argue that the DAPT state law (e.g., Alaska) applies instead of your home state law (e.g., New Jersey). To counteract the naysayers consider that DAPTs have been around since 1997 and there are few cases that have questioned these trusts, and of those cases that did, all were all fraudulent conveyances.
√ Digital Information: Fiduciaries can get access to digital information and Delaware has enacted such a law assuring access to digital information. Digital provides have been lobbying against this. The practical answer is to endeavor to secure all relevant digital information while the settlor or others are alive and well and can communicate it.
√ Crummey powers: President Obama has also proposed limiting Crummey powers to $50,000 per donor/per year. If you have insurance and other trusts you are gifting substantial dollars to each year using annual gifts you should evaluate options to take now.
√ NINGs and DINGs: Incomplete gift trusts (done in Nevada or Delaware and called NINGs or DINGs respectively) should be considered to save state income tax (NY has legislated these away). These may also works in Alaska and Wyoming (“AINGs and “WINGs”). How do these work? You transfer your property outside your high tax state before a sale, e.g., of a highly appreciated family business. This may also save federal tax because you may not be subject to phase out of itemized deductions. NINGs illustrate the increased emphasis on income tax planning generally, state income tax minimization in particular, and the cross-over of attorneys and other planners into the income tax arena.
√ Charitable remainder trusts: CRTs will receive new attention. Charities that had sought bequests may shift the focus to current gifts that generate income tax benefits since all but the wealthiest donor’s won’t get an estate tax deduction.

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Inherited IRAs: ■You IRA affords you some protection from claims. On your death you can designate heirs, say children as beneficiaries of the IRA. One way to spot an inherited IRA is by name. Inherited IRAs are often titled as follows: “John Doe, Deceased IRA for Don Doe.” However, after your death as the IRA owner, if the beneficiary is a non-spouse (e.g., a child), there will no asset protection afforded that IRA. Specifically, an inherited IRA is not to be considered a retirement account for bankruptcy law purposes and, thus, is not protected in bankruptcy. 11 U.S.C. §522(b) (3)(C); Clark v. Rameker, Dkt. No. 13-299, SCt 2014-1. ■What is the future of an inherited IRA as an exempt asset? Florida so far is the only state to amend its laws to protect an inherited IRA from creditors. For everyone else you should give serious thought to creating a trust to hold IRAs for the benefit of children and other non-spousal heirs to assure some level of protection. ■ What if one spouse, say the husband dies, and the surviving spouse, say wife is age 54. The wife could leave the IRA in her deceased husband’s name until she turns age 59 ½. If she then rolls it over at age 59 ½ what happens in that intervening period from age 54-59 ½? Is it a spousal IRA or inherited IRA that is not protected from creditors? Planning is much more complex for surviving spouses.
: ■New York recently amended its estate tax laws to phase in an exemption equal to the federal exemption. Although the changes are favorable for many they contain costly traps for others. The NYS Dept. of Taxation and Finance recently issued guidance on this. A NY resident’s estate is increased by gifts made within 3 years of death, but real estate outside NY won’t be counted. If your estate exceeds the exclusion amount by 5% (i.e., you entire estate is 105% of the exclusion) the entire estate is taxable. This “cliff” makes the tax incredibly costly to those that just tip over the exclusion amount. The current exemption is $2,062,500 and is phased up in increments. So if your estate this year was $2,100,000, $37,500 over the exemption, estate you would have a $49,308 tax. Filing a federal return, even just to claim portability, will preclude separate NY tax elections. TSB-M-14(6)M, 8/25/14.
c. In the Bobrow v. Commr. (Apr. 22, 2014) case the client rolled over an IRA contended that each IRA #####
d. Frank Aragona Trust passive loss decision was a full Tax Court case. The application of this cases holding is quite broad. The IRS has not issued regulations under 469 for the application of passive loss rules (legislative regulations) to estates and trusts. Trust owned real estate. Six trustees acted as a management board and made all decisions. and three involved full time. Some of activities conducted between wholly owned entities and some through majority owned entities. Does this activity qualify for real estate professional exception. This requires that the taxpayer must perform more than ½ the taxpayers services for real property trades or businesses. The Court held the trust could perform such services and further that services performed by individual trustees are deemed performed by the trust. Court said trust can qualify as real estate professional and trust material participated in business as a result of participation of the trustees as employees of the LLC. The IRS raised the same issues it raised in Matti K. Carter case. So according to Aragon a trust can qualify for a real estate professional exception. What about activities of trustees as employees? The case indicates these will be counted. This entire issues is quite challenging because there is no guidance yet. For trusts this important as it determines if the 3.8% Medicare Surtax applies to the trust income as well as the passive income or non-passive income characterization. Over $12,150 of trust income the tax rate is 39.6% + 3.8%. The characterization may also be important from the standpoint of IRC Sec. 6166 estate tax deferral.
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■ Low Tech Works: Sometimes low tech simple solutions are best. If the wrong person signs important documents for a trust or entity that might undermine the integrity of that trust or entity for tax or legal purposes. A modern trust might have a trustee, trust protector, loan director and more. Who signs what? Order self-inking deposit stamps for each trust so you can simply stamp checks for deposit. This is a great and simple way to avoid errors on who can sign a check. Similarly for entities, such as a family LLC it is common to receive documents prepared with forms or names that are incorrect. Have your printer make a self-inking stamp with the name of the entity, beneath it a signature line preceded by the word “By:” and beneath that the name of the person to sign followed by their title. For example: Smith Family Holdings, LLC/By: __________/John Smith, Manager. When you are about to sign something stamp it first. This is a quick and easy way to avoid the wrong person signing, or even the write person in the wrong capacity.
■ Estate Planner’s Ripley’s Believe it or Not: I thought a summary was a summary. If you google “summary” you get definitions like “brief abstract” or “brief statement or account of the main points of something.” Gee seems like a summary of anything by definition cannot include every point or it wouldn’t be a summary. I’ve heard some nasty tales of insurance agents getting caught in a ringer because their summary did not include every fact. If a summary included every fact it would be as long as the documents it was purporting to summarize! While it seems absurd perhaps all professionals, to protect themselves, should consider a caveat on any summary they prepare to the effect that “This is only a summary of selected facts. You must read the entirety of the underlying documents for all pertinent information.” Lawyers frequently provide summaries of long complex legal documents. It can hardly be rationale for someone to conclude that a 3 page summary of a 55 page will could possibly include every point. Perhaps we should remind clients of the obvious so it will be harder for them to tag us if something that later proves important was not in the summary.

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Lead Article Title: Real Life Planning Not Just Estate PlanningSummary: This issue of the practical planner is months late. The reasons are personal. But hopefully sharing them will provide you with some valuable planning ideas. If you have or do face similar bumps in the road, perhaps it will even provide some encouragement. These points also emphasize the human aspects of estate planning that I have written and lectured about and endeavored to help clients address. But as with so many things, actually dealing with them is quite different than merely writing about them.■ Worse than a Dentist: A well-known reporter/author client of mine recently exclaimed at her annual review meeting after we discussed a range of issues I broadly call “later life planning”* that “Visiting you is worse than visiting the dentist!” Ouch! But as she recognized, this topic is essential for everyone to address as they age, as well as anyone with a health challenge. Not fun, but the Ostrich approach of sticking your head in the sand and pretending there won’t be a problem doesn’t comport with reality and will enhance the likelihood of your becoming an elder financial abuse statistic or worse. If this incredibly bright and financially astute women finds this stuff tough to address, everyone must. Perhaps my efforts not to be a barefoot shoemaker might help you tackle these issues without more lidocaine.*For the sake of full disclosure I stole this moniker from Bernard Krooks, Esq. a nationally known elder law specialist and all around good guy.■Yogi Berra: “It’s like deja-vu, all over again.” The August 2006 issue of the Practical Planner lead article was entitled “Chronic Illness: Special Planning Required.” My wife, Patti, had been diagnosed with multiple sclerosis a month earlier. That article was my first shot at grappling with how that diagnosis affected our planning, and similarly how living with chronic disease impacts the approximately 130 million Americans facing that challenge. A common challenge of those living with multiple sclerosis is difficulties with balance. In February of this year Patti lost her balance and fell down a flight of stairs in our home. We had to tackle a decision many people struggle with as they age or deal with an array of health challenges. Do we stay? If we stay what steps should be taken? Do we move to a home without stairs? For us the decision was made, not easily, but quickly. We decided to move to a condominium with no stairs. So now in 2014 it’s like deja-vu, all over again.

■ Where the 2006 Article Lead: In 2006 I was shocked at the dearth of resources available to professionals advising clients with these issues. I made it my personal mission to address that deficiency and since that first article in this newsletter have written four books (including ones for the Michael J. Fox Foundation, National MS Society, and the COPD Foundation) and about sixty articles and counting on chronic illness planning topics. A workbook for consumers facing the challenges of brain disease or injury is in process for the American Brain Foundation. Patti and I set up a charity (chill, we don’t fundraise) whose mission it is to help professional advisers guide clients facing chronic disease and disability. We travel around the country for about two months a year in our Airstream RV and lecture to professional (e.g., estate planning councils), consumer and charitable groups. We’re already planning speaking tours for next year (with one to Birmingham, AL in the hopper).

■ Hair Replacement Estate Planning: Planning our move, downsizing, and other steps we’ve taken, are all part of the broader scope of what I encourage people to consider as part of what I generally call “later life planning.” Estate planning historically has focused on wills and minimizing estate taxes. Not that these aren’t important for many, but they fall far short of addressing important issues people might confront. People now live 30 years longer than they did 100 years ago. Estate planning could have a narrower focus when the number of years post retirement were expected to be so limited. Today’s retirees may live two or three decades+ past retirement age, with many of those quite active. The incidence of chronic disease increases with age. The estate planning “conversation” has to be much broader to remain relevant. What steps might help make those later decades more secure so you can enjoy them as much as possible? These entail not only estate planning steps, but as we have discovered, home design decisions, personal organizational decisions, and much more. While many of the steps we’ve taken had nothing to do with the recent incident or move, they do all relate to the broad topic of later life planning. So I’m going to steal an idea from Sy Sperling’s famous Hair Club For Men commercials – “I’m not only the Hair Club president, I’m also a client.” The planning steps below are steps I’ve taken, not just recommended to clients.

►Downsizing: With aging and health challenges we felt “less is more.” Less space means less to care for, less time demands, etc. Thoughtful downsizing can also eliminate family fights, protect you from financial abuse and more.
■ Small Is Beautiful: Downsizing meant getting rid of lots of stuff. What I realized is that in so many cases clients defer this decision until it is thrust upon them, often at an age or state of health when they can no longer organize and purge their own accumulations, thus leaving the burden to children and others. In many probate situations, a personal organizer company is hired to deal with property. Children, often living at a distance, but almost assuredly pressured by their own career and family responsibilities, simply find the task overwhelming for them to handle without help, if at all. Sadly, in many cases I’ve seen over the decades of practice, heirs quickly pluck obvious valuables from a deceased parent’s home, and then a home clean-out company trashes everything else. There is no doubt that valuables, and sentimental objects end up in the bin too. There is another loss. Whatever children did not want from our downsizing that was usable was packed and taken to a local thrift shop and several local charities that collected clothing and other items. After perhaps the 10th such trip, the manager of the thrift shop told me a small part of his personal story. He had been homeless for many years. He explained that being able to find clothing and other items at local thrift shops was what helped him get back on his feet. He credited, in his words, the local thrift shops with saving his life. When a clean-out company is hired to trash the contents of a decedent’s home, the less fortunate often lose out as well.
■ Scanning: We began the process of going paperless many years ago. At first blush the task is insurmountable. We began simply by scanning current items. Once we grew comfortable scanning current statements, bills and similar documents, we slowly began the arduous task of culling through the scores and scores of boxes of old tax, legal and personal documents that seem to be a common ingredient for most attics. We identified federal income tax returns (even older than the statute of limitations), tax basis documents, key legal documents, and so forth. These were scanned at a rate of a few hours a week and everything else was shredded. We tackled a few boxes at a time and when they were completed, retrieved the next couple of boxes. With small baby steps the process was not overwhelming, and over years of time only two small boxes of original legal documents remain. Original of the following were kept: estate planning documents, birth certificates, insurance policies, and so forth. Having all key documents scanned makes them easy to find, saves incredible space, and more. They are all backed up both to the cloud regularly, and periodically as part of a mirror back up to a portable hard drive. Last summer, on a month long trip, our forwarded mail included a love note (i.e., audit) from the IRS. We were able to find the documents on our laptop necessary to resolve the issue, printed them on our portable printer, and sent a certified letter to the IRS from the Post Office in Mitchell, South Dakota. If you don’t recognize that city, then you’ve likely never seen the famous Corn Palace. Scanning not only saves space, but lots of time. Think of the burden you’ll save your heirs from having to sort through tons of old financial and tax files. Consider the reduction of the risk of your being subject to identity theft if all those confidential physical documents are destroyed and only remain on an encrypted password protected laptop. For those that struggled through natural disasters like Hurricanes Katrina and Sandy, or might in the future, your documents can’t be destroyed in the cloud.
■ Shoot it and Lose it: Gail and Ron are our idols of downsizing, though we fell far short of their remarkable accomplishments. They downsized to a small New York City apartment so that they could focus their time on enjoying the amazing offerings of NYC and not on dealing with “stuff.” I suspect more and more retiring Boomers will follow their path. One of their tricks, shoot it and lose it. We shot pictures of large clunky framed diplomas and professional awards and trashed the physical ones. Considering that we had not looked at any of them in years (decades!) we’re more likely to look at the photos of them (if ever). Big space savings and a growing sense of “lightness.”
■ Digitizing: We had the requisite number of boxes in our attic stuffed with bins of old 35mm slides and videos of toddlers waving. That stuff took up a lot of space so we, with the help of our friends at Digiphoto, digitized it all. We gave them crates and got back one small portable hard drive, the contents of which has been saved to our laptops and backed up to the cloud on Sugarsync. We also learned that those priceless home videos degrade over time. The sooner you digitize the better shape they’ll be preserved in. Also, once all this stuff is digitized you can easily share it with all of your kids. I’ve witnessed more than a few family fights over the years over who gets the photo albums. Now you don’t have to split the baby, just digitally clone it.
►Home Safety: The driver for our move might have been physical safety, but the fruits are much sweeter. An apartment means no worries about the lawn, shoveling snow, mail being left at the door, etc. So whether you are concerned about aging, or you’re a Boomer looking forward to a retirement of cruises, these changes may benefit you as well.
■ Automation: Home automation can empower those facing the challenges of aging or disability. Almost every system in your home: lighting, temperature, security, audio-visual, and more can be programmed to meeting health challenges, or your travel schedule. For those with any physical challenge these systems can be controlled from an iPad. Crestron Electronics, Inc. has created the leading products in this field. Dan Feldstein, VP of Crestron explained that whatever physical challenge you face an interface can be created to facilitate your controlling these systems. For seniors facing cognitive challenges, a “Night” button they push to turn off the light out in their room can also automatically adjust temperature, set the alarm, and cut power to the stove and cooktop just in case they forgot something. Many home automation features can be tailored to address physical challenges that you might face now or in the future as you age. Working with an electronics integrator with a bit of creativity, we used JD Audio and Video Design Inc., you can tailor these capabilities to any challenge. While most of us will face some of the same challenges with age, we cannot foresee what specific challenges we might face in the future. Prewiring to provide future capabilities to add features can create the flexibility to adapt a system to your changing needs. While much of this technology has focused on entertainment goals, the uses to those with disabilities are incredible.
■ Accessibility: Most of the literature on home accessibility focuses on wheelchair access. While critical to address it is not enough because only about 7% of those with disabilities use any type of walking aid. The challenges faced vary by disease. Fatigue is a common debilitating symptom for those living with MS, PD, COPD, and other diseases. Although so prevalent it receives scant attention in accessibility discussions. Design changes, a bench in a shower, a nook to hold a bench outside a dressing area, a stool that can comfortably sit under a kitchen counter, and other simple measures can help combat fatigue. Tripping is a common hazard for those facing chronic disease or aging or both. Gait is one of the most affected motor characteristics of those with PD. For those with MS foot drop is a common challenge. Yet the norm in residential construction is to have a sill between rooms with different floor surfaces to demarcate the change in floor heights. Our contractor, Tony Cervieri, varied the thickness of plywood subfloors carefully so that there would be no height transition from tile, to wood to carpeted surfaces. Where the levels could not be perfectly matched a bit of feathering below the final surface did the trick. Non-skid tiles, wood instead of tile to minimize injury from a fall, low pile commercial carpet with thin padding, all help. Sometimes simple steps can make an incredible difference. It is anticipated that by the year 2050 nearly 20 million Americans will be age 85+. These are issues and steps that many of us should take when feasible to empower us to deal with what is almost assuredly inevitable.

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Checklist Article Title: Checklist: Getting $ Out of Trust

Summary: So you set up tiers of LLCs, SLATs, DAPTs and other acronyms in 2012. Sounded cool and if the exemption had plummeted in 2013 it would have saved bundles of estate tax. The plan was so successful that you’d now like to tap it for bread money. How can you get money out without torpedoing the plan? Assume for this discussion that you formed a family limited liability company (“LLC”) that holds a large portion of your investment portfolio. You and your spouse own 20% of the LLC each and two irrevocable spousal lifetime access trusts (“SLATs”) you created each own 25% and a grantor retained annuity trust (“GRAT”) owns 10%.

√ Turn off Grantor Trust Status: Most of these trusts were set up as “grantor” trusts which mean the income earned by the trusts shows up on your income tax return. It’s the gift that keeps on giving. That characteristic alone could result in your consuming cash personally while building the value of the trusts. That is all fine from the perspective of estate planning, but it can get a bit tricky for you in terms of cash management to pay income taxes, etc. So a long term solution may be to turn off grantor trust status. This could be done on just one SLAT (not the GRAT during the annuity term) to preserve flexibility for the other SLAT. You might even divide a trust into parts and terminate grantor trust status for only one part. If you’re in your 80s it would be a mistake because you would not be able to swap assets back into your name to get a basis step up on death.

√ LLC Distribution: If you make a distribution of cash from the LLC, the cash would have to be distributed pro-rata to the members. Thus, if the LLC distributes $100,000 you and your spouse would get $20,000, each or $40,000. This might help but be inefficient if your direct ownership of the LLC is low relative to cash needs since most of cash would go to the trusts. There should be no negative tax implication since income from the LLC would flow through pro-rata to owners in any event.

√ Salary: If you provide services to your family LLC you could draw a salary for management or other efforts. That would create taxable income subject to self-employment tax. While the compensation would be deducted by the LLC as a guaranteed payment to you, you’d be reporting the same amount as compensation income. If you can’t corroborate that the LLC really provided arm’s length compensation for real services, the IRS might argue that the purported “compensation” is really a retained interest in the income of the LLC so that the gifts you thought you made to the trusts are all pulled back into your estate.

√ Purchase: The family LLC can use cash to buy, at fair market value, stocks, or other assets, you own in your personal names. While that might sound simple, the LLC in contrast to the trusts, Is not treated similarly as a grantor trust so that the sale would trigger capital gains costs. Not a winner.

√ GRAT Distributions: GRATs must pay you a mandatory annuity to qualify for the favorable tax treatment intended. But some GRATs include provisions permitting additional distributions above the mandated annuity to you. That might provide you desired cash but it would be counter-productive from an estate planning perspective defeating the GRATs objective of leveraging growth out of your estate. Definitely not a winner.

√ Borrow: You probably can borrow money from the LLC or any of the trusts. This can be relatively simple and should leave asset protection and estate planning in place. Just be careful that a sufficient interest rate is charged, a written loan document signed, and that the terms of the loan adhered to (e.g., regular payments). Avoid creating a pattern of loans and correlating the borrowing with major life events, like a child’s wedding.

√ Redeem: You could have the LLC redeem some of your interests to infuse cash to you, but have your CPA run the tax numbers first.

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■ Trusts Aren’t Always Passive: Trust can qualify for real estate professional exception to PAL rules The Tax Court has determined that a trust that owned real estate properties and engaged in other real estate activities qualified for the Code Sec. 469(c)(7) exception for real estate professionals and thus wasn’t subject to the passive activity loss (PAL) limitations. In so concluding, the Court found that services performed on behalf of a trust may be considered personal services performed by the trust. Frank Aragona Trust, (2014) 142 TC No. 9
■ Mississippi Joins the DAPT List: Effective July 1, 2014, Mississippi became the 15th state to permit the creation of self-settled domestic asset protection trusts (“DAPTs”). This seems to confirm a trend of more states permitting self-settled trusts. Naysayers of this planning technique should take note, but those with DAPTs, or considering them, should still be cautious in light of the number of cases that have challenged the technique. Title 91, Chapter 9, Article 15, Miss. Code Ann. §§91-9-701–91-9-723.
■ Trust Expenses: The IRS published final regulations governing which costs incurred by trusts and estates can be fully deductible without having to be reduced by 2% of adjusted gross income. IRC Sec. 67(e). A cost will be subject to the 2% reduction if it is included in the definition of “miscellaneous itemized deductions” under IRC Sec. 67(b), is incurred by an estate or non-grantor trust, and it is “commonly or customarily” incurred by an individual holding the same property. Costs incurred by an estate or trust which would not have been incurred if the property were not held in in the estate or trust are fully deductible without the 2% haircut. The big number in all this is investment fees. The Regs provide that investment advisory fees are subject to the 2% floor, unless they are an incremental cost beyond the amount “normally charged” to an individual.
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■ #Valuations – becoming less likely to permit taxpayer to rely on appraisers to avoid accuracy and negligence penalties on undervaluation.
■ #Income tax side more aggressive. Must be that you have evidence suggesting that an inherited asset has a differ basis than 706 it is the value of the 7that will control value. IRS is increasing asserting position arguing consistency requirement with Form 706 to determine income tax basis for the successor
■ # The problem is that with a lot of the planning today it is complex and requires disciplined and clients are unwilling to be that disciplined.
■ #During estate tax exam IRS sees this and realizes no mention in a Form 709 and they went after the taxpayer. Sales were taxable sales reported on 1041 but they were not reported on a gift tax return. Whose gift tax return it was a QTIP? Only potential beneficiary of a QTIP is surviving spouse? So on whose 709 should the non-gift disclosure should have been made. IRS went after deceased spouse even though precluded by statute. One of the issues to address on Form 709 is not to concentrate the numbers on the return but the non-gift disclosures not reported on the return. What about capital contributions to an entity are they gifts? A capital contribution transfers assets to an entity is that a gift transfer? It has come up in an estate tax examination. IRS often takes position that a refinancing of a note is a gift and should be reported as a non-gift transaction.
■ # Be cautious about notes in FLPs and multiple churning like transactions. If you have underperforming notes and fail to collect in default or accelerate it is tantamount to a second gift. This means the same property can be taxed twice.
■ Use defined value clauses to backstop large transfers. These clauses transfer
1. Public charity and donoar advised fund. Use a Petter type lcause which was accepted by Tax Court.
2. Private foundation.
3. Lifetime QITP and GRATs used by many but no case law.
4. Wandry. IRS did not appeal.
vi. Gift tax reporting tips.
1. Start the statute of limitation by reporting.
2. Report consistent with the formula.
3. Attach formual documetns and appraisal.
4. If charity gets an interest file a protective cliam in case value of charitable deduction will increase.
5. Include if units may be reallocated a protective claim to reallocate deduction items in the event of a change. ■ # ■ # ■ # ■ # ■ #
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Lead Article Title: What’s in Your Document?Summary: Some Vikings want to know what’s in your wallet, but Viking lawyers want to know what’s in your will! Now that commentators have digested the implications of the sea-change 2012 Tax Act, what might you want to include in various estate planning documents? Real people want to know “Can I finally have my documents revised and not have to do so again in six months?” The law is now “permanent” (quotes courtesy of Congress!). While Congress loves to tinker the new tax paradigm certainly seems like it will have a reasonable shelf-life. This variant of the estate tax will last a lot longer than the constant state of flux that had persisted for years preceding the 2012 Tax Act, maybe (had to add that “maybe,” I’m a lawyer). Regardless, the changes discussed below are so different from what exists in many documents that for anyone that hasn’t had a make-over now is the time. When you revise your documents this round make them flexible enough to address some future changes (e.g., state’s changing their estate tax rules).

■ Power of Attorney: Permitting your agent to make those annual gifts, $14,000 per person in 2014, has been standard boilerplate in powers. But boilerplate is only okey dokey when it makes sense for you. That old boilerplate was a decent default approach for many in the past, but it no longer may be. ► For most folks a gift power may prove to be a dangerous spigot for an agent to commit elder financial abuse. Don’t kid yourself, this stuff even happens in “good” families and is committed by trusted loved ones. ► For wealthy folk living in a decoupled state, like New Jersey, permitting gifts to minimize state estate tax, well in excess of $14,000, might make sense. In NJ and other decoupled states there is no gift tax so your agent might gift away asset before your death a greatly reduce state estate tax. ► For the wealthiest taxpayers you might authorize your agent to make gifts up to the remainder of your federal exemption amount. This is $5,340,000 in 2014 but is inflation adjusted each year. Even if you’ve used up your full exemption the annual inflation adjustments will create valuable gifting opportunity in future years. This is a new and now permanent feature of the tax laws that did not exist when most powers of attorney were created. ► For any gift provision agents might be warned about gifting highly appreciated assets that might be best retained in your estate to qualify for a basis step-up. ► The bottom line is that yesterday’s standard gift provision will rarely be what you want today. ► When revisiting your power be sure it has provisions addressing issues like digital assets which no one may have addressed when your document was originally created.

■ Wills and Bypass Trusts: The centerpiece of most wills and revocable trusts has been the one-two punch of a bypass trust to hold assets the surviving spouse can access, but which our outside his taxable estate. The balance of many estates was then left to a trust that qualifies for the estate tax marital deduction. Yawn. But Grandma’s bypass trust won’t cut the tax-mustard any longer. Revise your will/revocable trust for more flexibility because of changing state laws, increased mobility (where will you live when you die?) and to provide greater flexibility to minimize capital gains to your heirs (income tax rates can now be higher than estate tax rates, so this is a significant change). The magic elixir for many plans is basis step-up — increase in tax basis (the amount on which capital gains are calculated) of assets owned on death to the fair value at death. How so? Freshen up your bypass trust with new flexibility: ► Include a “gap” bypass trust that is the amount between the state estate tax exemption and the federal exemption. If you move to a no-tax state or your state changes its laws flexible funding formulas can automatically adjust. This will give your executor/trustees maximum latitude to plan post-mortem. ► Give your surviving spouse the right to withdraw 5% of principal to pull out appreciated assets to have them included in his estate and achieve a basis step-up. ► Give an independent person the right to grant the surviving spouse a general power of appointment (GPOA if you need another acronym) over appreciated assets in the bypass trust to cause them to be included in his estate. ► Name an independent trustee and give a broader distribution standard (your spouse as trustee can only distribute pursuant to a more limited standard). This will provide more flexibility to distribute appreciated assets.► Add all descendants as beneficiaries so the trustees can sprinkle out income to whoever is in the lowest income tax bracket. Many old bypass trusts only named the surviving spouse, but that limits flexibility on shifting income which was not so important in the past, but can provide a significant benefit in the current tax environment. This will, however, prevent your executor from qualifying your bypass for as a QTIP or marital trust should that prove more favorable. ► Add charity to the list of beneficiaries to avoid percentage limitations on itemized deductions which individual beneficiaries face but trusts don’t. ► Investment clauses should be broad enough to permit holding only non-appreciating assets, such as bonds, in a bypass trust. Your family may still have an overall diversified portfolio, but the location of different asset classes within that portfolio can be managed to optimize income tax benefit if the trust permits. If the trust is silent the trustee may be bound by the prudent investor act and have to hold a diversified portfolio, to the family’s detriment, to avoid violating her fiduciary duties. ► Trust definitions should be drafted to give the right to include capital gains in trust accounting income. This will permit a trustee to distribute capital gains out to beneficiaries in lower tax brackets to avoid the high income tax bracket and 3.8% Medicare Surtax trusts face at about $12,000 of income.

■ Insurance Trusts (ILITs): ► Yesterday’s insurance trust may have held a survivorship (2nd to die) life insurance policy to pay estate tax on the death of the second spouse. That tax may no longer be an issue. Many other insurance trusts held only term coverage. Now, with such high income taxes, and most wealthy people no longer subject to estate tax, consider insurance trusts that own permanent policies that provide income tax benefits and a ballast for the rollercoaster investment world. This new application will reflect in changes in trustee selection, distribution provisions and more. ► Crummey powers that qualify gifts to trusts for the gift tax annual exclusion have traditionally required an annual written notice ritual. For those unlikely to ever be subject to estate tax a more streamlined procedure may suffice. Beneficiaries might now sign a one-time acknowledgment that they’ll accept verbal notification of annual gifts. ► Insurance trusts should often be more flexible then in the past, permitting gifts of other assets and serving other purposes. These “multi-purpose” ILITs (MILITs) can minimize the need for other trusts and simplify planning and lower costs. Example, ILITs can receive gifts of business interests and other assets and thereby reduce state estate tax, serve as a buffer to avoid your tripping over the federal estate tax exemption, provide asset protection benefits and more. ► ILITs, since they may own assets other than cash and insurance, should include broader provisions assuring grantor trust status (income taxed to you) so you can swap assets. The right to use income to pay insurance premiums may not suffice. ► Because of the higher income tax rates ILITs might contain flexibility to turn off grantor trust status. Consider giving a trust protector the power to prohibit the use of trust income to pay insurance premiums. ► The biggest change is to refocus estate planning from death planning in your will to planning while you are alive using MILITs to secure asset protection when you need it most, and to provide protection from the challenges of aging in the future. As boomers age, this dynamic will provide more practical non-tax benefits than what typically had been accomplished in the past.
►See the checklist article.

■ Revocable Living Trusts: ► If you reside in a decoupled state consider granting someone the right to revoke your rights in the trust to trigger a completed gift of non-appreciated assets (in CT and MN up to the state exemption) to minimize state estate tax. ► Revise living trusts for ideas mentioned above for your will and MILIT but also empower your revocable trust to do more than just avoid probate. Make it a powerful tool to serve your needs as you age. Review trustee selection and consider adding an institutional trustee now or on disability, integrate the use of care managers at appropriate points to provide independent evaluations and reports, and more.

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Summary: Life insurance is the keystone of many estate plans. If life insurance fails to meet intended objectives it could prove a devastating issue for millions of families. Since the only planning constant seems to be change (changing investment world, changing insurance performance, changing tax laws, changing family dynamics, …) it’s a puzzle why most families that buy life insurance then ignore it.

√ Many folks setting up ILITs assumed (remember what happens when you assume!) that the insurance product they purchased was “guaranteed” when it wasn’t. That means that they (or their trust) assumed 100% of the performance risk as to how long that life Insurance contract would continue to remain in force. You assume risk with every stock you buy, but that is why you hold a diversified portfolio of many investments and rebalance that portfolio with professional guidance at least quarterly (right?). Your insurance needs the insurance counter-part to diversification and rebalancing.
√ Some people make insurance funding decisions based on limiting their annual “expense.” But how much money is invested in a permanent policy will determine how that policy will perform and how long it will last. Paying less might seem “cheaper” but it can over time undermine the policy.
√ 38% of in-force flexible premium non-guaranteed death benefit trust-owned life insurance (TOLI) policies are illustrated to lapse prior to the insured’s life expectancy due to inattention of the trustees, or the impact of reduced interest rates over the last 20+ years. Trust owned life insurance (TOLI) requires TLC!
√ 92% of ILITs have individual trustees. Some refer to these trustees as “accommodation” trustees. They simply accommodate whatever insurance policy the grantor setting up the trust, typically a close friend or family member, selected. The fact that Uncle Joe picked a particular policy doesn’t mean you have a get out of jail card when that policy blows up years later on your watch and your formerly cute little cousins sue you.
√ The policy illustration is not a guarantee. Don’t use it to compare different types of policies and a layperson should not use it to compare different policies of the same type.
√ Plan your MILIT to include a professional trustee, or an individual trustee that works with insurance professionals. Insist on periodic insurance reviews. Trusts should not buy insurance, but rather “manage” insurance. The distinction is more than semantics. Passive ILITs may prove to be planning time-bombs. Defuse them with proactive professional management.
√ Is there adequate cash to pay premiums? Can the trust borrow from the policy, surrender paid up additions, use other trust assets, or modify the policy by changing face amount?
√ A policy is like any other asset and must be reviewed every few years. Review the policy, insurance company stability, owner and beneficiary designations, and other factors. Different policy types have different risks and these should be assessed by someone with the expertise to do so.
√ Policy exchange may be beneficial. This should be evaluated perhaps every five years. If an exchange is to be undertaken it should benefit the beneficiaries, not the brokers. Before consummating an exchange evaluate whether it would be more prudent to surrender the policy or sell it into life settlement market.
√ Obtain a policy performance monitoring and risk management evaluation report from an independent insurance consultant or TOLI provider who can also assist in the identification and implementation of appropriate available policy remediation options and decisions.
√ Draft and implement a TOLI Investment Policy Statement (TIPS) that sets out an annual ILIT administration process intended to safeguard the interests of all affected. While institutional trustees have policies and procedures in place to monitor trusts, including insurance performance, most individual trustees fly by the seat of their pants. Not wise given the risks. In a significant case, In re Stuart Cochran Irrevocable Trust, 901 NE 2d 1128 (Ind Ct of App 2009), the trustee was relieved of liability for insurance decisions because it: ► Documented the process it used; ► Relied on the advice of a delegated agent who did not have a financial incentive; and ► It examined both the existing policy and the proposed replacement policy before the exchange. The process is key!
√ Is the policy still appropriate? With the changes in the tax law, what type of policy and amount of coverage is appropriate? Is the trust itself still adequate or can or should it be modified or merged (decanted) into a new trust?

Thanks to Henry Montag of Uniondale NY for his input.

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■ New York: NY has proposed increasing its estate tax exemption to approximate the federal exemption, reducing its rate to 10%, factoring post 4/1/14 gifts into the estate tax calculation and more.
■ Estate tax freeze via a note sale transaction: This has become nearly a ubiquitous planning technique for the wealthy. You sell assets to a grantor trust for a note freezing the value in your estate and avoiding any capital gains tax. This technique results from cobbling together various techniques. The Obama administration has repeatedly tried shutting it down. Now the IRS is trying to whack this technique by claiming that the transaction should be recast as a failed GRAT, subjecting the entire value of the transfer to the trust to gift tax. The Tax Court is considering this in Estate of Donald Woelbing v. Comm’r, Docket No. 30261-13; Estate of Marion Woelbing v. Comm’r, Docket No. 30260-13. GRAT in contrast has statutory authority. In a GRAT you take back an annuity and the value of the gift is reduced by the value of the annuity. If the transaction doesn’t meet the GRAT requirements the annuity is valued at zero so the gift is the entire value of the transfer to the trust. The IRS is arguing that the note sale is really a failed GRAT that does not meet the GRAT requirements. While this this position conflicts with Treas. Reg. § 25.2512-8 and the Wandry case indicated a note sale was permissible, consider this a clarion call to exercise extreme diligence in carefully structuring and administering note sale transactions.
■ State Taxation of Trusts: The NJ court reconsidered the landmark Pennoyer and Potter cases. A NJ testamentary trust was created. The sole trustee resided in NY and the trust was administered outside of NJ. The trustee filed and paid NJ tax on S corporation income attributable to income from NJ, but not on non-NJ income. The fact that the tax return showed a NJ address was not significant. The court held that the trust was not administered in NJ, the Trustee was a NY resident, and therefore NJ could only tax the trust’s NJ income. Residuary Trust A. v. Director, 27 NJ Tax 68 (2013). Evaluate all trusts to ascertain if there is sufficient basis for state income taxation and if so whether changes can be made (resignation of a current trustee and appointment of a trustee in a more favorable jurisdiction) to minimize state tax.

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■ General Power Trap: There is another growing trust landmine that anyone engaging in matrimonial planning should be aware of. When a taxpayer dies, any assets owned by that taxpayer get a step-up in income tax basis. This means unrealized capital gains are eliminated. If the taxpayer had paid $10 for an asset worth $100,000 the new tax basis on death becomes $100,000. Tax practitioners, to help clients capture as much basis step-up elixir as possible, have begun to use general powers of appointment more frequently to cause this basis-step estate inclusion. If a taxpayer did not own an asset on death, but had the power to appoint that asset to her estate, creditors or the creditors of her estate, that power alone will suffice to pull the assets into that taxpayer’s estate and generate the sought after basis step up. With the likely growth in these use of these powers, be alert to who may hold a power to redirect assets, whether such powers are themselves reachable in a matrimonial actions as marital assets, and whether prenuptial agreements should address the exercise or non-exercise of these powers. Should a prenuptial agreement acknowledge that the spouse not holding a power of appointment has no claims or rights, or ability to mandate an exercise of a power held by the other spouse?
■ Charity Letters: The IRS challenged a recent claim for a conservation easement deduction in which the taxpayer received a side letter that promised to refund of a cash portion of the donation, and even rescinding the easement, if the tax deduction was denied. Graev v. Commissioner, 140 T.C. No. 17 (June 24, 2013). The use of letter agreements to confirm how donations will be used is growing. Be careful not to torpedo your tax deduction by overreaching agreements.

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Lead Article Title: Heckerling Tasting MenuSummary: The Heckerling Institute of Estate Planning is the pinnacle of estate planning conferences, with an intensive week of seminars covering the gamut of estate planning. Hold on to your socks because there is sooooo many ideas as experts from around the country have digested the implications of the 2012 tax act and other recent tax law changes. Estate planning is being transformed by the new exemption, higher income tax rates, developments in technology, changing demographics, and so much more. Following is a teaser of a few of the myriad of topics that will be presented. These materials were obtained through a covert operation on behalf of Practical Planner loyalists that provided a sneak peak at the session materials that have yet to hit the press. This year’s conference is January 14-19 at the Marriott World Center in Orlando. See www.heckerlinginstitute.com for more information.

■ Stretchy IRA Distributions: The name of the game for IRAs has generally been to streeeeeeeetch out payments for as long as possible to defer income tax. A beneficiary may defer distributions over his or her remaining life expectancy, which often runs to about age 83+. That magic tax elixir may be zapped. Senator Baucus proposed requiring that most inherited IRAs and qualified retirement plan accounts be liquidated within 5 years of death. President Obama included this change in his 2013 budget proposal to Congress. A majority of the Senate approved the change in July 2013. This change would eliminate many of the planning hoops taxpayers have been jumping through for years, but it has really painful teeth for beneficiaries (an estimated bite of $4.7 billion). Exceptions to the 5 year rule may be provided for a surviving spouse (perhaps by permitting a rollover similar to current law), a beneficiary who is disabled or chronically ill, a minor child and others. Chris Hoyt, Professor of Law at University of Missouri School of Law will be addressing the impact of this change and what it means to estate, tax and investment planning.
■ Cool IRA Beneficiary: There may be a more interesting beneficiary to name for your IRA than what most people do. This approach may be ideal for baby boomers in their second (third, fourth….) marriages, and who have some of their 1970s do-good idealism intact. Many taxpayers named a bypass trust (a/k/a credit shelter or unified credit trust) as beneficiary to use up their estate tax exemption, benefit their surviving spouse, and assure that the value would not be taxed in the survivor’s estate. That was not a winner for a lot of reasons. But there may be a better way. Name a two-generation charitable remainder uni-trust (CRUT) as beneficiary. The surviving sopuse would get an annuity for life, e.g., 5% of the value of the trust each year (kinda like the payment of income from a bypass trust). When the surviving spouse dies the annuity stream could be paid to the children (e.g., to children of a prior marriage – boomers have a higher divorce rate than all preceding generations) for their lives. There would be no income tax triggered by the transfer from the IRA to the CRUT ‘cause CRTs are tax exempt. PLRs 199901023 and 9820021. On the death of the last child whatever assets remained in the CRUT would go to charity. That might be consistent with the way boomers begin to redefine retirement and estate planning as they did every other social institution over their lifetimes. Chris Hoyt will talk more about this strategy which might just grow in popularity in coming years.
■ Under 10M Estates: For estates not subject to the federal estate tax some taxpayers might assume that there is little planning to do, but hey we’re lawyers, there’s always something we can find to complicate their lives. The reality is that eliminating the need to address a federal estate at most obviates only one of the myriad of issues that comprehensive planning can address. Steve R. Akers, of
Bessemer Trust, will be addressing planning for estates not subject to the federal estate tax. Several of the comments below are drawn from some of the topics he’ll be addressing. The simplicity many expect is simply not practical. Maximizing income tax basis increases available on death is a major goal that will change the face of estate planning.
■ Portability: On the death of the first spouse portability permits the surviving spouse to use the first spouse’s estate tax exemption. In the past this benefit could not be captured without a bypass trust (you probably still want a bypass trust, but that may have some different provisions then in the past). So, on the first spouse’s death an estate tax return should be filed so that this tax benefit can be protected. Filing the return is how the survivor makes the election. While some taxpayers might object that the process is too costly, that is not necessarily the case. The decedent’s assets must be valued in all cases for basis purposes so the incremental cost of preparing a return may not be that much more. The portability regulations allow a relaxed reporting procedure to merely list assets qualifying for the marital deduction rather than listing values of each of the assets. Filling out the estate tax return for most estates will not be overly onerous.
■ Trusts: Many folks will be tempted not to use trusts and instead favor outright bequests if there is no perceived tax advantage. But liability and divorce risks make outright bequests a risky gambit. So trusts will continue to be the preferred dispositive scheme. However, trusts that provide for distributions to maintain the beneficiary’s standard of living (health education maintenance and support, or “HEMs”) may not provide the desired protection. Discretionary trusts, in which the trustee can determine if, when, and how much to distribute, should be favored. Another approach that will likely become more common is granting a beneficiary a general power of appointment over trust assets. That will cause estate inclusion and secure an increase (step-up) in basis. However, a general power may also expose the assets over which the power can be exercised to the reach of creditors as well. While trust planning may be assumed to be simple, navigating trust Scylla and Charybdis, won’t be simple, but Captain Akers will guide the way.
■ Home Sweet Home: For folks under the federal estate tax exemption ($10.5M in 2013 for a couple) state estate tax is the tax to avoid, and that may depend on which state they have the closest tax connection. States generally tax those who are resident for income tax purposes, and estates of those who were domiciled in the state. With some state income taxes reaching 13%+ the determination as to which state you a resident in for income tax purposes can have significant economic implications. With about 20 states having a death tax, determining when they can assess that tax is critical. Generally, the taxpayer must be “domiciled” in a particular state for that state to subject him or her to a death tax. The Black Law Dictionary defines “domicile” as “The place at which a person has been physically present and that the person regards as home; a person’s true, fixed, principal, and permanent home, to which that person intends to return and remain even though currently residing elsewhere.” That simple definition can give rise to a myriad of issues, among them that more than one state may claim you as a domiciliary to tax your estate. Adding to the complexity are the varying definitions some states have. Domicile can also be a sticky concept. While many people feel that they have moved out of a particular state, their “moving” might not be sufficient to break the tie of domicile in that prior state. The determination may turn on a subjective intent of where you intend to return. Domicile and residency often go hand-in-hand, but not necessarily. You might make more than a transitory visit to a state thereby subjecting yourself to income tax in that state, but retain your domicile elsewhere. Delaware, for example, includes in the definition of a resident for income tax purposes anyone who is domiciled in the state. A California case provides an extensive listing of factors to consider in the residency analysis and may be a useful starting point. Appeals of Stephen D. Bragg, 2003-SBE-002 (May 28, 2003). The decisions are very fact specific which means reviewing any case law in the states in issue will be critical. It also means that those who plan carefully to have the facts support the position they intend will likely fare better. The analysis has another dimension when evaluating income taxation of trusts. New Jersey, for example, provides that if a resident trust does not have any assets in New Jersey or income from New Jersey sources, and does not have any trustees in New Jersey, it is not subject to New Jersey tax. Thus, careful planning and administration of trusts may afford valuable opportunities to minimize estate income taxation of trusts. Richard Nenno and others: “There’s No Place Like Home, But Where’s Home?”
■ Follow Up Counts: Too often taxpayers and their advisers focus solely on how to implement a plan to maximize tax, asset protection and other benefits. While critical, without the appropriate follow-through, it’s not enough. If transfers are not reported properly on a gift tax return, an IRS audit could unravel the best of plans. Some folks prefer to have their CPA prepare the return. While that may be perfectly reasonable, consider: “Ultimately it should be the attorney’s responsibility to review the return to make sure that the transaction is reported properly and all positions are adequately disclosed.” Selecting the “right” appraiser is key. Courts have acknowledged industry expertise of a valuation witness while simultaneously discounting that expert’s knowledge of “fair market value” for tax purposes. Should the attorney, not the taxpayer, engage certain experts under a “Kovel Agreement” so that their work remains confidential? United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961). “Wrapping up your Gift Tax Return” by Stephanie Loomis-Price and others.

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Checklist Article Title: Grantor Retained Annuity Trusts (“GRATs”)

Summary: Grantor Retained Annuity Trusts (“GRATs”) have been a popular planning tool for many years. Maximizing that benefits of a GRAT will take more than just drafting a trust document that complies with tax law requirements, thoughtful selection of assets to fund the GRAT, and careful administration of the plan are crucial. The following checklist is drawn from “The Care and Feeding of GRATs” by Carlyn S. McCaffrey, Esq.

√ There are 8 tax requirements that must be reflected in the trust document for a GRAT to be respected for tax purposes. However, the IRS has argued on audit that merely reciting the requirements is insufficient and that the GRAT must be administered in accordance with those requirements as well. In Atkinson v. Commissioner, 309 F.3d 1290 (11th Cir. 2002), aff’g 115 T.C. 26 (2000) the court found that adherence to the charitable remainder trust rules, not merely listing the requirements in the trust, was required. This argument has been extended to GRATs which are patterned after similar rules.
√ A GRAT cannot issue a note to satisfy the annuity amount due the grantor. Treas. Reg.§ 25.270§ -3(b)(1)(i). That restriction does not prevent the use of notes issued by another person (e.g., the grantor’s spouse), or another family trust, to make an annuity payment. For, example, if the GRAT is having cash flow shortfall the GRAT might selling GRAT assets to a family dynasty trust for a note, and then use that note to pay the annuity payment to the grantor.
√ GRATs are grantor trusts during the period the annuity payment is made to the grantor. This means all income of the GRAT assets is taxed on the grantor’s income tax return. There are several important benefits to grantor trust status. No gain or loss is recognized if the trust sells appreciated assets to the grantor, or buys assets from the grantor. The GRAT can distribute appreciated assets to pay the annuity due without triggering gain. No gain occurs on sales between the GRAT and another grantor trust of the same grantor. The trust will be permitted to hold shares in an S Corporation. This is significant in spite of the popularity of LLCs in that there are over 2 million S corporations.
√ While some believe that a series of short term (e.g., 2 year) GRATs are always better than a longer term GRAT, especially if volatile assets (e.g., stocks) are given to the trust, this is not always the case, especially now. If interest rates rise or if tax laws change, it may prove preferable to have locked in the initial rates and rules.
√ While many transfers have relied on formula clauses to reduce the tax risk of the IRS challenging the valuation of a hard to value asset (e.g., an interest in a family business), GRATs remain the only assured approach to avoid the tax risk of a valuation challenge. This can be a safety net for anyone endeavoring to gift close to their remaining gift exemption amount ($5,250,000 in 2013).
√ GRAT annuity payments are permitted to increase 20% per year. Using an increasing payment GRAT can reduce cash flow requirements in early years, making the transfer of family business or certain other assets easier to structure. If the property will increase over time, an increasing annuity payment will result in the transfer of greater economic value to the remainder beneficiary.
√ Getting granular can enhance the results of a GRAT plan. If feasible establish several GRATs each holing a specific asset class (or get more granular with each holding a single asset). This can insulate outperforming GRATs results from the laggards.
√ There may be benefits to the remainder beneficiaries transferring their remainder interests in the
GRATs. This might be impeded if the GRATs include a spendthrift clause. If the transfer is a sale to a GST exemption trust it may permit a GRAT which is not efficient for GST tax planning, to effectively transfer the remainder interest to a GST exempt trust.
√ Make your GRAT a sure bet by funding it with carefully selected assets such as preferred family LLC interests, discounted interests, stock subject to a restriction on transfer (e.g., SEC or a lock up from a public offering, or restrictions imposed by an employer issuing the stock) that will end prior to the GRAT term ending, and other specific types of assets.
√ Monitor GRAT performance. If the assets in the GRAT don’t appreciate during the early years the GRAT will be unlikely to succeed. Consider buying the assets out of the GRAT and transferring them to a new GRAT.
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■ A detailed summary of current developments from the past year has long been a hallmark of the Heckerling Institute. The following won’t even qualify as an appetizer for what is to come. “Recent Developments 2013” Belcher, Harrington and Pennell.

■ With portability permanent many estates will (should) file a federal estate tax return to secure the first spouse to die’s exemption. Some experts have questioned whether a QTIP marital election is valid if the estate is under the federal exemption amount (and therefore did not need the marital deduction to avoid tax). This has profound implications in decoupled states that don’t permit a separate state QTIP election. The Treasury-IRS Priority Guidance Plan has added this topic.
■ The Obama administration has again proposed that estate, gift, and GST rates and exemptions revert to 2009 tax rate of 45%, $3.5 million estate and GST tax exemptions, and $1 million gift tax exemption).
■ The Supreme Court held that DOMA unconstitutionally deprived persons of equal liberty in violation of the Fifth Amendment. Windsor v. United States, 570 U.S. ___, 133 S. Ct. 2675. The ripple effects continue. For example, in Obergefell v. Kasich, 2013 U.S. Dist. LEXIS 102077 (S.D. Ohio July 22, 2013), an Ohio federal district court ordered the Ohio registrar of death certificates not to accept a death certificate for a gay couple unless it recorded his status as married and his same-sex surviving spouse’s status as his surviving spouse. This trend will likely continue.
■ Retaining the right to receive dividends on a life insurance policy to benefit his former spouse was not deemed an incident of ownership and the policy was not included in his estate. CCA 201328030.
■ In the Estate of Elkins v. Commissioner, 140 T.C. No. 5 (2013) the court permitted a 10% fractional interest discount on art.

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■ Delaware Incomplete Non-Grantor trusts (“DINGs”) were approved in several private letter rulings. The trusts were structured to avoid powers that could trigger grantor trust status. A distribution committee was used to approve distributions which could be made only with the consent of an adverse party. Because the donor retained a testamentary power to appoint the remainder of the trust assets among the donor’s descendants the transfer was not a completed gift. The donor’s consent power over the trust income and principal rendered the gift incomplete. The use of DINGs had been chilled by the IRS reexamining its earlier conclusions. These rulings likely will encourage a resurgence of Delaware DINGs (similar trusts in Nevada are referred to by the acronym NINGs). Current Developments 2013.
■ A topic receiving much attention is how to obtain a basis step up for assets held in a bypass trust. Some suggest granting a contingent general power of appointment to the surviving spouse to pull appreciated assets into the surviving spouse’s estate to obtain a basis step-up. While there are some risks with this consider including in the bypass trust a general power of appointment over the portion of the by-pass trust to cause inclusion in the estate of the surviving spouse for Federal estate tax purposes under Section 2041. See PLRs 200403094 and 200604028. Can the general power of appointment be granted only over appreciated assets? Perhaps appreciated assets can be defined as “…assets owned by the By-Pass Trust upon my spouse’s death the income tax basis of which may increase (and not decrease) pursuant to Section 1014(a) of the Code if such assets passed from my spouse within the meaning of Section 1014(b) of the Code.” Might it be feasible to structure a tiered formula of sequential contingent general powers of appointment to secure a basis step up on assets exposed to the highest tax brackets first? For those living in a decoupled state, the cost of a state death tax must be factored into the analysis. Some practitioners might prefer not having the spouse serve as the trustee if these powers are granted. “Clinical Trials With Portability” by Franklin and Law.
■ It is not uncommon that a surviving spouse fails to fund a bypass trust formed under his or her spouse’s will. It might be just an oversight, perhaps the surviving spouse was overwhelmed by the loss, etc. But what can be done after the fact to correct the situation? First identify the assets to be used to fund the trust. Determine, generally under state law, how income earned in the intervening period should be allocated among beneficiaries, including the to-be-funded trust. Be alert for discounts or premiums if a fractional interest in an asset is used to fund the trust. A funding agreement, along with transfer documents, may confirm the decisions made. “Funding Unfunded Testamentary Trusts,” by Davis.

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Lead Article Title: A Little of This, and a Little of That■ Revisit Your Prenuptial Agreement: ’Cause it was so much fun the first round! Portability, the right to use the estate tax exemption of your deceased spouse, was only made a permanent fixture of the estate tax law in January 2013. So, most prenups don’t address it, and for many couples that could be a biggie. Consider amending your prenup to address portability issues: ► Should a portability election be made? The tax benefits may inure to your new spouse’s kids, so your executor may not care. ►Who should bear the cost of electing portability which requires the filing a federal estate tax return that may otherwise not be required? Since the surviving spouse’s heirs will benefit, perhaps the surviving spouse, not the estate, should bear the cost. But, much of the work of filing an estate tax return has to be completed to determine the income tax basis of assets you held at death, so how should overall costs be allocated? ► Should the decision as to whether to file a return be left solely to the surviving spouse? ►If so, how will the spouse have the authority to act? Should he or she be named as a “special executor” solely for this limited purpose ► You might obligate your executor to cooperate and make available copies of any gift tax returns you filed, and asset data. Similarly, the surviving spouse may be obligated to provide your executor with a copy of the return filed. ► You might be obligated to file a state estate tax return and the decisions the surviving spouse makes on the federal return may affect that state filing, the cost and taxes for which your heirs may be responsible. Should you require that the surviving spouse provide your executor with a draft return to review in advance? What if there is s conflict in positions on the state and federal return?

■ Power up Your Power of Attorney: Powers of attorney need to change to Add to your durable power of attorney the following: “I hereby authorize my agent to exercise any power granted to me as Principal under any irrevocable trust to which I am, the “grantor” as such term is defined for purposes of the federal income tax laws, to swap assets out of said trust for property of equivalent value, if permissible for the Agent to act under the terms of said irrevocable trust. ■ Consider expressly authorizing your agent to borrow against your assets in order to raise cash to consummate the swap of assets with an irrevocable trust as provided for above. Better still, establish margin and other lines of credit now to facilitate an agent taking that action.

■ Self Cancelling Installment Notes (SCIN) Riskier: ►The IRS is a bit thin scinned about this estate planning technique. You can sell an asset to an heir, trust or anyone for a note. If you do, the value of the note is included in your estate. Notes can come in a myriad of flavors, and one such flavor is a cancellation feature. This could provide that if you die before the note is paid off, the note is cancelled. If its cancelled then there is no value to tax in your estate. Conceptually, so long as a fair price is paid for this benefit (which could be either a higher interest rate or a larger principal amount) it should be a fair deal. That was the concept behind the SCIN planning technique. ►However, in a recent pronouncement, Chief Counsel Advice 201330033, communicated the IRS’ tougher position on the SCIN technique. In the case, the taxpayer was in poor health when the sale occurred, and died six months later, before receiving any payments. The value of a note for gift tax purposes is the face value of the note plus accrued interest unless the taxpayer can prove a lower value. Reg. Sec. 25.2512-4. ►The IRS held that the notes should be valued using the standard gift and estate tax valuation paradigm, what a willing-buyer and willing-seller would agree to. Reg. Sec. 25.2512-8. That would include the decedent’s life expectancy, considering the decedent’s actual medical history on the date of the gift. ►The full value of the notes, ignoring the cancellation provision, was included in the decedent’s estate.

■ 2012 Gift Hangover: ►Many gifts made in 2012 used what is referred to as a defined value clause. A mechanism to cap the maximum amount of gift to hopefully avoid a taxable gift if the IRS successfully challenges the value of the assets as being worth more than your appraisal. ►Many 2012 gifts were made with appraisal guesstimates because of time pressure. When the final appraisals were received in mid-2013 the numbers sometimes difference considerably. You now have to pick through the exact language of the defined value clause, and the documents assigning the interests involved to see what has to be done. ► The results in some instances are surprising, and problematic. ►Example: At the end of 2012 you made a gift to irrevocable Trust-1 a sufficient amount of your membership interest in an LLC so that the fair value of the LLC interests, as finally determined for federal gift tax purposes, does not exceed $2.5 million. You also made a gift to another trust, Trust-2, of LLC interests worth $2.5 million. While you were certain your LLC interests were worth more than $5 million when the gifts were made, the actual appraisal valued all your interest at a mere $2 million. Did you make a gift of all of your interests to Trust-1? Did you gift ½ of your LLC interest to each of Trust-1 and Trust-2? ► What steps have to be taken to clarify or correct which trust owns what? Do you create a corrective assignment and state that ½ of your LLC interests are held by Trust-1, and ½ by Trust-2, since you intended to give an equal amount to each trust? Is the assignment valid since it might be interpreted as giving away more than you owned? It may all depend on the language used in the assignment or other transfer documents, and the defined value clause formula. ►If those documents are ambiguous then you may have to look to state law for guidance. That too may not be a simple decision since so many trusts were created in trust friendly jurisdictions like Delaware. Did the documents specify a governing law? Is it Delaware law or your home state law that applies? ►Might you have to transfer additional LLC interests you own to fulfill the mandate of the transfer documents? Reality is that many 2012 gift tax returns were completed in September and early October under time pressures not much less onerous than the time pressures under which the 2012 gifts were made. ►Go back and review the exact language contained in all relevant documents and determine what action should be taken to clarify any ambiguity. Be certain that the amended and restated LLC operating agreement, certificates (if your LLC issues them), and K-1s on the partnership income tax return, all reflect the same and defensible LLC interests. ►Some assignments were drafted so that up to the $2.5 million would be transferred. In those cases it might be that Trust-1 will own the entire interest transferred and Trust-2 nothing. If the language of the transfer documents supported that ½ of the transferred interests, each not to exceed $2.5 million was given to each of Trust-1 and Trust-2, then each trust may in fact own ½ of what was given, albeit worth less than anticipated. ► If the results from the assignment and formula clause is not what was intended, there may be some simple fixes. The moral of all this is that the governing documents on all sophisticated trust transactions needs to be carefully thought through and a myriad of “what-ifs” considered. Those seeking to complete sophisticated planning on a shoe-string will often find themselves confronted with problems from cutting corners. Last year, 2012, was unique, and there was simply insufficient time to address all the potential nuances. Unfortunately, the 2012 gift tax returns did not afford many taxpayers the opportunity to revisit and rethink all of their 2012 planning. ► Circle back now, and use whichever of the many options available to correct or shore up these types of issues. It may be possible to decant or merge the trusts into new trusts that better accomplish the intended goals. Also, since the estate tax laws many feared would sunset on January 1, 2013 were made permanent, if Trust-1 received the entirety of the gift, make new gifts to Trust-2 if that will accomplish your goals. ► It may be feasible from the powers given to a trust protector or others in the trust documents to tweak the results to get closer to your intended goals.

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Checklist Article Title: Existing Bypass Trusts

Summary: One of the most common estate planning techniques is the bypass trust. If your spouse predeceased you, you likely have a bypass trust now. If not and both of you likely have bypass trusts in your wills (or in your revocable trusts). In a nutshell a bypass trust is intended to give the surviving spouse access to the assets it holds, yet keep those assets from being taxed in the survivor’s estate. To assure maximum confusion, lawyers will call bypass trusts by many names: applicable exclusion trusts, credit shelter trusts, exemption trusts, family trusts, etc. Let’s say your spouse died and you have a bypass trust now. What are some of the points to consider?

√ Do you need the trust: Probably, but perhaps for different reasons then you think. Most discussions start and end with estate taxes. But estate taxes are only one part of the analysis. Assets in a bypass trust may escape creditors and claimants. We live in the most litigious society in history and that won’t change so don’t terminate the trust without careful consideration of the asset protection it provides for you, and possibly your heirs. Elder financial abuse is epidemic. If you have funds snug in an irrevocable trust that alone may justify keeping the trust going.
√ Are you really saving estate taxes: Maybe. Most bypass trusts were created when it was assumed that a 50% federal estate tax could apply to all assets over $1M. Now, there is a permanent inflation adjusted $5M exemption and portability (your surviving spouse gets your unused exemption even without the use of a bypass trust). So very few folks will be subject to a federal estate tax. If you’re married and have a net worth say over $8-10M using a bypass trust may sound like a no-brainer, but there are much better planning options. For everyone else, if there is no federal estate tax the only estate tax savings is if you live in one of the approximately 20 decoupled states (e.g., NY, NJ, MA, and CT) but the maximum rate is 16%. That is not insignificant and your heirs will likely appreciate the savings, but for most folks the savings are nothing like what was anticipated when the trusts were drafted.
√ Oh, but you lose the basis step up: Many estate planners are suggesting you won’t benefit from a bypass trust because on the death of the second spouse the assets in the trust will retain the same tax basis for determining capital gains. In contrast, if the assets were held outright by the surviving spouse, the tax basis would increase to equal the fair value of those assets on death and the capital gains on pre-death appreciation will disappear. All true, but not the whole story. Many older people (and its usually older folks that have funded testamentary bypass trusts) have a relatively conservative investment allocation. If you locate bond accounts in the bypass trust and equity accounts in your own name, you can retain your desired asset allocation, but eliminate any post-death appreciation the bypass trust, rendering the basis argument moot. Proper investment management has always been a key to successful estate planning, now its even more important.
√ Bypass holds appreciated assets: Your wealth manager may be able to harvest gains and losses and reduce those appreciated positions over time. If that won’t suffice, read the language of the will that created the bypass trust, including the often ignored provisions near the end (too often dismissed as “boilerplate”). Your trustee may have sufficient flexibility to distribute appreciated assets to you as beneficiary. If so, those assets will be included in your estate and receive an increase in income tax basis on your death. If you live in a decoupled state you have to weight the capital gains savings to your heirs versus the increase in state estate tax the distribution might entail.
√ You really don’t need or want the bypass trust: You weigh all the pros and cons and determine that in spite of my best efforts above to convince you otherwise, you really don’t want the cost and hassle of the bypass trust. Again, carefully read the entire will that created the trust. Some bypass trusts permit a distribution of “any and even all principal.” That might suffice for the trustee to simply distribute trust asset to you and terminate the trust. Many bypass trusts limit distributions to an “ascertainable standard” which means maintaining your standard of living. That language rarely would permit the termination of a trust. Many, perhaps most, trusts have “spendthrift” provisions. A court would be loath to easily terminate a trust with such a provision since it indicates that the testator establishing the trust intended to protect beneficiaries with such a clause.
√ If you do terminate: Consider having everyone sign off acknowledging the termination to protect the trustee making the distribution.

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■ Charitable Gift Agreements: It’s becoming more common for donors to work out arrangements with charities when large donations are made. These agreements should specify the use of funds, naming considerations (what any dedication plaque will say, where it will be displayed, etc.) and other considerations of concern to the donor. Also, the details should be flexible enough to give the charity reasonable latitude to address changing circumstances, but without thwarting donor intent. Likely that the use of this formality will grow. As a recent court decision makes clear, charities must take these commitments seriously. Charities can’t solicit funds for a particular project and then put the funds to another use. In Adler v. SAVE, the New Jersey court required a Princeton, NJ animal shelter to return $50,000 donated by a couple who expected the donation to fund construction of a new facility that was never built.
■ Reasonable Compensation: Reasonable compensation can be a critical factor in planning for any closely held business. If you own an S corporation, you might be tempted to pay a modest salary and draw out profits as a distribution to avoid payroll taxes. The IRS could argue that the salary you’ve taken is unreasonably low. If you make a gift of business interests to a trust, you might take out an excessively large salary since you cannot receive all of the distributions if you no longer own all the stock. Taking an excessive high salary might be argued by the IRS as proof that you never really gave away the stock. The compensation porridge cannot be too hot or too cold, or the IRS bear might snarl. Reasonable compensation, however, must be based on all the facts and circumstances. In a recent case the IRS expert evaluated gross revenues of a real estate business, but the court said all facts and circumstances had to be considered. Sean McAlary Ltd, Inc., TC Summary Opinion 2013-62. When tax issues become a facts and circumstances test careful homework along the way, corroborating the reasonableness of the positions taken, may go a long way towards supporting the desired result.

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■ Islamic Estate Planning. It is obligatory on all Muslims to make certain that the distribution of their estate is done in accordance with Islamic law. The Qur’an, provides guidelines as to how assets should be bequeathed. These rules are further clarified in Hadith. These requirements can be integrated into a modern estate plan. But caution is in order. Significant assets are often transferred outside of probate. Without careful planning non-probate assets might inadvertently fall outside the ambit of a well planned estate. One step would be to establish a revocable living trust that would own, or be named beneficiary of, certain assets and provide for the proper disposition. Many people after creating a Sharia compliant will might assume that they’ve addressed any steps required. However, the disposition of significant assets might be governed by how they fill out bank and brokerage account forms, or how title to a checking account was created. Joint accounts, pay on death (POD) accounts, and similar titles could result in a dispositive scheme that unintentionally violates Islamic law. Title to every asset, and every beneficiary designation, not just the will, must be reviewed. Thank you to Dr. Majid Khan.
■ Administering Complex Trust Plans: So you set up an insurance trust and skipped visiting your estate planner, CPA and insurance agent for 10 years. But you think the trust is fine and golly you saved all those professional fees for all those years. Well cowboy, you may be riding in the wild west of estate planning but don’t you’re forgetting your Shakespeare, “All’s Well That Ends Well.” And bluntly you won’t be hear when it ends to see if it is well. Neglecting what might be perceived as a “simple” insurance trust is bad enough (Crummey powers, hanging powers, insurance policy performance, gift tax returns and GST allocations and more). But if you think you’re going to be slick and skip properly administering the more complex trusts that proliferated in 2011-12 you’re playing with fire. These trusts were far more complex then the simple insurance trusts (which in reality were never simple). While the typical insurance trust has a trustee, the SLATs, DAPTs and other acronym trusts, may have an institutional general trustee, an investment trustee, a loan director, a person empowered to substitute assets, someone else authorized to add charitable beneficiaries, and more. The complexity grows from their. Heed the warning from your favorite car commercial: “Professional driver on a closed course.”

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Lead Article Title: Survey of Current Tax, Estate and Financial Planning IdeasSummary: Commerce Clearing House (CCH) publishes one of the most widely used on-line tax, estate and financial planning research resources. Their Board of Directors meets annual discuss the state of planning, this issue of Practical Planner summarizes many of the ideas from the recent meeting. Professional advisers can get a copy of the transcription of the entire program from CCH at ####.■ Permanent Changes: We now have a $5 million, inflation adjusted, permanent, transfer tax exemption. But are the 2012 tax law changes really “permanent”? President Obama has already proposed in his budget (Greenbook) subsequent to the 2012 act to change the “permanent” rules to rules which, you guessed it, tax the wealthy more. Do we really have permanency? Few commentators are really convinced this is the case. So while we can all pretend the law is permanent, it seems that nary a tax specialist around is convinced. What does that mean to taxpayers? If there is a tax break you can benefit from, like valuation discounts, sales to grantor trusts, etc., grab ‘em while you can.

■ Planning for Large Estates: What planning is being done for large estates? Do we mean venti, grande, ###? Whatever. Anyone worth more than the federal exemption, those worth less but who live in decoupled states with low exemptions, and anyone else who just loves to have complex and costly estate planning, should continue to deploy the existing arsenal of estate tax planning techniques used in the past. Many of these can be tweaked to better deal with the higher income tax rates. Several of these fall in the category discussed above of “grab ‘em while you can.” ♣ Is there anyone who is wealthy who did not make large gifts to trusts in 2012 before the law may have changed? The few of you who remain should use what remains of $5.25 million exemption. Most if not all gifts should be made to irrevocable, dynastic, grantor, trusts (there’s a long list of remaining adjectives, but…). ♣ Self-settled, asset protection, completed gift, trusts remain popular for some. These are trusts to which you gift assets, intend those asset be removed from your estate, yet you remain, in some fashion, a beneficiary of the trust. In spite of several recent court cases ruling against self-settled trusts, there were no grumblings from the Board when one well known adviser mentioned that he continues to use these. That’s good news for anyone worried about lawsuits, malpractice, taxes, or divorce (does that leave anyone out?). Nonetheless, caution is in order. ♣ GRATs (grantor retained annuity trusts) remain popular, despite the fact that the President’s Greenbook still recommends limiting these to a 10 year term. For those wealthy folks who have used up their exemption amounts, GRATs, which shift the growth in the value of assets above a hurdle rate of return outside the estate, with little or no current use of gift exemption, are an ideal tool ‘cause you don’t really need to use exemption to avoid a current gift tax cost. ♣ Sales to defective grantor trusts are hot since interest rates remain low and many asset values have not fully recovered from the recession. President Obama has targeted this technique for restriction or repeal. ♣ FLPs and LLCs provide control, asset protection, and valuation discounts. Recent cases on discounts seem to vary as to amounts of discounts that might be allowed, but in most cases meaningful leverage can be obtained. ♣ SCINs (self-cancelling installment notes) can be used when say a parent sells asset to a child or trust, and if the parent dies before the note is repaid in full, the note is cancelled. ♣ Transfers to grantor trust remain the rage. These trust have you, as the grantor/donor continue to pay income tax on income earned by the trust. This characterization continues to reduce your estate by the income tax paid and most important, permits you to swap assets without triggering capital gains. This can enable you to bring appreciated trust assets back into your estate so that their tax basis (the amount on which gain or loss is calculated) is increased (stepped-up) to fair value at death. ♣ Low interest loans to family members are a simple technique to shift growth out of a benefactor’s estate while interest rates relay low. ♣ Split-dollar insurance loan arrangements are another type of loan technique used to purchase life insurance. Low rates make these useful, but also, the incredible income tax benefits permanent life insurance affords, and continued estate tax leverage, make these transactions popular. ♣ Partnership freeze transactions are useful if you own negative basis real estate and in other circumstances.
■ Gift Planning Human Aspects: ♣Tax driven planning will not be particularly relevant for most clients. Only about 3-4,000 estates a year will pay a federal estate tax. That being said, about 20 states have decoupled from the federal estate tax rules so many estates will face state estate or inheritance taxes. While these can “add up” the 16% highest rate is nothing like the confiscatory estate tax many would have faced. What all this means is that the estate planning conversation will finally have room for more than a discussion of taxes for most folks. That’s a good thing IF people still pursue planning. ♣ Planning will focus more on personal goals and what is often referred to as values based wealth transfers. This is the warm and fuzzy stuff many advisers did not learn about in law school! How do you want to incentivize your descendants? What types of values do you want to communicate to your heirs? ♣ What benefits do you wish to create for your heirs? ♣ You should create a statement of objectives, a sort of “family wealth charter” analogous to a business’ mission statement. What is your intent for bequests? What do you hope the money left will do for your heirs? What planning desires might you provide as a guide for heirs and trustees? This statement should be reviewed periodically and refined. It should evolve over time as your wishes become clearer and your heirs begin to be brought into the planning process. Have you ever had your children to an estate planning meeting? You should! ♣ While everyone of means lamented the estate tax as the ultimate destructive force of family wealth, the estate tax at its worst did not hold a candle to the negative impact of family controversy, liability issues, and divorce. Of late, and especially for those of moderate wealth, health issues can be the biggest threats to family wealth. These aspects of planning are stepping out of the planning shadows and starting to receive the attention they deserve.
■ Will Drafting. ♣ With no estate tax, many will favor simplicity and opt for outright distributions to heirs instead of trusts. That will prove one of the worst decisions they can make. The better answer if there is any substantive wealth involved will be long term or perpetual trusts. Nothing can guard wealth better from taxes, divorce or lawsuits then a trust. The control or complexity issues are really a smoke screen or excuse clients use to avoid doing what is best. ♣ Wills should include broad authority to shift trust situs to move, if feasible, a trust to a less taxing state if the beneficiaries and trustees move. This is also important as the nuclear family continues to disintegrate and mobility increases. ♣ In moderate estates, include the right, or a mechanism, not to fund trusts provided in the will, or to terminate trust once formed. Flexibility is key. (Doesn’t this contradict what I just said above about trusts being the cat’s meow of planning? Of course, but us lawyers are allowed to make contradictory statements). ♣ Define capital gains as part of income so trustees can distribute capital gains out of the trust. This may permit capital gains to be taxed to beneficiaries in lower brackets. ♣ It might be more common, especially for first marriage situations, to include a power to distribute appreciated assets from bypass trust. This will enable the family to include those assets in the estate of the second spouse to die and thereby capture a basis increase (step-up) on the second spouse’s death.
■ Life Insurance Planning: ♣ Many taxpayers purchased life insurance to cover estate taxes, now what should be done? Most taxpayers are retaining their life insurance policies as investments or as a secure means of passing on wealth to their heirs. For those retaining policies as investments, review analyze the types and performance of policies to see what can be improved. New policies might tend to be on one life rather than survivorship (pay when the last of the husband and wife die) when the motive is ballast for an investment portfolio rather than payment of estate taxes. ♣ Regular policy reviews are more critical then ever. This is because of the changes in tax environment, looming interest rate changes, evolution in the use of policies, and more. ♣ Who should be the beneficiary of the insurance policy? If someone dies or divorces who should receive the proceeds? It is essential to ascertain who is named in the beneficiary designation forms and what has actually been filed with the insurance company. Any time there is a life change the beneficiary designations should be considered. In almost every case, a properly crafted irrevocable life insurance trust will be the beneficiary and owner of choice. ♣ Private placement life insurance is an attractive investment opportunity. The private variable life policy has loads that are quite different than commercial VULs. ♣ It is growing more common to have trusts own assets other than life insurance. This will change the dynamic of insurance trust planning.

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Checklist Article Title: Income Tax Planning

Summary: The CCH Advisory Board also tackled the new income tax paradigm. We face some of the highest income and capital gains tax rates in many years, and there is more progressivity in the tax system as well. More attention to the income tax consequences of planning, even of estate planning, is the new normal.

√ Gifts (and other transfers) should be to grantor trusts. As explained in the lead article this supports continued tax burn as the donor pays income tax on trust earnings, but more importantly permits you to swap assets transferred to the trust back into your estate to capture a basis step up. These two benefits are so powerful that those taxpayers meowing for simplicity or cheap planning will miss out on the tax planning fun.
√ Buy back or swap assets before death to obtain basis step up. If you’ve left your Ouija board at home, you had best opt for periodic reviews with your advisers to identify what assets to swap or move where, when and how.
√ Integrate income tax planning with your overall investment strategies. Consider the new dimensions to the income tax system: 39.6% tax rate on high income individuals, an additional 5% capital gains rate, a 3.8% Medicare tax on net investment income (NII). 0% capital gain rate in 15% bracket, 15% rate up to $450,000 of income for a married couple, and 20% over that. The different income levels at which itemized deductions are phased out, the highest tax brackets, kick in, or the Medicare tax applies, will leave those using seat of the pants tax planning behind. You need to plan over a longer term horizon to ascertain when to realize gains so can minimize capital gains rates. When you identify the different thresholds, you can then project how much additional income to trigger before you hit the next tax threshold. Then you can trigger just the right amount of income, not to much, not too little. Kinda the tax version of the three bears and the porridge.
√ For trusts the high brackets apply at very low rates. In 2013 trust income over $11,950 is zapped with the highest capital gains tax and the 3.8% tax. So planning distributions to beneficiaries, and assuring flexibility to distribute capital gains and to be able to include them in accounting income, will facilitate watching the thresholds applicable to trusts.
√ Taxpayers will need to do projections, especially from age 70 ½ to ascertain marginal tax rates to plan. For example, is may be advantageous to do a Roth conversion.
√ Charitable remainder trusts (CRTs) are hot because they can be used to minimize income taxes. CRTs can avoid higher rate today, and can distribute out at lower rates when you as a beneficiary are in a lower rate bracket, e.g., after retirement.
√ If you’ve stopped working you may be under age 70 ½ and have not yet been required to take required minimum distributions (RMDs) from you retirement plan. Conventional wisdom has been to defer taking RMDs until you had to. But now that tax rates are more progressive it might now be advantageous to take some of that income in that gap years between retirement but before 70 1/2 to realize it at lower tax brackets. This may reduce the ultimate RMDs that come out of your IRA.
√ Have your CPAs review investment planning considerations when they review your income tax returns. Have them coordinate with your wealth managers. Income tax planning must be more integrated than ever before with the overall financial plan.
√ Investment and tax planning should be considered when evaluating estimated tax payments. Carefully orchestrated gain harvesting might lower the required tax estimates.
√ Locate high earning assets (asset location) in qualified plans to shelter the income from the higher income tax rates.
√ Pack assets into your Roth IRA when feasible. Use 401(k) plans to shift assets into Roth IRAs.
√ Use ETFs and other efficient techniques to minimize current income taxes.
√ Diversification is critical in light of continued investment uncertainty.
√ Interest rates make it vitally important to address interest sensitive investment assets. There are more rate increases to come. This will have a significant impact on costs of margin accounts on leveraged portfolios, asset allocation and more.

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DOMA: ■ In the recent Windsor case the Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. Marriage is no longer defined for federal law as between a husband and wife. State definitions of marriage will control, so if you are married in a state that recognizes your marriage, the federal government will have to recognize it too. ■ The IRS has quickly followed suit issuing Revenue Ruling 2013-17 and two sets of Frequently Asked Questions (FAQs). Planning for same sex couples will never be the same. Anyone affected should revisit planning immediately, especially the potential for filing tax refund claims. ■ A qualifying couple will be treated no different than any other married couple for federal estate tax purposes. This means for the first time same sex couples can plan their estates using marital trusts and all the planning options others have used. Wills and all other planning needs to be reviewed and documents revised. If your same sex spouse died recently and a tax was paid, it may be advisable to file a refund claim in case the IRS permits this. Even though the FAQs generally apply prospective, income tax refunds are permitted. Perhaps estate tax refunds will be too. ■ If you were married in a state that recognizes same sex marriages but then moved to a state that does not, you will retain the protection of marriage status for income and estate tax purposes. There had been uncertainty as to whether you had to live in and die in a state that recognized same sex marriage. No longer. ■ If one same sex spouse had left a pension to a charity or parent, if no waiver was signed, with DOMA repealed the surviving spouse may have a claim on these retirement assets. ■ Registered domestic partners or those who have entered civil unions will not be treated as married for federal tax purpose. These couples should evaluate the benefits of being married in a state that permits it since the tax consequences of marriage are now available with certainty, and the economic benefits can be substantial. ■ Couples should amend prior income tax returns for 2011 and earlier open tax years (3 years from filing) and file a married filing joint return before the statute of limitations runs. The savings for some could be significant. ■ What happens to couples that filed single and would have paid more tax if they had filed married filing joint? The IRS will not require that they amend prior returns and pay more tax.

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■ Powers of Appointment. ♣ This is cool stuff so don’t skip this! ♣ Powers of appointment for you non-tax geeks are rights to appoint or designate where assets, such as in a trust, can be distributed. A general power of appointment includes the right to appoint trust assets to your creditors or your estate. This right causes the assets to be included in your estate. ♣ So what’s the hottest new idea since the Sham Wow? Expand the scope of beneficiaries of trusts to facilitate income splitting. For example, a typical credit shelter trust in the old days (pre-2013) may have only had the surviving spouse as a beneficiary. Now, include your mother and mother in law (imagine how fund annual trusts meetings can be!) can all get distributions to spread income to those in the lowest tax bracket. ♣ But just like the Sham Wow infomercial, “there’s more!” ♣ Give an independent trustee the right to give these folks general powers of appointment over appreciated assets, or negative basis real estate investments, so that those assets can be included in their estate to get an increase in basis on their deaths for assets held inside the trust. Wow! That’s cool! ♣ So if your mother in law is not loaded she can be given this right. She doesn’t have to act on it, it just has to be there. Appreciated assets subject to her general power of appointment are pulled into her estate, but if she is well below the $5M federal estate tax exemption, and lives in Florida which has no sate estate tax, the tax basis of those assets will be stepped up and capital gains will magically disappear, and no estate tax will be triggered to get this great income tax benny. ♣ Be careful that if this is an institutional trustee they may be quite concerned and cautious about exercising the power. ♣ Do this with caution because of creditor issues (does your mother in law drive like your teenage son?). beneficiaries rights are being expanded by states. Most states are expanding the rights of beneficiaries to receive information about trust operations and assets, the right to demand an accounting of the trust, etc. To some extent this can be addressed by selecting a state (situs) that limits these rights. This is yet another example of why the default planning answer is to set up trusts in a trust friendly state like Nevada or Alaska, ya never know when or how it may come in handy. ♣ Creative uses of powers of appointments could prove to be the tax planning gold that grantor trusts have been. That’s a big statement. ♣ Less creative uses of these powers will likely prove to be the optimal retirement plan for many probate litigators.

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Lead Article Title: Your Planning TeamSummary: Fostering a coordinated financial and estate planning team is perhaps the most important steps that you can take to assure that your planning is properly handled. Advance apologies if some portions of this article ruffle feathers, but that’s far better than the adverse consequences that might otherwise happen if your team is not coordinated. Some of the most significant planning opportunities, and some of the most costly planning problems, are not squarely within the purview of your attorney, CPA, wealth manager, trust officer, or other planning members, but rather in the less well demarcated overlap between the various disciplines. Remember those Venn Diagrams from grade school with the three overlapping circles? The point where the three circles intersect, the issues of tax and finance that draw on your CPA, attorney and financial planner, is so often the planning sweet spot. In most cases your lawyer cannot advise you how to optimally operate a trust without consideration of which assets are held by the trust. That’s an asset “location” (not allocation) decision. And if your attorney and financial adviser try the task alone, without the insight of your CPA on income tax considerations, they’ll miss the mark. Remember how mom always told you that “two heads are better than one?” Well they are, and three and four heads on a planning team are exponentially better still. There is another important reason for coordinating your team: checks and balances. Some advisers are incompetent, some are downright scoundrels. So insisting on coordinating the team will protect your financial and legal affairs. More commonly, no adviser can know everything, not even the top in their field. So coordinating your team will permit other advisers overlap and help compensate for an adviser that lacks the skill or insight to address a specific issue. When the team functions well, everyone watches your back and you benefit. So if a coordinate planning team is the cat’s meow, why doesn’t it really seem to happen enough? What can you do about it?

■ It Costs Too Much: Let’s start with number 1 on the Letterman top 10 list of why advisory teams don’t function properly. It’s a classic case of “penny wise and pound foolish.” The benefits of a coordinated team will almost assuredly, and in almost every case, outweigh the costs, often dramatically so. People worry that it will cost too much. “If my CPA talks to my attorney they’ll both bill me!” True. But if they both talk your planning might actually work. The better answer is to minimize the costs of the team functioning as such. Permit advisers to interact directly without your involvement. They can talk more freely, and using technical jargon, all of which will expedite the process. The cost of copying other advisers on an email to you, or anyone on your planning team, is negligible.
■ Emperor’s New Clothes: Many folks think they have a “team” because they have a CPA, an attorney and a financial adviser. The emperor may have had pants, a shirt and underwear in his dresser drawer, but he was still au natural. The fact that you have the component parts is good, but unless they operate as a team, you’re missing out. You as the client have to authorize and direct your advisers to communicate. Many advisers are reluctant to reach out to other members of your team because they’ve been chastised by clients in the past for doing what they know is right.
■ Adviser Arrogance: Coordinate often doesn’t happen because of adviser arrogance. The attorney assumes that he or she understands everything necessary to create a plan and irrevocable trust and doesn’t communicate with your CPA. But after the 2012 tax act, for most taxpayers the income tax is far more important than a federal estate tax that they no longer face. Most attorneys simply don’t have the income tax knowledge that most CPAs have. And even for those that do have the knowledge, even fewer have the experience CPAs do preparing tax returns. While some lawyers may look down on tax return preparation as an inferior tax “activity” to research or planning, understanding how to report a transaction is a critical part of the planning process. This also works in reverse with many CPAs presuming that an attorney will add nothing to the review of the income tax returns they prepare. While this might be the case in ordinary situations, for the first year of a new entity or trust, or if the underlying planning is quite novel or complex, involving the attorney who prepared the plan and documents in a least a limited review capacity, can be critical to properly reporting the transaction. Some wealth advisers and trustees have added estate planners, CPAs and other professionals to their staff. That can be a great backstop and second opinion for a plan, but too often some in the wealth management community view their internal staff as all that is necessary to handle trust administration or even planning. That too is a mistake. A CPA, even if less technically proficient than the staff accountants at the trust company you use, may have a decades long relationship with your family and may understand your goals better than the trust company. Often, CPAs and attorneys working “in the trenches” have a different type of perspective. So even if the wealth management firm’s staff has more technical knowledge, they don’t have the same perspective. Adviser arrogance is easily resolved. You as the client have to make it clear that you expect a coordinated team effort. When wealth management, CPAs and attorneys work in concert the team will play beautiful music, and you’ll benefit.
■ Adviser Ignorance: Some advisers, e.g. an older small adviser you may have outgrown years ago, naysay anything a new or more sophisticated adviser recommends. Instead of admitting ignorance or discomfort with a document, plan or product, they negate it. There are several ways to assure that this common roadblock doesn’t happen. Encourage advisers to review planning as a team without your involvement. An adviser who doesn’t understand a technique will be more likely to ask questions freely if not embarrassed in front of you as the client. Welcome new ideas from your team, and if another adviser shoots an idea down, understand why.
■ Adviser Control: The more one adviser can control of your financial, estate and legal planning process, the more they can gain from your relationship. But their gain is not necessarily your gain. If a bank and complete income tax returns for a trust, and provide estate planning services, that’s great if they have the returns prepared or reviewed by your independent CPA before filing, and review the estate planning recommendations with the team. If not, are they seeking to enhance the perceived importance they have to you at the expense of the rest of your advisers? Insist on full cooperation and an approach that strengthens the team, not one adviser’s position.
■ Adviser Greed: Thankfully this is a bit rarer, but it does exist, and your team can protect you. If a “financial planner” suggests you buy a product, but suggests you don’t need to speak to your other advisers, be like Uncle Martin on My Favorite Martian and raise your antennae. Recently, an “insurance consultant” had a client’s insurance trust sell all life insurance and buy annuities. The sales person told the clients that there was no need to consult her attorney who wrote the trust or her financial planner who managed all her money. Apart from violating the trust, not providing the cash flow to the desired persons, and being inconsistent with the clients financial plan, it was the active discouragement from communicating with other advisers that permitted this misguided “plan” to be implemented for the financial betterment of the consultant. The stories of high commissioned products being sold when obviously inappropriate is legion. So too are the incidences of other advisers milking an elderly or ailing client that is too feeble to protect themselves. Did the elderly person name their attorney as sole executor because of a long term relationship, or as a result of overreaching and manipulation? If any adviser insists that a new plan or major decision doesn’t need to be reviewed by any other adviser, that is the sign that you must review it with your team.
■ Compartmentalization: A common occurrence is for clients to tell each adviser something different. This may not be intentional and may only result from the different types of matters each adviser may address. The reason is irrelevant, but the reality is important. When your advisers each freely share information each is likely to be better informed about your facts and circumstances. Yes, some cost, but more important, your planning will likely improve.
■ Yes Men: Some folks just love to hear what they want to hear. Some advisers are only too happy to say whatever those magic words are to keep a controlling client happy, on board and paying their bills. That destroys the free flow of ideas from a team. This is common because so many people seeking estate planning services have forceful personalities, after all, that is what enabled them to be successful and amassed the wealth for which they need planning! Encourage the free flow of ideas, especially dissenting ideas. The dissenting opinion might just be the most valuable to you, and may if followed break the damn on other beneficial planning scenarios.
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Checklist Article Title: New Tax World

Summary: After the 2012 tax act most folks will never face a federal estate tax. If you’re a family under the $10.5M wealth level, or an individual under $5.25M (and those amounts will be adjusted upward for inflation in future years), then what do you do with existing planning? In some cases you might just be best off eliminating planning that was done previously, but in most cases you can retool prior planning to make it work better under the new tax rules. (Before zapping Consider the following:

√ Family Limited Partnership (FLP) or Limited Liability Company (LLC): Many of these entities, holding family investment assets, were formed to create discounts that would reduce estate taxes. Now, however, if your estate is not likely to be subject to an estate tax, you might not see the point of keeping that FLP/LLC around and paying annual fees to your CPA for the income tax return, legal fees, complexity and more. But before you zap that FLP/LLC reconsider how you can still benefit. ◙ The entity might provide valuable asset protection. In most states if you own only a portion of the interests in the entity it can be quite difficult for a claimant to realize any benefit. ◙ In divorce, the entity might avoid commingling immune assets with marital assets and protect a child who has received gifts or inheritances outside of trust. ◙ If you want to avoid discounts have the partnership agreement (LLC operating agreement) revised to eliminate the restrictions that previously created them. In that way, on death, the absence of discounts will mean a greater step up in tax basis and lower capital gains for your heirs. Be cautious in the changes made to accomplish this as you don’t want to excessively undermine the asset protection the FLP/LLC provides while eliminating the discounts. ◙ If you’ve given away interests in the FLP/LLC to heirs, it may be possible to reinforce or even create retained interests that for estate tax purposes might bring the entire FLP/LLC back into your estate for basis step up purposes. That could be a better result than liquidating since only your interests would then get a basis step up. ◙ Finally, so long as you meet the tax rules of Code Section 704(e) you can use the FLP/LLC to shift income to lower bracket family members.
√ Bypass Trust: Many widows and widowers have existing bypass trusts formed when their spouse passed away. These trusts may have made a lot of sense at the time (and even until last year when there was worry of the estate exemption dropping to $1M), but do they make sense now? ◙ Does the cost of filing a tax return, dealing with an attorney, and the complexity still pay to keep? If you assuredly won’t face a federal or state estate tax, it may not. ◙ If the assets in the bypass trust have appreciated (e.g., stocks held for years) your heirs won’t receive a step up in income tax basis on death to the fair value of those assets. So they will face a larger capital gains tax. That capital gains tax may outweigh any state estate tax your estate will bear. The trustee might have authority to distribute out appreciated assets so that they do, even if the trust is not liquidated. ◙ The trust might be able to provide significant income tax savings if all your descendants are named beneficiaries by distributing income each year to the beneficiaries in the lowest income tax brackets. ◙ In some cases, unless the asset protection (lawsuit protection) benefits of the trust remain meaningful, you might just want to distribute the trust out and close it down (assuming the terms of the trust permit this).
√ QPRTs: Qualified Personal Residence Trusts are special trusts to which you may have given your house to remove it from your estate in a tax advantageous manner. ◙ If you did this when the exemption was much lower, you may no longer need the QPRT to save estate tax (but watch out for state estate tax). ◙ If a QPRT succeeds the house is outside your estate which means no increase in tax basis (the amount on which gain or loss is calculated when heirs sell after your death). That could be costly. ◙ If you don’t face a large enough estate tax the income tax cost your heirs will face may outweigh the estate tax savings (if any). ◙ Consider unraveling the tax effects of the QPRT (you probably cannot unravel the QPRT since the trust is irrevocable). Assuring you hold a “retained interest” will cause estate inclusion and provide your heirs with a basis step up. Consider signing a lifetime lease for $1 a year. Watch trustee liability!

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■ Buysell Agreement: Every family (and other) business should review their buysell agreement and be sure it is current. Caution, the tax laws (IRC Sec. 2703) contain tough rules as to when a family buysell will be respected for setting value for estate tax purposes. If you have an old pre-October 8, 1990 buy-sell agreement you’ve still never updated, be careful that a significant change might subject that agreement to the stringent IRC Sec. 2703 rules that it be comparable to arm’s length agreements between unrelated parties, so that it may no longer depress value for estate tax purpose. See PLR 201313001.
■ Is the 4% Rule Dead: Financial planners have used a 4% rule for many years. The “rule” isn’t really a rule but a rough generalization that suggested that if you don’t spend more than 4% of your principal you’ll never run out of money. So if you planned on retiring with $5M in savings (ignoring your house which you can’t spend) you could spend $5M x 4% or $200,000/year and be “safe.” There seems to be a growing chorus expressing concern that in the current investment environment 4% may be too high for someone that has retired or is retiring shortly. While rules of thumb are only as good as the thumb you’re using, the bottom line is that caution is advisable. Everyone should review their budget and financial plan to be sure they remain on course at least annually. Many wealthy people view budgets as something for the proletariat, no so. No matter how big your nest egg, there are limits to how you can spend. It is amazing how many people stress over how they’ll divide up their estate, without first assuring they’ll have an estate at the end of the line. “The 4 Percent Rule is Not Safe in a Low-Yield World,” the study by Michael Finke, Wade Pfau and David Blanchett.
■ Can’t Always Use Your CPA as an Excuse: An estate’s CPA filed an extension for the estate tax return and told the executor it was a 1 year extension when extensions are really only for 6 months. The IRS zapped the estate and the Court would not let the executor use the CPA’s bad advice as a get out of jail card. That advice did not constitute “reasonable cause” to excuse the late filing. Peter Knappe, Executor of the Estate of Ingborg Pattee v. U.S. (CA 9 4/4/2013) 111 AFTR 2d 2013-612.

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■ Disclaimer Trusts are the Rage But Should You Disclaim? With the new high $5M inflation adjusted federal estate tax exemption the most common estate tax planning technique may well become a disclaimer bypass trust. You leave all outright to your surviving spouse (great in a 3rd marriage or if your spouse is a physician worried about malpractice risks, but alas that is another story). Then your surviving spouse can disclaim (renounce) any portion of that bequest which will go into a bypass trust which she/he has access to, but which won’t be included in her estate. This is a great way to use the benefits of hindsight to determine if a trust should be used and how much to put into it. But in many cases there is a better option. Most bypass trusts are, and will likely remain, less than optimal vehicles. Most are simply not drafted using modern trust drafting techniques. Why settle for a Big Mac if you can have a steak at Ruth’s Chris steakhouse (I’m a vegetarian, but that sounded like a good analogy)? Don’t disclaim (unless you’re imminently going to be sued). Accept the inheritance and immediately set up a modern, state of the art, trust and gift the assets you just inherited (and more if you wish) to that trust. The trust should be set up in one of the trust favorable jurisdictions (Alaska, Delaware, Nevada or South Dakota). It should be a grantor trust (you pay income tax on the trust earnings to further reduce your estate but also so you can swap assets to pull appreciation back into your estate). The trust should be a long term or perpetual trust so you can lock in the tax and asset protection benefits for yourself and all your heirs. You can be a beneficiary of the trust which makes the trust a “self-settled” trust. This does create some risk, which you should evaluate with your advisers. This approach can enable you to avoid multiple trusts (e.g. a bypass trust from your late spouse, a marital trust from your late spouse, and a trust for your estate planning). If you live in a state with an exemption lower than the federal exemption amount (e.g., NY, NJ) you can greatly enhance the state estate tax savings with such a plan (except in CT and MN which have a gift tax, but even then it might still be beneficial). Yes, these are more complex and costly, but Ruth charges more too, and she doesn’t sell Big Mac steaks!

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Lead Article Title: Estate Planning Risky BusinessSummary: So we have a $5 million inflation adjusted exemption and a couple can transfer $10.5 million in 2013 with nadda tax due, so like who cares about estate planning? Well, you might like to be the Alfred E. Neuman of estate planning “What! Me Worry?” but Alfred, there are still worries out there.
■ Estate Exemption Bad Penny – its back! Just when you thought the estate tax was permanently out of your heir [pun intended] President Obama issued on April 10, his new budget/tax proposal, affectionately referred to as the “Greenbook.” This fiscal gem includes a call for a 45% estate tax rate and a $3.5 million exemption in 2018. Yes, this is the same exemption that was permanently pegged at $5 million inflation adjusted and a rate that was permanently reduced to 40%. While it’s hard to understand the delay in effective date, or to imagine this ever being enacted, elderly or ill taxpayers that have estates over $3.5 million that haven’t used all of their exemption, might want to plan before Congressional budget horse trading results in a worse result.
■ Grantor Trust Bad Penny: Last year’s Greenbook included an estate tax planning bomb that would have all assets of grantor trusts (trusts on whose income the grantor is taxed) included in the grantor’s estate. That broad sweeping proposal could have taken down every common insurance trust along with more sophisticated planning trusts. The new 2013 Greenbook proposal seems to narrow the range to focus more on including in the grantor’s estate appreciation in assets sold to a grantor trust. While this may remove many trusts from the legislative crosshairs, it leaves one of the most powerful and common planning techniques still available to the very wealthy subject to potential elimination. For those high net worth taxpayers who might still benefit from these transactions they should be completed before the legislation becomes effective.
■ GRAT Bad Penny: Last year’s Greenbook proposal to mandate a minimum 10 year term for Grantor Retained Annuity Trusts is baaaaaack! GRATs are a great leveraging tool whereby you could gift an asset to a trust, receive back an annuity for a set number of years, and thereby shift any increase in value of the asset above the interest rate used to calculate the annuity out of your estate. GRATs are an especially great tool if you’ve used up all your exemption, want to make more transfers to heirs, but don’t like the prospect of paying gift tax. The moral of this story is the esame as that for the note sale transactions described above, complete planning now, don’t wait for the law to be changed.
■ Home State Connections: When planning for self-settled trusts (you form the trust and are a beneficiary) there are some that worry about any connections your trust has to any state that doesn’t permit this type of planning. For example, you might live in NY but set up a trust like this in South Dakota that does permit it. This problem could be particularly concerning when the trust owns interest sin a close business and you’re named the investment trustee of the trust. Some advocate forming a family limited liability company (“LLC”) in the state where the trust is set up. That way the “direction” is in the trust and any investment activity is inside the LLC that the trust is directed to hold. Further, having this type of LLC formed in the state where the trust is arguably another connection to the state in which the trust was formed, perhaps boosting the nexus to that state and thereby further supporting the trust. South Dakota has lead the charge in this arena and might present an opportunity worth considering.
■ Grantor Trust Surprise: – So you put assets into a trust, structured as a grantor trust, for your spouse and descendants. Then the big “D” happens. Your now ex-spouse has the growing trusts assets to benefit from. But if the trust is a grantor trust might you still bear the income tax burden on the trust earnings post-divorce! Ouch. Be sure that the mechanism to turn off grantor trust status is addressed in your property settlement agreement and implemented as a condition to the overall divorce.
■ Reciprocal Trusts: This is a common planning technique. Wife sets up trust for Husband and descendants, and Husband sets up a trust for Wife and descendants. This is a great way to grow wealth outside both of your estates, protected from claimants and in a way you can each access significant assets. But to succeed the trusts have to be different enough that the IRS won’t unravel the plan as mirror trusts (reciprocal trusts) without substance. Did you really differentiate the trusts sufficiently? Perhaps it is worth a review to be sure, and if not use the various powers in the trusts, or the possibility of decanting (pouring one trust into a new better crafted one) to bolster your position. Some advisers claim using a limited power of appointment (LPOA, explained below) in one trust but not the other suffices to differentiate them. Not so according to one expert, Jeffrey A. Baskies, Esq. of Boca Raton, FL. The idea of using a LPOA to distinguish one from the other comes from a misreading of the Levy case. Levy can’t be cited as precedent (TC Memo) and apparently never even reached the issue of whether having a LPOA in one but not the other made the trusts non-reciprocal (as the IRS and taxpayer apparently stipulated to that issue – the trial was over whether or not the LPOA was valid under state – NJ – law).
■ Tax Reimbursement: – So you set up a grantor trust for your heirs, and the trustee has the right to reimburse you for income taxes you pay on income earned by the trust. So you have a big sale of the business and ask the fiduciary to reimburse you for taxes. Well in the intervening years you and your kids who are the beneficiaries of the trust have had a falling out. Yeah, that usually only happens after the big bucks are given away to them. So when you ask the trustee for a reimbursement the kids who are the beneficiaries, and to whom the trustee has a fiduciary duty, object to any distribution to reimburse you! Egaads! What happens? Is there any law on this? Would your trustee make a huge discretionary distribution to a non-beneficiary when the real beneficiaries say don’t? Even if your kids still talk to you, might the IRS still argue that you had an “understanding” with the trustee about the reimbursement and pull the whole trust back into your estate? If you have a reimbursement clause and hope to use it, chat with your advisers well in advance to address these and other issues.
■ Spousal Lifetime Access Trusts (SLATs): The use of a SLAT, or lifetime bypass-type trust were a hot ticket in 2012 and still present what for many is the optimal way to minimize or avoid federal or state estate tax. But SLATs can present potentially surprising tax concerns. Bear in mind that while the concepts of SLATs have been used for decades, historically they were most frequently used in the context of life insurance trusts which are different in application than the SLATs many taxpayers are setting more recently. The comparison to the traditional bypass trust can be a bit dangerous too since for a traditional bypass trust the grantor spouse is deceased. In the inter-vivos bypass-like trust such as a SLAT the grantor spouse is alive. If a distribution is made to the beneficiary spouse, and really used by the grantor spouse, and if the IRS could demonstrate that such cash flows corroborated an agreement that the grantor spouse would continue to benefit from the funds in the trust, the IRS might argue that the trust assets should be included in the grantor spouse’s estate. Creditors might argue the same. If distributions the beneficiary spouse receives from the SLAT are deposited into a joint checking account on which the grantor spouse writes checks, that sequence may corroborate the IRS challenge. What assets did you transfer to your SLAT? Some assets just should not be transferred (pension assets, professional practices, or favored assets whose status might be undermined, e.g., a Florida homestead). If the wrong asset was transferred address what can be done to mitigate with your attorney ASAP.
■ Powers of Appointment: Powers of appointment, a right given typically in a trust or will to someone to designate who might enjoy property, are one of the most powerful and flexible of planning tools. But alas, roses have thorns. Limited powers of appointment (LPOAs) are sometimes used to create flexibility without causing estate inclusion. A limited power is the right to appoint to anyone other than your creditors, your estate or creditors of your estate. In reality, many limited powers are more restricted, e.g., to descendants. But limited powers don’t always assure problem avoidance. If you made a gift to your spouse, and your spouse gifts the assets to an irrevocable trust over which you are given a limited power of appointment to appoint trust assets to say descendants, does that create an incomplete gift as to you? The IRS may argue that the transfer to your spouse was merely a step along the way to your transfer to the trust. And if you are treated as the grantor to the trust and you hold a limited power of appointment over assets of that trust, the fact that a limited power should not cause estate inclusions generally won’t save your day. What if that power is only given in a contingent marital trust that will only be funded if the assets are included in your spouse/grantor’s estate? Will that suffice to create a link to you for estate inclusion in your estate? This might cause inclusion in your estate under Code Section 2038 regardless of whether the trust was formed in a jurisdiction that permits self-settled trusts.

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Checklist Article Title: : What’s in Your Wallet

Summary: Here’s a few tips to answer the Viking question “What’s in your wallet” that hopefully will give you some practical pointers on this basic financial instrument that is viewed as so basic few folks stop to think about it.

√ First, whatever you have in your wallet, make a photocopy of the front and back of it all and keep it in a secure place. Scan the copies. Perhaps black out portions of the numbers from credit cards to avoid the risk of misuse if your computer gets hacked. If you ever loose your wallet it’s a lifesaver. I actually lost my wallet about 20 years ago. Took my photocopies and went to the Department of Motor Vehicles to get a new license. While in line I called and canceled all my credit cards and had new ones issued. On the way home I stopped at the library and Blockbusters (life before Redbox and Netflix) and got new cards. But for the photocopies, I would not have easily or quickly remembered what was in the wallet, or had all the numbers readily accessible.

√ Here’s one ‘cause I’m a tax attorney. And this will be a great tax benefit to lots of readers. I carry two American Express cards, one Master Card, and one Visa Card. One Amex is for business and on for personal. Visa is business and Master card personal. I intentionally obtained different cards so that it is visually easy to identify personal from business. This is an easy, and pretty audit proof way to simply tax reporting and legitimately maximize deductions. If I’m buying something for business I use a business card. If I am buying something personally I use a personal card. If I go into Cosco or Home Depot, for example, I almost always end up buying personal stuff as well as stuff for my business. Simple – I put the business stuff on the business card and have a second order I pay for on the personal card. I cannot overlook deductible items at year end and I don’t have to hunt for them, they’ve already been paid for from the business. I don’t have to worry about garden ornaments ending up on my business and causing grief on a tax audit, because they were paid for personally. Anyone that has their own business will benefit tremendously from this.

√ Here’s another one that is a bit personal to us, but should serve as an example of how you can tailor emergency planning for your personal circumstances. For any of your readers who are among the 130 million Americans living with chronic illness or disability (yes that is a real number!) and who travel, some of these steps (or similar ones) should be considered. We travel around the country in an Airstream and I lecture to professional advisers (CPAs, attorneys, financial planners) and consumer groups on financial and estate planning for chronic illness. See www.chronicillnessplanning.org. We travel through lots of rural areas, and far afield. If there is an emergency I carry a number of cards for emergency services we’ve signed up for. I might have a problem with our truck (that pulls the Airstream), the Airstream itself, or with a health emergency. So we carry AAA which could help with the truck (and the cars at home), a Good Sam Club Platinum Emergency Road Service Card (Good Sam is like the AAA of the RV world), Good Sam Travel Assist (they can fly us home and have someone drive the RV back) and Skymed a medical evacuation service (I like a plan “B” because in life “stuff” happens). Anyone with a significant health issue or disability can carry what works for them, but the bottom line for everyone if you carry what you need to protect yourself and your family/loved ones in an emergency you’ll be better prepared.

√ Record all your key data, card numbers and passwords in an encrypted cloud based system so you can access it if needed even on the road, and in an emergency, someone you trust can access it to help. While it’s nice to have a scan of your wallet, especially accessible on the road, it really doesn’t suffice in a web based world. While there are a number of such services, we use a password App called Keeper. https://keepersecurity.com/

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√ If you have lots of affinity credit cards in your wallet, e.g. with Airline miles, plan for them. Consider making a specific bequest of them in your will. The reality is that transferring miles post-death can be difficult and costly, if feasible, try to spend them prior to death.

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■ Related Party Loans: Lots of you make them to closely held businesses. But caution is in order. As a recent case illustrates, it is difficult to establish that an employee’s dominant motive for a loan was to retain his job when he was a significant shareholder. If a substantial investment motive was present, the shareholder-employee’s loan, if unpaid, will result in a non-business bad debt rather than a business bad debt. Haury, TC Memo 2012-215. Caution should always be exercised when making any related party loan.
■ Avoiding Penalties Not Always Easy: An estate was subjected to a late filing penalty. The executor demonstrated that the estates CPA obtained an extension but incorrectly advised the executor as to the due date being a year later rather than the correct six months later. The court held that relying on the CPA did not constitute “reasonable cause” to abate the penalty. Peter Knappe, Executor of the Estate of Ingborg Pattee v. U.S. (CA 9 4/4/2013).
■ New Jersey Law Updates: Several new laws updating New Jersey’s New Jersey Business Corporation Act and the Revised Uniform Limited Liability Company Act have been enacted. For example, the changes permit shareholders to participate remotely at meetings. For LLCs operating agreements may be more broadly construed to include certain verbal agreements. The prior statutory right of a terminated member to receive fair value for membership interests if the operating agreement was silent has been eliminated. Non-controlling LLC members have been given more rights analogous to minority shareholders.
■ Valuation of Interest in Art: In Elkins the estate owned fractional interests in art that had to be valued. The co-owners of the art were the decedent’s children. While the case provided a substantial victory for the IRS, that victory may prove short lived. It appears according to some commentators that the Tax Court committed what might be a fatal valuation error in considering the circumstances of the children/co-owners in the analysis. The valuation should have used the tax paradigm of a hypothetical willing buyer, not the children themselves. Elkins Est. v. Comr., 140 T.C. No. 5 (March 11, 2013).
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■ Power of Attorney – most folks sign POAs to avoid the need for guardianship. While this can work a POA is not always sufficient and you might want your position as agent reinforced by being appointed guardian of the property for the person (grantor) you’re serving. It provides a structure, you can do a formal accounting to protect yourself, and the rules are more defined. This can be done preemptively to fend off potential problems or claims from difficult spouses or heirs. Thanks to Steven Greenberg, Esq. of Hackensack, NJ.
■ Terminal Illness Planning Denial and emotional issues make planning once a loved one is diagnosed with a terminal illness very difficult. Involve care managers and others to help move the process forward as updating documents and planning while feasible can avoid potential costly problems later. Consider signing a new durable power of attorney that is effective immediately (i.e., non-springing to avoid having to prove it is effective). Update or obtain a revocable trust and transfer appropriate assets to the name of the trust. This is the best tool to manage asset during health challenges. Consider including a clause that permits an independent person to revoke your loved ones rights to trust assets transforming the transfer to the formerly revocable trust into a completed gift.
■ Elderly and Infirm: For elderly or infirm use American Express for all credit card transactions. Their customer support (e.g., if a vendor charges an inappropriate amount, or doesn’t respond to a complaint), and fraud detection are incredible. This can provide a great addition to the other more routine safety net procedures. It is also advisable for the same people to sign up for a credit monitoring service as they are the vulnerable targets that those committing financial abuse. But before signing up for such a service be sure that you can designate an authorized representative to act on your behalf. At least one of the major monitoring companies won’t permit this.

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Lead Article Title: The Intelligent Valentine’s Day KISSSummary: Is there a more romantic topic for Valentine’s day then estate planning? KISS –Keep It Simple Stupid. “Since I don’t have a $10 million estate I want a short and simple will and I don’t want to spend much ‘cause it doesn’t matter.” That will likely become the mantra of many folks addressing estate planning after the American Taxpayer Relief Act of 2012 (ATRA) made the $5 million inflation adjusted exemption and portability (you can benefit from the unused exemption of your deceased spouse) all permanent. This is a sea-change. Most wealthy folks feared the return of the $1 million exemption and 55% estate tax rate. Well that fear is now gone. But planning for those worth $5 (single) or $10 (couple) million+ hurdle remains complex and time sensitive (see Checklist). But the cavalier application of the KISS principal will likely undermine your financial security and that of your loved ones. Yes, in many cases planning can be simpler and less costly for those under the $5/$10 million wealth range. But a more intelligent application of the KISS principal to simplify planning when and where appropriate, will be the way to go. To understand the Intelligent KISS we sought the counsel of none other than Christian Grey. “For those under the new exemption amounts, planning remains a hot topic,” swoons Grey. “While the KISS principal can apply there remain at least 20 shades of estate planning.” 20 shades will still require more than a form will to accomplish your goals. “Your estate planner needs new tools in his or her estate planning playroom to deal with the new planning environment,” he adds. Mr. Grey’s suggestions for celebrating Valentine’s Day appear on page 5.

Repurposed Bypass Trust (credit shelter trust) – Your will could establish this type of trust and bequeath the federal exemption amount (or a lower state exemption amount) to it. Your surviving spouse could benefit but the assets, and any growth in their value after your death, would all be removed from your estate. That was standard planning for many years. Now what? ■ Many folks might still benefit from these trusts to remove assets from the reach of state estate tax (remember for this article we assume you’re under the $5/$10M inflation adjusted federal exemption). These trusts can still protect assets from a remarriage, lawsuits, etc. ■ If you keep these trusts in your will consider a couple of tweaks in how you apply them post ATRA. Consider giving an independent trustee a right to distribute the assets outright to your spouse and terminate the trust. In that manner, if the trust isn’t needed, or obtaining a basis step up on the surviving spouse’s death is beneficial the assets can be paid out. Basis step up means that assets included in your estate get an increase, or step up, in the amount on which gain or loss is calculated when the assets are sold (tax basis). ■ Some attorneys like disclaimer bypass trusts. You bequeath all the assets to your surviving spouse and then he or she can disclaim (renounce) some of the assets and they would go into a trust for him or her. This is theoretically a better approach, but few surviving spouses actually take that step. ■ Also, as the exemption amount increased in past years many bypass trusts were drafted to only benefit the surviving spouse, because the amounts were so large. But ATRA was a paradigm shift. For most taxpayers the income tax, not the federal estate tax, is the real birdie to keep your eye on. If your spouse, kids and all descendants are beneficiaries of the bypass trust, then the trustee can spray or sprinkle income to whichever beneficiaries are in the lowest income tax bracket. That can provide great flexibility to avoid the new 3.8% Medicare tax on passive investment income. ■ So you can repurpose a bypass trust to save income tax if you don’t need to worry about federal estate tax. There is another important spin to this planning. With portability, when your spouse dies you succeed to his or her unused exemption. So you may never need a bypass trust to avoid federal estate tax on your death. So assets in a bypass trust may result in higher income tax during the surviving spouse’s life, no federal estate tax savings, perhaps a state estate tax savings, but no basis step up on the second spouse’s death. So your old style bypass trust could cost you more in income tax while you’re alive, cost your heirs more in income tax when they sell assets after you’ve both died, and at best given you a state estate tax savings which may be less than all these costs. Not necessarily a winner. The challenge with all this is that the analysis can be affected by the nature of your assets (how do you invest), the tax basis in assets, future appreciation, and all sorts of other variables. ■ Christian, help, I’m in need of a KISS! So repurpose your bypass trusts with the changes suggested above will give lots more flexibility. How you invest (asset location) and other variables can also squeeze more bennies out of your repurposed bypass trust. ■ In some instances, such as when your estate is small enough that the alternative techniques suggested below may not be worthwhile, a bypass trust might remain the hot choice, but for many bypass trusts perhaps should be used but only as a backstop to better approaches discussed below. ■ Bottom line: you need to update your will and estate plan even if you’re under the exemption amount.
Repurposed Life Insurance – Folks under $5/$10 million in wealth use to buy survivorship life insurance to pay estate taxes. While still possibly useful for state estate taxes, in the new world of estate planning for those safely under the exemption amount survivorship insurance may be a hard limit. But don’t discard insurance planning, repurposed (like the bypass trust and other planning) it may be a real winner. Consider a permanent insurance policy on one life. Evaluate the projected return on a one-life rather than survivorship policy. Consider the increased income tax benefits of a permanent insurance policy in light of the increased income tax rates and the 3.8% Medicare tax on passive investment income. Investments can grow inside a life insurance policy free of income taxes. These dollars can be borrowed out later, often in a tax advantaged manner. Insurance can still be great, but for most folks, it will be applied in a different manner for different benefits.
Repurposed Irrevocable Life Insurance Trusts (ILITs) – The classic life insurance trust is a trust that held life insurance so claimants couldn’t reach the proceeds, beneficiaries couldn’t squander the proceeds, and it wouldn’t be included in your estate. If you’re under the new high exemptions the third component may not matter, but the first two benefits (and others as well) still are really important. That being said, instead of having a survivorship ILIT for those safely under the exemption amount, consider the repurposed ILIT: ■ Have an ILIT for one spouse’s life, not a survivorship or 2nd to die policy. ■ Own a permanent policy to take advantage of income tax savings of growth inside the policy. ■ Set it up so your spouse/partner is a beneficiary and funds can be borrowed out of the policy and distributed. This is akin to the Spousal Lifetime Access Trusts (SLATs) lots of advisers rave about. ■ Consider incorporating a long term care feature on the policy. ■ Bottom line: you need to update your ILITs and insurance plan even if you’re well under the exemption amount.
Multi-Purpose Irrevocable Life Insurance TrustsTM (MILITs) – Yea, so I made up a new name and acronym! But this can be the Intelligent KISS for estate planning for most folks with enough wealth to plan but not enough wealth to be willing to put up with the cost and complexity of the planning they would have if the federal estate exemption had dropped to $1-2 million. This is just a few additional steps from the repurposed ILIT described above. SLATs were the rave for many planners in 2012. It was a great way (when done right, but lots were not!) to remove assets from both spouses’ estates but let one spouse have significant access to the assets, and even, if done creatively and with a little risk (handcuffs not required), the spouse setting it up could benefit too! Well the MILIT can do everything a SLAT can do too! Why spend for two trusts if you can use one. Remember we want that KISS. But you can do better. Let’s say you live in one of the 20 or so states that have decoupled from the federal estate tax and that your state has a $1 million estate tax exemption. We’re going to ignore Connecticut since they have a gift tax and being domiciled in a state with a gift tax is a hard limit for MILITs. Under traditional bypass trust planning (see above) you’d put $1 million in a bypass trust under your will on your death for your spouse. But if your combined estate is say $4 million (well below the $10 million inflation adjusted federal exemption) you could still owe hundreds of thousands in state estate tax on the death of the surviving spouse. What’s the solution? A MILIT! Set up your MILIT today (you probably have or should have an insurance trust anyway). You can do more than just gift annual gifts to the trust to pay insurance premiums. Put more in, just like you would with a SLAT. As you get on in years, or if your health declines, you can put more money in. In your 60’s put in perhaps a few hundred thousand. When you hit 70 perhaps add $500,000. In your 80s maybe you gift more. You can put far more into your MILIT then a bypass trust could hold since after $1 million in our example, your estate would be paying state estate tax on the first death. And that’s a hard limit no-no even with only 20 shades of Grey. But in any decoupled state other than Connecticut, you can gift up to $5 million+ into your MILIT before death and reduce your state estate tax by far more than the old bypass trust planning could ever do. So what are the benefits: ■ All the benefits of the repurposed ILIT above. ■ Avoid much more state estate tax then the old bypass trust plan. Your surviving spouse won’t have to deal with the complexity following your death, the MILIT will already be up and running for years. ■ You might suffice to use a single trust with planning instead of an ILIT, SLAT and bypass trust. While that is far less acronyms for your estate planner (and less fees too!) it is simpler for you, better income and estate tax results for most folks, and all around its simpler. Give your Valentine the KISS of a MILIT! Laters baby!

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Checklist Article Title: Wealthy 2013 Plan

Summary: If your net worth is over the $5/$10 million federal threshold, you should plan fast and aggressively. Do I sound like the estate tax version of Chicken Little? Maybe, but President Obama has made his position clear that the wealth should bear more tax, more fiscal cliffs are looming, and President Obama has repeatedly called for changing key estate tax planning techniques that most in Washington would view as mere “loophole closing.” These include: Eliminating grantor trust benefits by including them in your estate. Grantor trusts make the income of a trust taxable to you even though the economic benefits accrue inside the trust (outside your estate). For the really wealthy, a grantor trust permits you to sell interests in a highly appreciated business to a trust and not recognize gain. Valuation discounts are on the block. So is the ability to allocate GST exemption for more than 90-years.

√ Get With the Program – If you’re in this wealthy category and did not gift your exemption amount last year, get moving before the game rules change. Most people that should have made gifts but backed off did so because they did not appreciate the significant mechanisms that can be provided to assure them, their spouse/partner and family access to the funds transferred. Yes, you’ll have to jettison the KISS principal, but at this wealth level if simplicity is your goal, and costs your concern, you’re not seeing the forest through the trees. You can set up non-reciprocal SLATs (each spouse or partner sets up a somewhat different trust for the other), self-settled trust (DAPT) or some hybrid variation of it, and more. If the “loopholes” above are closed these planning ideas won’t have the bang they did.
√ Top off Your Irrevocable Gift Trusts – If you set up an irrevocable gift trust last year but used less then all your exemption, if the trust was set up appropriately for your circumstances (e.g., sufficient access to the trust assets if you need them), top off the gift and use up the remaining exemption. Also, since the $5 million exemption is inflation indexed it increased another $130,000 in 2013. Gift that amount too. If you wait and the loopholes are closed you might need to have your current trust split into separate subtrusts to hold gifts before the change and those after. If your trust wasn’t drafted with enough flexibility, you might even need a new trust. Not a very practical prospect for $130,000. So gift now.
√ Sell Assets to Your Trust – If your wealth is substantial enough that gifting $5,250,000 (the maximum 2013 exemption amount) or $10,500,00 if you’re married, is only a down payment on your planning, you should evaluate selling assets (e.g., interests in a family investment LLC, real estate entities, etc.) to your grantor trusts (the trusts you set up in 2012 were likely grantor trusts, but be sure before you sign!). This is a great way to freeze the value in your estate and shift future appreciation to a trust outside of your estate. It can also lock in significant valuation discounts. If the loopholes above are closed this technique, which has been the keystone of many high net worth families plans, may be impractical. That will be a huge tax benefit to lose out on.
√ Revisit GRATs – Some advisers were pushing these last year because of the proposals to require a minimum 10 year term for GRATs. That would take much of the zing out of the technique and make the mortality risk of GRATs impractical for older or ill taxpayers to bear. Using GRATs if you hadn’t used your exemption rarely made any sense. But now, if you’ve used up most of your exemption on your 2012 gifts, using GRATs which can be structured to shift value out of your estate without using any significant current exemption, could be a great technique, If you have closely held business interests (even a family investment LLC) this is a potentially valuable approach to consider. Again, you have to move before the GRAT “loophole” is closed.
√ Decant and Clean Up – If you have old trusts and planning, the time to clean them up is now. If the grantor trust and GST “loopholes” are closed you will have fewer options and more difficulty cleaning up past planning “stuff.” Decanting is the process whereby you pour an old trust into a new and better crafted trust. While no one can be sure what if any “loophole” closing will occur or its impact on decanting, if you have old trusts that might need an overhaul, act now.

Recent Developments Article 1/3 Page [about 18 lines]:

The American Taxpayer Relief Act (ATRA) permanently eliminated estate tax worries for most taxpayer. So now, what do you do with those family limited partnerships ( FLPs) and limited liability companies (LLCs) that you set up for estate planning discount purposes? No one enjoys the formalities of maintaining FLPS/LLCs, the cost and hassle of the extra income tax returns, and more. So if they don’t provide an estate tax benefit, deep six’em! Not. Repurpose them (just like lots of other planning can be modified for the New Normal of estate planning as illustrated throughout this newsletter). FLPs and LLCs continue to be benefit you by: ■ Providing control over assets (e.g. as a manager of a manager-managed LLC you can control within reason investment, distribution and other decisions). ■ Protect assets from creditors. In many states charging order protection is available (the claimant can get your share of distributions but cannot take over as a member or partner). ■ Limit irresponsible heirs by controlling how much say if any they have in FLP/LLC operations and what distributions they get. Even if the federal estate tax benefits were zapped, these entities should remain the cornerstone of many plans. But, just like those late night infomercials (don’t ya love Sham Wow!) there’s more! Given the restrictions on itemized deductions many high income taxpayers will find itemized deductions disappearing. Creative but careful use of FLPs/LLCs may secure certain deductions. Most important, FLPs/LLCs were historically used to shift income (subject to the family partnership rules of IRC Sec. 704(e)) to lower bracket family members. This can avoid the top 39.6% rate and perhaps the 3.8% Medicare tax on passive income. ■ Bottom Line: Retool your FLPs and LLCs and morph them into income tax planning tools. For really wealthy taxpayers, see the Checklist article. Gift discounted FLP/LLC interests now!

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Be a Care Bear about 2012 Planning. You need to share more love with your 2012 planning to enhance the chance it will succeed. Ignoring what you’ve just done will almost assure failure. While there are lots of steps that will have to be taken, and they’ll all depend on the details of your particular plan, a list of many of the common steps to take (or avoid) might help you understand some of what is involved: ■ Typos and incomplete steps abound. No plan or document could have escaped oversights and lose ends with the mad rush to consummate gifts towards the end of 2012. Whatever you did, it all should be given a second look. ■ Many transfers were completed with the minimal documentation needed to conclude the transfer. For example, if you gave gifts of stock to a trust a stock power and assignment may have been signed. Circle back and be sure to issue a stock certificate to the trust, execute an amended and restated shareholders’ agreement, etc. ■ Some transfers were made without securing required lender or other approvals. Consider contact any third parties and obtaining the approvals. ■ Some trusts were funded with gifts of cash because appraisals or third party approvals could not be obtained in time. Consider swapping in the hard to value assets that you initially intended to be in the trust. ■ Gift tax returns will be required for almost all 2012 transfers. Be sure to ascertain which professional will have primary responsibility for the preparation and that they begin the process of obtaining the necessary information to file. ■ Income tax returns should reflect the consequences of 2012 transfers. This may require allocation of entity income to the time period before and after the transfers, filing returns for new entities and trusts, etc. ■ Review asset allocation and location decisions post transfers. ■ Review all insurance coverage to be sure all assets and risk remain covered and new ownership interests, entities, are properly reflected. ■ Distributions must be consistent with the post-transfer ownership interests. If 35% of an FLP was gifted to a trust, distributions must be made 35% to the trust. ■#Observe all post transfer formalities. If new entities were formed to hold assets given, be sure the right people with the appropriate positions/titles sign appropriate documents and confirm appropriate actions. If an investment trustee is require to approve trust investment decisions be sure that individual executes investment documentation. If another family member was named as manager of a family LLC the account opening documentation and investment policy statements likely should be signed by that person in his or her capacity as manager.

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Lead Article Title: 2012 Planning Time Concerns
Summary: 2012 is the year of the estate plan. Here’s some tips to make it really happen for you and your heirs.
■ If you snooze you loose: Lots of folks have waited waaaay toooo long to address 2012 planning. Many are finding out the hard way that most good advisers are too booked to help ‘em. But lots of folks that think they are well along the 2012 planning path are still asleep at the switch and haven’t followed up on many critical and time sensitive components of what they (not their advisers) have to follow up on to get their deals done. 2012 is unparalleled in tax planning history. The hand holding your CPA, attorney, wealth manager may have given you for planning in a prior year just ain’t happening this round. Everyone that is any good is really overwhelmed. Every pro will drop balls because there are so many flying. To get your planning completed, and to get it completed right, you have to follow up.
■ It’s Crunch Time! OK Cap’n Crunch if you have 2012 gift planning still in the hopper, and you hope to complete it before year end, time is of the essence. The estate planning “machine” of local attorneys (e.g., who are needed for trusts in other states like Delaware), appraisers (real estate, business, discount, etc.), CPAs (e.g., cash flow projections which are essential for any note sale transaction or transfer of business interest), corporate counsel (essential to obtain lender, lease and other approvals and to draft the entity documentation essential to consummate a gift of an entity interest), trust companies (to review and approve trusts, serve in fiduciary capacities, open accounts), are all incredibly backlogged. Most appraisers and attorneys will no longer take any new matters for 2012. The closer we get to Auld Lang Syne the more this backlog will grow. It will become harder, if not impossible, to finish many 2012 transactions. Bob Keebler a smart well known CPA and retirement planning guru has expressed concern that those waiting too near year end to convert IRAs to Roths may find that their requests won’t get processed.
■ Deadline May be Before Year End: The election results, and President Obama’s reiteration of this intent to have the wealthy bear more tax, has an ominous tone for anyone in the process of completing estate planning. No one knows what will happen in Washington. While it is possible that Congress will just kick the can down the road by extending the current estate tax regime, it is also possible that President Obama will push legislation through as part of addressing the fiscal cliff that will have a profound and negative impact on planning. Remember we got a new tax act in December 2010. Legislation to address the fiscal cliff could change the estate tax game rules before year end. Some provisions could be made effective as of the date of proposal, not enactment, which means you may lose the opportunity to implement a plan that is well underway. You need to expedite completing all planning. And many of the steps to do so are in your hands and are your responsibility. Speedy Gonzales gotta be your role model until New Years!
■ Be Proactiv®: Proactive is not just a zit cream. It’s how you have to hustle to get your planning done this year. You must be personally proactive in pushing your advisory team (anyone and everyone involved in your planning) forward. You must make it a priority to personally set up meetings to sign documents, meet with advisers and push each phase of planning to conclusion. The volume of work everyone in the estate planning machine is experiencing is unprecedented. There has never been a time in the history of the estate tax (no exaggeration) where you had to be more proactive, and more personally responsible, to assist and push your own planning to completion than now.
■ Steps to Consider: What must you do now to increase the likelihood that your 2012 planning will be completed? Ask your advisers what specific steps you can take, and review the points below and act immediately to the extent that these matters pertain to you. If you are not sure, call and/or email each adviser that may be involved on the applicable component of your planning:
■ Appointments: If you have a trust, shareholders agreement, deed or other legal document that has to be completed, call your estate, corporate, and real estate attorney, and schedule an appointment to review your documents, and a second appointment to sign. Get the key dates locked-in so the essential actions happen.
■ ID Numbers: If you have an entity that needs a tax identification number (EIN, TIN), call your CPA and get one assigned immediately as you will not be able to open a bank, brokerage or other account without it. Record the EIN on the front page of the document so that you’ll have it available whenever needed.
■ Appraisals: If you have an appraisal that is in process, call your appraiser immediately and confirm a date that you will receive a valuation number. That figure is essential to your plan. Many 2012 estate plans have interrelated components. The appraisal you obtain will affect the value (percentage) of an entity or real property you hope to gift (or sell). This in turn affects what your corporate attorney must draft in entity documents and what your real estate attorney must draft on any deeds. Depending on the numbers, the structure of your transaction may have to change. If you gifting close to the maximum $5.12 (your remaining exemption), you may want to integrate a “defined value clause” into your planning. This is a mechanism used to minimize the fallout of an IRS challenge to the value of your gift. More risk and complexity, and unless the excess value is paid over to a charity not particular secure. More decisions, more documents, more complexity and not much time. You need to understand the options and the risk and make a decision. Your estate planner can explain the many options for structuring these clauses (Wandry; excess to charity/private foundation, excess to QTIP or GRAT, etc.) but you have to make the call. To get the appraisal done, you might defer receiving the full appraisal report until next year, and rely on a written letter providing just the valuation figures. There is some risk that if there is a change when the final report is completed a tax may be triggered. But that risk may well be worth taking because the options are so limited.
■ Approvals: Third party contractual approvals are essential for many transactions. You may not be permitted to transfer real estate, or an entity (e.g., LLC) that owns real estate, without lender approval. The loan docs for your business lines of credit may have covenants restricting transfers, dividends, and all sorts of stuff 2012 gift planning may violate. A tenant (e.g., an anchor tenant in a shopping center) may have rights to restrict your transfer of the ownership entity. If you have a franchise, the franchisor may have to approve any transfer. If you have not already obtained the necessary consents, you should have your corporate, real estate or other attorney address these issues on an urgent basis. Devise “Plan B” in case the approvals cannot be received in time (gift cash now, swap in business later).
■ Securities: Call your wealth managers and plan the transfers now, even if your trust is not done. If you will transfer securities from your personal account, or an entity, to a trust, or other entity review the possible glitches with your banker today. Don’t assume you’ll be able to make a quick transfer near year end. Trust companies are overwhelmed. It will only get harder. Open accounts with a check as an initial deposit before attempting to transfer securities. If you are transferring securities from one institution to another without having the same identity of accounts (e.g., you have stock at Bank A and want to transfer that stock to a trust in Trust Company X) you may encounter significant problems. Discuss the logistics and how to handle such transfers with the intended recipient institution now. Discuss the Patriot Act and “Know Your Customer” restrictions with your financial advisers. They cannot short-cut regulations no matter how important a customer you are and this due diligence stuff takes time. Call every financial institution involved in your 2012 planning yesterday and proactively address these issues. Try starting the paperwork now even if other steps, like a trust being signed, are not done. Act now.
■ Moving Target: This is a volatile time for planning. Not only are there tremendous economic uncertainties and the future of the income and estate taxes unknown, but there have been rapid fire developments affecting key planning techniques vital to many 2012 transactions.Checklist: Second Article 2 lines less than One Page [about 54 lines]:
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Checklist Article Title: Post-Election Tips
Summary: President Obama has been reelected to a second term and has reiterated that he expects the wealthy to pay more income tax. Ordinary income tax rates may be raised by increasing the top two tax brackets to 36% and 39.6%. Capital gains tax rates increased for high-earners to 20%, plus the 3.8% surtax. The Republican position that rates should not be raised, even on the wealthiest taxpayers, might, to some extent depending on the shape of tax negotiations, morph into tighter restrictions on a range of deductions. Here’s some planning tips to discuss with your CPA before year end.
√ Medicare Tax: In 2013, a 0.9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples and a 3.8% Medicare tax will apply to net investment income if you adjusted gross income (AGI) exceeds $200,000 single ($250,000 joint). Investment income derived as part of a trade or business is not subject to the new Medicare tax unless it results from investment of working capital. Discuss asset allocation decisions with your investment adviser, and business liquid holdings with your CPA. Trustees should review distribution policies with the trust’s CPA as paying distributions to beneficiaries under the tax threshold may save money.
√ Deductions: Analyzing when to take deductions and losses. The usual rule to accelerate tax deductions and losses may be wrong. Because of possible tax increases the opposite approach might be best, but… If restrictions on deductions are enacted, then perhaps you should only defer deductions that aren’t likely to be restricted. The reinstatement of the 3% AGI phase out of itemized deductions may also make many deductions of little value in 2013 regardless of other changes. So, the calculus of what to defer and what to accelerate could make this the most uncertain year-end ever.
√ Harvesting Gains: Recognizing income, and harvest capital gains, in 2012, before rate increases could be a smart move. Gift an existing installment note to a non-grantor trust and trigger the income tax at 2012’s lower rates. Use derivative strategies and straddles to recognize gain in 2012. The straddle rules prevent you from taking a loss early, not from triggering gain early. Caution, the gains triggered by gain harvesting in 2012 may impact the taxation of Social Security benefits for some. If you’re elderly or terminally ill, loss harvesting may never make sense as it may be more advantageous to simply hold the securities until death and achieve a step up in income tax basis for heirs.
√ Depreciation: Bonus depreciation and Section 179 deductions are important to consider as you plan asset acquisitions near year end. If you buy a new car should they buy it now or in January 2013 when income tax rates are higher and when you may qualify for a Section 179 deduction?
√ Shifting Income: Income shifting to junior generations, and 2012 from 2013, may be advantageous. This should be considered when you make gifts, when trustees plan distributions from non-grantor trusts, etc. Family limited partnerships may morph into income shifting tools that they were before estate planners engineered FLPs into discount machines. If you can get paid this year instead of next, the income may be taxed at a lower rate than next year. If you have a bond paying interest on January 1, sell that bond in December. The income will be taxed at 35% now, instead of at a 43.8% marginal tax rate in 2013. Sell bonds trading at a premium in 2012 when the premium is taxed at lower 15% capital gain rates. Repurchase the bond later. Asset location considerations should be evaluated. If the marginal tax rate on dividend paying stocks increases, for example, it may prove advantageous to hold those stocks in qualified plans.
√ Roth Conversions: Convert your IRA to a Roth IRA at today’s lower rates. Generally, convert by asset class to take advantage of market conditions and volatility. Roth IRAs are not subject to the required minimum distribution (RMD) rules that regular IRAs are subject to at age 70.5 so they’re groovier for doctors and others worried about asset protection. Beneficiaries can realize tax free withdrawals from Roth IRAs, but not from regular IRAs. From an estate tax planning perspective, funding a bypass or applicable exclusion trust with a Roth IRA is much more efficient since they are full dollars, whereas funding with a regular IRA is not only more complex but it underutilizes the benefit because the dollars involved are partial or pre-tax dollars.
Recent Developments Article 1/3 Page [about 18 lines]:
■Wandry: As one example, the defined value clauses (explained above) have been subject to more shapeshifting than Star Trek Changelings. A court case, Wandry, upheld a pro-taxpayer approach to this mechanism. Then the IRS filed an appeal. Then the IRS withdrew the appeal. Then the IRS issued a non-acquiescence indicating that they do not agree with the holding in the case.
■Self-Settled Trusts: The recent Illinois case that ruled unfavorably on the use of self-settled trusts has raised eyebrows from some advisers and yawns from others. Rush Univ. Med. Center v. Sessions, ____ N.E. 2d ____, 2012 IL 112906, 2012 WL 4127261 (Ill, Sept. 20, 2012). Some have concluded that the use of a domestic self-settled truest (“DAPT”) for residents of non-DAPT jurisdictions is not viable. Others have pointed out that the result in Rush U was not unexpected in that it is consistent with prior bad fact cases attacking self-settled trusts. The reality is that before and after Rush U DAPTs were and remain unproven. Until the Supreme Court rules on the application of the Full Faith and Credit clause of the constitution as to whether a DAPT jurisdiction has to respect the judgment from the non-DAPT jurisdiction, will it be confirmed whether creditors can reach a DAPT, and hence whether transfers to a DAPT will be removed from your estate for a non-DAPT resident. The court evaluated the use of self-settled trusts under the common law rule was supported by a number of Illinois cases. Marriage of Chapman, 297 Ill. App. 3d 611, 620 (1988), and Crane v. Illinois Merchants Trust Co., 238 Ill. App. 257 (1925). The court stated the common law rule as follows: “Traditional law is that if a settlor creates a trust for the settlor’s own benefit and inserts a spendthrift clause, the clause is void as to the then-existing and future creditors, and creditors can reach the settlor’s interest under the trust.” The court noted that this conclusion did not require that the transfer be a fraudulent conveyance. Clearly the planning and implementation in the case was flawed. Holding real estate in Illinois, and having the grantor as a trustee and trustee protector was inadvisable. Perhaps restrictions that can be incorporated into a self-settled trusts, e.g., that you cannot benefit unless you’re not married, or that no distributions can be made to you until after ten years and a day after funding (to fall outside the period when a bankruptcy trustee can avoid a transfer to a self-settled trust), etc., may make the trust as not being self-settled if those events have not been triggered.Potpourri ½ Page:

■ We Weren’t Standing on all 4 Paws: We got barked at about our pet trust article. Pet trust documents which are free standing have a much different set of rules and laws than when pet trusts are formed under your will. Thanks to pet lawyer expert and friend Rachel Hirschfeld, Esq. http://www.PetTrustLawyer.com No greenie for me tonight!
■ Grantor to Grantor Trust Dies: The income on a grantor trust is taxed to you as grantor. If you sell assets to a grantor trust for a note, there should be no income triggered because it’s a grantor trust. But what happens when you die? After your death it cannot be a grantor trust. As a safety measure consider formally electing out of the installment sales method in the year of the grantor’s death since there is no tax in that year. Some might argue that you can’t elect out of the installment sale treatment since no sale occurred for income tax purposes. This might prevent the IRS from arguing that gain should be recognized in some subsequent tax year when grantor trust status did not apply. Thanks to Steven Seigle, Esq. Morristown, NJ.
■GRAT and Defined Value Clause: Defined value clauses are a mechanism to limit the risk of an IRS audit adjustment on hard to value assets transferred to a trust. In contrast to the Wandry, another approach is to have the excess value paid over to a non-taxable recipient. While case law has supported this mechanism when the excess value is paid over to charity some tax experts believe that the excess can be paid over to a zeroed out grantor retained annuity trust. This raises a number of issues. If the hard to value asset ends up in a GRAT as a result of an audit the term of the trust must be long enough that there will be liquidity to pay the annuity amount. If there is inadequate liquidity the annuity would have to be paid in kind, this might require an appraisal each year to make the payment in kind. This would be costly and complicated. GRAT cannot receive additional contributions. An impermissible additional contribution will disqualify the GRAT. So the argument is that the transfer under the defined value clause is deemed effective the date of the formation of the GRAT and the sale (which is why it all should be consummated on the same day). There is no assurance that the IRS will buy this technique. In choosing the GRAT term it might be advisable to have the GRAT term extend longer than the likely period during which an IRS audit might result in a valuation adjustment shifting assets into the GRAT. While theoretical arguments might be made that it should not matter, it would seem “odd” to have stock paid over to a GRAT that has already ended under its own terms.

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Lead Article Title: Worlds Ugliest 2012 Gift PlanSummary: “Worlds Ugliest 2012 Gift Plan.” You might have seen worse, but this baby is up there. And, just like Ripley’s Believe it or Not! Where “Truth is stranger than fiction,” this plan was a real one. Fortunately the taxpayer appears to have been saved from disaster, but their “plan” is a great checklist of everything you don’t want to do in your 2012 gift plan. While some of the items below individually could undermine the success of a gift plan, the advisers who created this winner chose to really assure as many bad facts as possible to maximize the likelihood of failure (or at least it seems so).

■ Form a New LLC: This client had a limited liability company (LLC) that had been around for years, yet the advisers set up a brand new LLC to use for the gifts. If you don’t have an LLC (or other suitable entity) and using an entity makes sense in your transaction, then setting up a new one is the only alternative. But setting up a new entity instead of using an existing entity will only heighten tax and asset protection risks. While the old and cold entity might have an clear business purpose, will the newly formed entity? Elsie J. Church v. US. Gifts of non-controlling interests in LLCs can qualify for valuation discounts (i.e., the value of a 20% interest in the LLC is less than 20% of the value of the underlying assets). ). While 20% of an LLC is worth something less than 20% of say the securities portfolio the LLC owns, securities are worth their actual value. The LLC interest may be discounted because a 20% owner cannot control the vote, distributions, etc. Using a long existing LLC, in the view of some advisers, may be more secure. If you have an asset like an operating business or rental property you certainly want it held in its own LLC to protect your other assets from a lawsuit that business or property might create. But if you have an existing investment LLC setting up a duplicative new one will only increase the costs and complexity. Good for the lawyers but not for you.
■ Transfer assets into the LLC 2 Days before Making Gifts: Say you want to put assets into and LLC and then gift non-controlling LLC interests to trusts. Those non-controlling interests should be valued at a discount from the underlying asset value (see above). However, if you plop assets into the LLC just prior to the gift, the IRS will say that the gift was really of the underlying assets and that the LLC “envelope” holding those gifts should be disregarded. Shepherd v. Comr. Poof! Your hoped for discount disappears. Just like a fine wine, assets must appropriately aged to develop the discount bouquet. Two days barely makes vinegar.
■ Have Documents Notarized in Different States: So you’re in State A and sign your documents, but your lawyer has a notary in State B notarize a key transfer document. Hmmmmm, absent a little “Beam me up, Scotty” transporter action that just doesn’t seem possible. The IRS or a creditor might raise an eyebrow as to the validity of the document and trash the entire transaction as invalid. Estate of Senda.
■ Put Personal Use Assets in the LLC: If an LLC is supposed to be respected as a legitimate business and investment entity it should not own personal use assets. Putting your house into an LLC and continuing to live there without paying rent will torpedo your plan faster than you can say “Supercalifragilisticexpialidocious.” Reichardt v. Commr. Well, a residence used by your family member free of rent might differ from the facts in the Reichardt case since it’s not you, but free family use of personal property will torpedo the LLC just the same.
■ Have Lots of Back and Forth Unsubstantiated Loans: Undocumented loans between the LLC and members and other family entities might be recharacterized as equity, compensation, gift transfers, etc. depending on the circumstances. Miller v. Comr. But an excessive amount of undocumented loans might jeopardize the integrity of the LLC.
■ Leave the Donor Cash Poor: If you’re left with inadequate assets after the transfer to the LLC to support yourself the transfer could be deemed a fraudulent conveyance or indicative that the LLC could not be valid as you would have to be able to retrieve cash from it to survive. In our worst case scenario the taxpayer was left with a mere $3,500 in cash in his name. That fact alone would likely torpedo the gift plan. Estate of Harper; Estate of Reichardt; Estate of Schauerhamer.
■ Don’t Get an Appraisal: Although four months after the purported transaction was completed the lawyer wrote the clients suggesting they obtain an appraisal of the LLC interests given. Consummating a $5 million gift without a formal appraisal of the LLC interests is certainly inadvisable. While in the recent Wandry case the appraisal was completed after the gift the transfer documents clearly limited the dollar amount specified and there was a commitment to obtain a qualified appraisal. Winging it just isn’t sensible and gives no protection in the event of an audit.
■ Don’t Sign Appropriate Post Gift Documentation: If you gift away 80% of an LLC, there should be a post gift operating agreement signed by all the owners and confirming the ownership percentages. In this worst case scenario nothing was done for more than a year after the assignments were executed. No current operating agreement.
■ Be Sure the Donor Didn’t Understand the Transaction: The IRS has taken a liking to asking taxpayers to explain the transactions they were involved in. If the taxpayer had no clue the deal was done, what was done, how or why, you may as well just start praying that the taxpayer is not questioned by the IRS, or the plan will assuredly flop.
■ Use Effective Dates and No Real Execution Date: Proper execution of documents to assure their effectiveness is important. Proper dating of documents to assure that the sequence of events occurred as appropriate, and that there was sufficient time between different steps of the transactions (whatever those time frames might be) is vital. If your attorney prepares key documents signed listing an effective date, but no date for the actual signature, you cannot demonstrate what time frames actually existed between the steps or the order in which the different steps in the transaction actually occurred.
■ Pay Personal Expenses from the LLC: Paying personal expenses from a family entity is contrary to respecting the entity for tax and legal purposes. If practices were lax, clean them up before any transfer is made.
■ Don’t Open an LLC Bank Account: Without the fundamental business formality of a bank account how can the LLC pay its own bills? How can it possibly look real?
■ Don’t Use a Defined Value Clause: In the wake of the Wandry case, some advisers are suggesting a more frequent use of a defined value clause that establishes a gift of an intended dollar value of LLC interests rather than a percentage of LLC interests. When gifts are made of hard to value assets like LLC interests that may be discounted, especially when the LLC owns minority interests in other entities that hold hard to value real estate assets, and when you’re pushing up to the line of your $5.12 million gift exemption, some type of safety valve, like a Wandry defined value clause should at minimum be discussed and considered.
■ Show LLC Assets on the Donor’s Balance Sheet: If you want to convince the IRS that the LLC is, in the words of Dr. Phil, the “real deal” you really should consider separate LLC financial statements, but you absolutely don’t want to show your pro-rata share of underlying LLC assets on your balance sheet. That is tantamount to your almost corroborating to the IRS that there are no discounts because the gift was of underlying assets, not discountable LLC membership interests.
■ Don’t Use Independent Professionals: Have the CPA prepare all tax returns, determine the value of the entity interest given, use the CPA’s wife as a witness, have the same CPA serve as the sole trustee of the donee trusts, don’t have anyone represented by independent counsel, etc.
■ Believed Client was on Deathbed: The IRS has long frowned on deathbed gifts. But documenting in an email that you believe the client was near death as the rationale for the plan is really over the top. At least make the IRS auditor earn his or her keep!
■ No Documentation of Capacity: One statistic suggests that 50% of those over age 85 have some degree of cognitive impairment. If you’re dealing with a donor in her late 80s should you at least have counsel corroborate that the donor had adequate capacity to sign the relevant gift and other documents? Also bear in mind that contractual capacity may be required to execute an operating agreement, assignments, trust and other documents. This is a greater level of capacity then testamentary capacity which will suffice to sign a will.

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Checklist Article Title: How Much Can You Gift

Summary: Everyone is talking about the importance of making big gifts in 2012, but the critical question for many, is how much can you realistically afford to gift without jeopardizing your own financial security? The question is complex and the right answer might be the wrong answer! Many clients are being completely misadvised in the name of an illusory “conservative” approach.

√ What are all of your personal goals? You cannot make a reasonable decision without laying all the cards on the table. Is assuring maximum resources for what hopefully will be many remaining years of retirement key? What are your ages and health status? What is the potential for a long joint life expectancy? What is really necessary to assure financial resources until the second of you dies (if you are married or have a partner)? So the prerequisites for those that are wealthy enough to plan, but not so wealthy that what remains will assuredly cover all future costs, are financial projections and simulations.
√ Some planners might suggest that you “run the numbers” assuming very low growth rates to be “conservative.” But is that really the right answer? Using a consistent low investment return may even understate your performance if there is a market drop in early years of your projections. It might also so understate the anticipated return that it will preclude you from really achieving your gift and other goals. More sophisticated simulation models but better help you gain a level of comfort and identify a more robust gift plan.
√ Whatever projections are done life expectancy has been increasing, future inflation rates are difficult to predict, and possible health issues and the state of government and insurance programs to offset health care costs are a significant uncertainty. And since you’ve lived through the Great Recession investment risk must be a worry. But using worst case scenario projections won’t protect you any better than going on a diet and use “very low” calorie estimates for the food you eat. It would be a fun diet but not very productive.
√ Some planners suggest running illustrations out to an old age like 100 years old, others suggest that if there is longevity in your family, run it out to 120. One well known planner suggests: “…run to some age that you think is well beyond the point you will actually live to, and show a high inflation rate and a low rate of return.” That may eliminate the ability to make gifts when you can and should. Importantly it ignores the tremendous flexibility trust drafting can provide. You might gift a gift to a self settled trust of which you, your spouse and all descendants are beneficiaries. So if you can receive distributions if needed. Your spouse or partner might fund another trust that names you and descendants as beneficiaries. One of the assets you might gift to the trust might be a closely held business from which you will continue to draw a salary.
√ Excessively conservative financial projections will be damaging to making gifts. Perhaps a more sophisticated approach can achieve more objectives: facilitate maximizing gifts, deflecting any fraudulent conveyance claims by creditors (e.g., you gave away too much as to render yourself insolvent), rebutting an IRS challenge that you had to have an understanding with the donee’s to give you money back since you did not retain sufficient assets, all while assuring your financial security. What approach may achieve all these goals? Perhaps use a budget and investment projection and model a result that gives you an 80% probability of achieving your financial goals. Then gift sufficient funds into a self settled trust (domestic asset protection trust or DAPT) to assure a much higher probability of achieving your financial goals. The excess over that can be given to a dynastic trust that you are not a beneficiary of. Making unreasonably “conservative” financial projections ignoring the nature of the done trusts that can be used in your plan is actually not conservative but dangerous to your taking the optimal planning steps for you.
√ The core of the above decision must be a budget and financial plan that assures that both of you, the resources you need for your future, from whatever sources. Intelligent financial planning must lead the estate plan. You cannot gift completely away in any format assets that the financial plan determines are essential for your financial needs. You can gift away assets to your children or trusts for them that the financial plan demonstrates you will never need. Some amount of wealth, perhaps unlikely to be needed by you, but which might be needed by you, should be structured in a manner that permits you access to it “just in case” you should need it.

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■ Hug Your Appraiser: The Tax Court denied a real estate developer’s charitable contribution deduction for $18.5M of real estate donated to a charitable remainder unitrust (CRUT) because the taxpayer who did his own appraisals failed to satisfy the substantiation requirements under Code Sec. 170 and the Regulations. Mohamed, TC Memo 2012-152. Lot’s of folks making donations or gifts get cheap on the appraisals. This case is a painful lesson that the dough spent on a good appraisal may well prove money well spent.
■ Madoff: Losing money to Madoff was devastating, but having an estate tax assessed on assets that really didn’t exist is beyond reason. A recent NJ taxpayer victory, by David Edelbaum, Esq., protected taxpayer’s rights to avoid this painful result. The decision validates that tax laws, to be given efficacy, must reflect common sense and be equitable. The court recognized that the estate tax can only be imposed if there is wealth transferred based on economic reality, and not based on fictitious brokerage statements that perpetuated the underlying Ponzi scheme. Most importantly, the court looked to Federal tax principles and stated that events that come to light after date of death but that impact on the true value at death must be taken into account. Thanks to David M. Edelblum, Esq. Feingold & Edelblum, LLC, Hackensack, NJ.
■Reimburse Taxes: Grantor trusts are popular especially for 2012 gifts. But if a grantor trust sells an asset at a large gain, you have to bear the tax. That actually is the whole point, because that reduces your estate for estate tax purposes and creditor protection. The trustee can have the discretion to reimburse you for the taxes, and that discretion won’t cause the entire trust to be taxed in your estate if state law doesn’t result in that discretion making trust asset reachable by your creditors. Revenue Ruling 2004-64. NJ might be amending its law to permit reimbursement. Before running to create a trust in NJ, remember that Alaska, Delaware, Nevada and South Dakota lead the way in trust friendly jurisdictions and there are better options to reimbursement. Have the trust loan you funds to cover taxes so that the economic value remains inside the protection of the trust. Many state laws are modeled after New York’s Estates, Powers & Trusts Law s.7-3.1(d).

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Pet Planning: Take affirmative steps to protect your pet. Draft a letter of instruction to family or friends who will step in to help in an emergency. Save all key pet records electronically and inform them where they are (vet records, licenses, vaccination records, and more). Ideally create a checklist of care that is appropriate, a list ing of likes and dislikes. Save this letter in the same electronic folder and give a hard copy to those who will be responsible. Introduce the potential care takers to your pets in advance and show them some of the importance nuances of care. Include in your durable power of attorney (pets are treated as property under the law) authority and direction to care for pets. In your will you could bequeath your pets to a particular caregiver. Name successors. Decide if you wish to leave money to the caretakers to defray the costs of caring for your pets, and whether you want to do more and leave them money as an incentive to provide good care. Finally, do you want to have the money and pet held in a trust so that someone has a fiduciary obligation and legal structure for the care of the pets? State laws differ and this may not be legal in your state, and your state may put caps on how much you can give to such a trust. If you set money aside for care and it is not used, in the trust you can mandate that it be given to an appropriate pet oriented charity. If you use an informal arrangement you can make a non-legally binding request that any excess funds be so given.

■ 18th Birthday: If you (your kid) recently turned 18 there are steps to take. If you had a car in your name consider transferring title to her, but be sure there is adequate auto and excess liability coverage. She should sign a durable power of attorney and health proxy to address emergencies. Even if she has negligible wealth a power can be important to help out. If there are any trusts for her you should review them and see if they have an age based payout that is triggered. For example, many old style trusts have a mandate to pay income beginning at age 18. UGMA accounts might end. If she has a job encourage her to get a credit card and start building her own credit record. Teach her how to get free credit reports and monitor her status.

■ Don’t Get Scammed: If you get an email fraud alert don’t call the number in the email. Instead call the main number for your bank, or the credit card number on the back of the card and let them connect you to their fraud unit. If the email itself is a scam this will prevent you from getting pulled in by calling a fake “fraud department” number.

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■#####Partner gifting to Trust
Who are the trustees? Perhaps the trust should be structured as a “directed” trust under Delaware law so Dick can be designated the Investment Trustee which would give him power to control the vote legitimately and still accomplish his estate planning goals. Any other approach might not work. Your concern also is the investment clause in his trust should permit the trust to hold stock in FB without diversification. Who are the successor Investment Trustees? You also need the shareholder’s agreement reviewed and revised to address succession.
■ #Phil….that is the interpretation most seem to be giving it. Seems that the prudent course would be to file for all affected estates or if not send a letter explaining it to the clients to protect you. Bob if you feel differently please chime in.

From: Phil Kavesh [mailto:southbayphil@gmail.com]
Sent: Monday, July 30, 2012 2:56 PM
To: michelle.ward@keeblerandassociates.com; Martin Shenkman
Subject: Fwd: FW: Portability Regs contain the answer?

Looking at example 1, under 20.2010-2T(c), it appears you are correct–DSUE does include a “windfall” carryforward of unused exemption even if it exceeds the first spouse’s estate!

In other words, even where an exemption trust may be fully funded by all the deceased spouse’s assets but still be under $5.12 M, there is more exemption passing to the survivor through portability! This then is a big gift to taxpayers beyond prior law and many first estates should be electing portability that aren’t because practitioners like me never understood this!!

Should you use your “contacts” within the IRS to clarify this? Because if it’s right we need to do a teleconference on this asap while practitioners can still extend 706s for 2011 deaths!! I don’t want to personally go to the immense bother of reviving old estate administration matters and charging clients for portability elections, or scaring other practitioners, unless we are clear on this ■ # ■ # ■ # ■ # ■ # ■ # ■ # ■ # ■ # ■ # ■ #

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Lead Article Title: Estate Planner Cocktail Party ChatterSummary: Have you tried a “Nerdz” – 1/3 oz Three Olives® grape vodka, 1/3 oz sweet and sour mix
1/3 oz DeKuyper® Watermelon Pucker schnapps. Pour, shake and strain……enjoy at, where else but a cocktail party of estate planners (yawwwwn)! If you worked the floor with drink in hand, here’s some of the chatter you’d hear:

■ Hug Your Appraiser: The Tax Court denied a real estate developer’s charitable contribution deduction for $18.5 million worth of properties donated to a charitable remainder unitrust (CRUT). Although the Court acknowledged that the donations were made, and speculated that his self-appraisals actually undervalued the real estate, the deductions were denied because he failed to satisfy the substantiation requirements under Code Sec. 170 the Regs. Mohamed, TC Memo 2012-152. Lot’s of folks making donations or gifts get cheap on the appraisals. This case is a painful lesson that the dough spent on a good appraisal may well prove money well spent.
■ Cleaver Family Harmony”: While the folks might believe (perhaps justifiably so) that one child has greater financial needs then the others, leaving more to that child, however justified, might just leave a legacy of anger for all. Another approach would be to have a family meeting, with or without advisers, and discuss the issues and concerns openly. Things are often different than the folks perceive. And surprisingly, if given the opportunity some siblings may step up to the plate to help another if asked to do so. That can be a far better result than a surreptitious unequal distribution plan. If the focus can be shifted from something being an individual’s issue, to a collective family matter, more harmonious solutions may become feasible. Thanks to David Schechner, Esq. West Orange, NJ.
■ “Talk to Lori”: Instead of “Talking to Chuck” try “Talking to Lori.” Sometimes it’s the simple ideas that have so much impact on getting planning going. “Change the perspective and conversation at life transition Points” and “Plan proactively not only defensively.” Example: Before marriage, a prenuptial agreement is common. But the focus of the conversation is usually negative, i.e., on the marriage not working out. Reframe the talk to a positive perspective of how overall planning during their marriage will be handled, gift tax planning to benefit both parties, integrating asset protection considerations into the prenup, and planning for your new life; and so forth. Change the conversation and enhance the result. [Thanks to Lori Sackler of Morgan Stanley-Smith Barney, Paramus, NJ.
■ Deed Transfers: In spite of portability many spouses still should re-title assets to fund a bypass trust on the first death. Can the lender call the mortgage? Depends on state law. Section 341 of the Garn-St. Germain Act of 1982 prohibits a lender from exercising its option pursuant to a due-on-sale clause upon a transfer where the spouse of the borrower becomes an owner of the property. Thanks to James Costello, Esq. Bridgewater NJ.
■ Better ILIT: You remember new and improved Tide, well why not new and improved ILITs (irrevocable life insurance trust)? Why set up an ILIT in a boring state like NJ or NY for example, when you can set it up in a zippy state like Delaware, Alaska, etc.? If you can get the cost of using an institutional trustee down to a modest enough level, taking advantage of better state law might be well worthwhile. Consider the following advantages an Alaska ILIT might afford: ◙ Very low life insurance premium tax (10bps); ◙ The trust can be a self-settled trust that includes the grantor as a discretionary beneficiary PLR 200944002; ◙ No rule against perpetuities so the trust can last forever; ◙ No state income tax. This may be academic today, but if the insured dies and the trust hold substantial funds to invest, it can be a biggie. Thanks to Matthew Blattmachr, CFP® Alaska Trust Company.
■ Clawback: If you make a $5.12M gift today and in 2013 we end up with a $1M exemption, will the $4.12M excess gift be clawed back into your estate triggering an estate tax? Bright estate tax minds take opposite views as to whether this is “to be or not to be.” Bottom line, that is not the question. In most conceivable cases, gift planning should still be pursued ‘cause lifetime gifts may outweigh the risks of clawback: ◙ lock in discounts that may be repealed, ◙ remove post-gift appreciation from your estate, ◙ grandfather grantor trust and GST allocations to a done trust, etc. Nevertheless work the numbers, consider the risks, try to evaluate who will bear the clawback tax if it happens (not easy!). State tax apportionment laws may not address this if the will is silent. Will taxpayers really pay their lawyers to go through these hypothetical mental gymnastics and draft more complex clauses? They should. But they should also floss daily.
■ Death Bed Planning: ◙ If you have highly appreciated assets in a grantor trust (an irrevocable trust you give assets to but on which you continue to pay the income tax), and the trust used a power of substitution to achieve grantor trust status. This permits you to swap say cash for appreciated assets inside the trust of equivalent value. This technique can bring those assets back into your estate and let them get a basis step up on death. Help your heirs avoid the higher capital gains the folks in Washington keep threatening. ◙ If there is no swap power it the irrevocable trust you set up there is another way to skin the cat (isn’t that an awful saying!). Buy the appreciated assets from the trust. This purchase will similarly be ignored for income tax purposes. Rev. Rul. 85-13. ◙ If you live in a decoupled state (e.g., NY, NJ) you can make a death bed gift and save state estate tax. But Goldilocks, check the gift provision in your durable power of attorney – some are too cold and prohibit gifts, some are too hot and limit gifts to the annual gift exemption, but some have a power that is just right. ◙ What if you only have appreciated assets in your name (gee I wish my portfolio looked like that!) and worry that a death bed gift will saddle your kids with a bigger capital gains tax then the state estate tax saving you’ll realize? Take a smarter route – margin your securities account and gift the borrowed cash (but make sure the check clears before death). The debt should reduce the size of your estate, but the appreciated securities will be in your name and get the step up in tax basis to reduce the capital gains your heirs would otherwise pay.
■ Power Roth’ing Your IRA – Make sure your durable power of attorney affords your agent the right to convert your IRA to a Roth. If you’re on your death bed a conversion will trigger income tax due the payment of which might reduce your estate for estate tax purposes, and may even push your estate below the threshold to file a return (but lots of estates should file a federal estate tax return anyway to secure portability for their surviving spouse). If you recover, you can recharacterize your Roth back to a regular IRA and avoid the tax. But if your power of attorney doesn’t expressly permit Roth’ing and recharacterization, the general language in your power might not suffice.
■ Home Sweet Home: Home ownership use to be a given. Now planners are evaluating the pros/cons and helping clients determine if renting is a better economic deal than owning. Just ‘cause appreciation may not be likely doesn’t mean renting wins the day. Consider other benefits of owning: ◙ You can improve your home for medical reasons and deduct all costs as a medical expense. ◙ If you’re wealthy you can use a Qualified Personal Residence Trust (QPRT) to shift value in a very advantageous way to kids. ◙ $250,000/$500,000 home sale exclusion. ◙ Meet the home office requirements and you can use a room as an office and take a tax deduction. ◙ Home ownership in many states benefit from special laws that afford valuable asset protection that is cheaply and simply obtained. Example: If a husband and wife own a home together as tenants by the entirety a claimant of one spouse cannot force the sale. ◙ The legal, tax and other benefits of home ownership can be significant.
■ Big Apple Takes a Bite out of Nonresident Partners: Arizona residents were partners in a partnership that owned hotels in New York. The partnership sold New York properties and apportioned the entire gain using the three-factor apportionment formula. NY recently held that the gains from the sale of New York real estate were not apportionable using the three-factor formula. Rather the gain should be considered as entirely allocable to New York since the properties were in NY.
■ 2012 Two-Step: As the 2012 year draws to a close clients will be coming out of the woodwork realizing gee maybe I should do something. But as we get nearer the end of the year timing presents unique planning issues. For example, what will we (the client and the planners) still have time to do? What if there is no time for an appraisal? Do you really want to wing it on a guesstimate relying on defined value clause? What if really late in the year the trust company cannot open a new trust account in time? What do time constraints do to how you would structure funding an LLC and gifts to a trust? Would you, or must you, opt for non-trust gifts (e.g., gifts of LLC interest direct to a child) thereby losing any GST benefits and the trust asset protection benefits? What happens if you try to set up a trust in say NJ and later shift it to Delaware to get advantage of Delaware law? What issues does that create? How should practitioners try to protect themselves from the added risk and complexity near year end transactions may present? Act now.

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Checklist Article Title: Shaft-ed

Summary: Elder financial abuse is a misnomer. It is a much broader issue. Seems that a growing number of people, especially anyone with any type of vulnerability (age, health, other stress, lack of sophistication) are being taken advantage of. Here’s what Isaac Hayes sang about not getting the Shaft:

√ Team Effort: Who’s the cat that won’t cop out When there’s danger all about? SHAFT!
Have a coordinate estate planning team. If your CPA, attorney, insurance consultant and wealth manager are from independent firms and all look over each other’s shoulders, there is a much lower likelihood of you getting the shaft. Can you dig it?
√ Understand: You don’t need to understand the esoteric nuances of a GST allocation but you do need to understand the big picture of all your planning and documents. Even the most exotic planning idea can be explained in broad terms. If the stuff is complicated, get other advisers or family involved. No shame in getting help. Big risk in someone drafting something you sign that you truly don’t understand. Example: Most good wealth managers have some knowledge in their shops about estate planning. Similarly, most CPAs have some background as well, while many have considerable expertise. Include them in the estate planning discussions to assure that your wishes are really being implemented.
√ Oversight: Checks and balances are critical. There’s lots of ways to build them into your planning. Have duplicate monthly statements sent to a trusted family member or better yet your CPA. Ideally have the recipient log information into a computer bookkeeping program to generate reports that can be reviewed to identify unusual items. Use an institutional co-trustee on trusts.
√ Be a Detective: Private eye John Shaft asked lots of questions. So should you. Be alert for anything out of the ordinary. Often when something doesn’t seem right, it isn’t! Is one of your advisors being unusually solicitous? Are there inconsistencies in recommendation a particular adviser is making? Has a nice or nephew that you haven’t heard from in years suddenly resurfaced without logical reason? Has an “investment” adviser made recommendations without looking at your overall financial situation? Does someone selling you a product get uncomfortable if you ask how they are compensated, or if you request that another adviser review the proposal? When a planning technique or product has a unique or trademarked name, or combines several different products or techniques into one, especially if it is complicated to decipher the component parts, be wary. It’s a bit like dieting, gotta eat less and exercise more, most of the rest if fluff. Financial and estate planning requires a budget, estate planning documents, investment allocation, appropriate insurance coverage, etc. Anyone recommending esoteric slick sounding stuff before the basics are in place, is not looking out for you. The investment product with a high guaranteed return is as real as the muffin with no fat, sugar or calories.
√ But That’s What the Client Wanted: Perhaps the biggest excuse professionals use for taking actions that may be inappropriate. Professionals should make sure that the steps a client requests are rationale and reasonable and not blindly follow requests made under stress or when in emotional pain. Clients should encourage their advisers to challenge them. A “yes man” might be good for the go but not for much else. Encourage your advisory team to engage in discussions and to advocate for different options. Meaningful evaluation of different views will lead to better decisions. If you tell your attorney to disinherit your son, she might simply do so. A better attorney will engage you to understand the underlying reasons and propose possible alternative solutions that may better meet your objectives.
√ Simplify and Organize: Get bills on auto-pay and deposits made automatically. Not only is it harder to miss something, but the more automatic the less opportunity for the bad guys to dig in. Consolidate accounts, less is more. The less accounts the easier to keep track of your assets. Use a P.O. box to minimize the risks of someone snagging your mail. Get credit reports from the major bureaus and review them for anomalies.
√ Checks and Balances: How do you protect a client who is aging from elder financial abuse, or a client that is so busy they cannot keep tabs on all the details of their financial life. There are so many problems that can affect clients. Some ideas might include: ◙ duplicate copies of monthly statements to your independent CPA (it’s not only the funds under management, but checking accounts and other accounts); ◙ Appoint a monitor under the power of attorney; ◙ Use co-trustees instead of one trustee; ◙ Have annual meetings of all advisers so that there are checks and balances on advisers; ◙ Any adviser that doesn’t encourage others to review his or her work deserves suspicion; ◙

√ Checks and Balances: Have a care manager meet you in your home and complete an independent evaluation periodically. Abuse of those who are elderly or vulnerable is common, growing and usually undetected.

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■ Florida Trust Change: Non-probate and non-trust assets of divorced couples (e.g.) insurance, annuity, and retirement plan beneficiary designations, and transfer on death accounts). A final judgment of dissolution (i.e., the divorce) will treat the ex-spouse as predeceased if the client failed to change the beneficiary designation after the divorce. Anyone who is divorced in Florida must carefully evaluate the ownership (title) to accounts and beneficiary designations post divorce. If an ex-spouse was to remain a beneficiary of a particular account or assets be certain to review with Florida counsel what steps to take to secure that result in light of the new law. Thanks to Jeffrey A. Baskies, Boca Raton, FL. An important lesson of this development is for those living in states that don’t have this Florida type of law. If you divorce and don’t revise your beneficiary designations, your ex-spouse may remain your heir regardless of what you agreed in the divorce agreement because. So the really real lesson of this Florida law change is a reminder to everyone to be sure your planners periodically review all of your beneficiary designations and title to your accounts to make sure they are consistent with your goals.
■ Same Sex Couples: A surviving same-sex spouse pursued victoriously a constitutional challenge to Section 3 of the Defense of Marriage Act (DOMA), which denies recognition of same-sex marriages for purposes of Federal law. The court found that the provision violated the Equal Protection clause of the Constitution and allowed a marital. Edith Schlain Windsor v. U.S. (DC NY 6/6/2012) 109 AFTR 2d ¶ 2012-870.
■ Basis Adjustment: A partnership was granted a 120-day extension of time in which to file a basis election under Code Sec. 754 to adjust basis. When a FLP or LLC interest is sold or a member/partner dies be sure your CPA looks into this. While the IRS was lenient in this case its not the position you want to be in. The IRS found that the failure to file the election resulted from “inadvertence” and the partnership acted reasonably and in good faith. PLR 201222012.

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■ Whimpy Wandry Appraisals: Post-Wandry might taxpayers use a defined value clause and be less concerned about the quality of their appraisals then the price?
■ Post-Death LLC Planning: A sale of a minority member’s interest or the death of a member will close the partnership (an FLP or LLC taxed as a partnership) tax year as to the transferor but not terminate the partnership. Allocations to the transferor member can be determined by: ■ an interim closing of the partnership books. ■ by the proration of annual income, ■ or any other “reasonable” method. If the operating or partnership agreement specifies an approach that is what you must use. If not, have a sharp CPA evaluate the tax impact of each alternative and see what nets the best tax result for the family. In 2013 if we get a 3.9% Medicaid tax the spread from higher to lower bracket family members (including say a deceased parent’s estate) may net a few tax dividends. Without a provision in the governing agreement there could be abuse. A departing member could be allocated much more income than expected. Say for example there is a taxable loss from operations up to the date of death (or the date of a buy-out). If the remainder of the year is very profitable using the days allocation method can have an adverse result for the deceased (selling) partner/member. Most taxpayers would opt for a closing of the books to avoid surprises but in the family context there could be creative post-mortem advantages for not addressing this in the governing agreement and instead leaving it to the family to pick the optimal approach after the fact. The problem is that it could backfire on certain beneficiaries. Thanks to Ira Herman, CPA – JH Cohn, Roseland, NJ.

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Lead Article Title: : Root Canal Estate Planning and OtherSummary: Some simple paradigms can be used to explain important and essential planning concepts.

■ Root Canal Estate Planning: – Most clients use the root canal method of estate planning. Wait 5, 10 perhaps 15+ years between appointments. Do you complain about your estate planning being very complicated? Do you gripe about the costs? Is it a frustrating process? That may largely be due to your using the root canal method. Why don’t you try skipping your semi-annual dental cleaning for years too! Just wait until a tooth hurts like the Dickens, call your dentist and wind up at the endodontist for a root canal. Ouch! Maybe if you went to your dentist and estate planner regularly things could be different. You can’t expect to avoid the dreaded root canal if you don’t take care of your teeth. Ditto on your estate plan. Annual visits to all of your advisers is the way to root out problems before they become more complex and costly. Regular care is what would make your planning less painful. If there is an error in a trust, or a required formality overlooked, annual meetings can often provide an opportunity to correct a problem and get everyone back on track before small potential problems become more significant, costly and time consuming to address.
■ Jigsaw puzzle: Starting with the big picture is usually the way to tackle a complex situation. To really plan properly you and your advisers need the mile high view to make sure the global decisions are logical and coordinated. Then you can drill down to get the details. A gardening website summarized it all: “Shrubs require consistent and routine trimming to maintain a healthy and well-manicured hedge. Occasionally a hedge is neglected and becomes overgrown. With the proper pruning technique, an overgrown hedge can be restored. Depending on how out of control your hedge is, it may take a few years of trimming to completely train it.” If your estate plan looks like a jungle, you might have to opt for the Jigsaw approach. Focus on identifying the corner pieces. Perhaps the succession plan for your business or getting your life insurance into a trust. When you’re able to solve a few pieces at a time (i.e., able to add a few corner pieces) the rest gets easier. Pick independent planning steps that can be handled relatively independently to chip away. These are the pieces of the puzzle that just looking at them you know where they fit. With the corner pieces and a few obvious puzzle pieces in place, often even the most complex or messy plans can take shape. This can be a lot more efficient and palatable than struggling beyond reason trying to pull all the disparate parts together from the get go in one comprehensive plan.
■ Rocket Ship: If you shoot a rocket ship to the moon and are an inch off in your aim at launch, you could miss the moon by 100s of miles. So to with a budget and financial plan. If you’re overspending today, 20 years from now you may be wiped out. Even for very wealthy people, spending at too high a rate, which may seem inconsequential today, could have a devastating impact over time. When Elton John sang his famous song about financial planning, he crooned “And I think it’s gonna be a long long time.” He was right on target. The compounding of excess spending over a long long time is ruinous. So focus on the details and even the small issues today. You can put it off, but one belt notch of tightening today may save 3 tomorrow.
■ Oxygen Mask: When you’re on an airplane the flight attendant tells you that if the oxygen masks fall, put yours on first before helping anyone else. (Don’t ask your anesthesiologist ‘cause she might say put the mask on a child and certain other people first, and that would ruin our analogy). So too with planning. Some number of folks are so preoccupied getting enough money and help to their kids they forget about taking care of themselves first. It is a wonderful thing to be generous and helpful to your children or other heirs, but not to the point you have to ask them for money so you can step up your meal plan to something more enticing than a Happy Meal. Put the oxygen mask on your financial planning first. Sure, funding irrevocable trusts is a great way to save estate tax and keep your CPA filing annual tax returns. But if you’re not a beneficiary of that trust, how can you get access to money if you need it? Read Murphy’s law below.
■ Murphy’s Law: What can go wrong will go wrong. The key questions in every plan is “what if.” What if this, what if that….keep asking what if until the reply is “I really don’t care.” Asking what if questions and considering planning to address them is vital.
■ Sailboat: You cannot sail a boat straight into the wind. The sail will flutter and you won’t get anywhere. You need to tack back and forth constantly readjusting to hit your target. Planning is like that too. There will be years you just have to overspend your budget (yes, even uber-wealthy folks need a budget). In some years you just cannot afford the time or emotional investment to undertake certain important planning tasks. No problem. Make up for it next year by tacking in the other direction. Being reasonable with yourself, and flexible but diligent in your planning, is the realistic way to stay on track.
■ Cream and Milk: – GRATs, grantor retained annuity trusts, are tough for some folks to understand. Perhaps thinking of the milk and cream from a freshly milked cow will help (you have milked a cow haven’t you?). The cream rises to the top of the milk. In a GRAT you get the milk and the cream that rises to the top over the mandated 7520 federal interest rate is what get’s skimmed off for the kids.
■ Waterbed: – Grantor trusts (you as the person setting up the trust pay the income tax) seems like an odd concept to many people. But grantor trusts are one of the hottest planning techniques for wealthy taxpayers (well today — the Pres wants them out). Grantor trust status is the core of a DAPT (domestic asset protection trust) or Dynasty trusts. The waterbed analogy might help. If you push down on the foot of the bed, the top of the bed rises. The overall volume in the bed doesn’t change. In a grantor trust you pay the income tax on income earned by the trust so the assets in the trust, like the top of the waterbed, rises. The assets in your name decline. But you haven’t lost out on any wealth, just redistributed it.
■ Tylenol vs. Advil: Everyone has taken both Advil (a non-steroidal anti-inflammatory agent, NSAID) and Tylenol (Acetaminophen) for a headache (perhaps after reading each issue of this newsletter with the cramped type and odd attempts at humor). But do you have a clue how each drug helps that headache? Nope. But that doesn’t mean they don’t work. They do. And you (and everyone you know) takes them without having a clue why they stop that headache or pain. You should know dosages, possible side effects to be concerned about, drug interactions to avoid, etc. But do you really need to understand how it works? But then when it comes to a complex estate planning technique like a defined value clause, a Graegin loan, or a split-dollar loan, you feel you need to understand all? Certainly you should understand the big picture. What you are doing, what your options are and generally how they impact you. But bear in mind the Tylenol/Advil analogy. Don’t let the impracticability of understanding a complex tax, estate or investment strategy or technique to the degree your adviser does, dissuade you from taking steps that are in fact prudent and appropriate for you.
■ Weakest Link: Everyone remembers the TV show, but the same paradigm applies to an estate planning team. Most folks are reticent about letting their advisers (CPA, business attorney, estate planning attorney, insurance consultant, wealth manager, etc.) really coordinate as they should. The best crafted irrevocable trust plan can be undermined by any adviser not addressing his role properly. If the trust is drafted impeccably, but the CPA fails to file an election required to maintain the S corporation election for S corporation stock given to the trust, the results can be disastrous. Ditto if a brilliantly drafted Grantor Retained Annuity Trust (“GRAT”) is drafted, and the income tax returns are filed perfectly, but the investment location decisions are misunderstood by the wealth manager. Avoid the weakest link in your plan by coordinating your advisers. It may only take an hour web conference a year, but the benefits will far outweigh the costs, often exponentially. You have an important responsibility in assuring the success of any planning, and a that responsibility is not being fulfilled if you do not participate in regular reviews of your plan and documents and coordinate your advisers.
■ Annual Physical: Annual reviews are essential to the success of any plan. You have not had a meeting in nearly 10 years. Regular maintenance is essential for an estate plan, e.g., maintaining an insurance trust, no different than an annual physical or periodic service on your car. Failing to do so will substantially increase the likelihood of your goals not being met. It is especially important given the rapid changes and continued uncertainty in the tax laws. Estate planning is an ongoing process, not the mere signing of documents. You have an important responsibility in assuring the success of any planning, and a that responsibility cannot be fulfilled if you do not participate in regular reviews of your plan and documents and coordinate your advisers. If this sounds like the root canal message above. It is!

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Checklist Article Title: Trust Distributions

Summary: Many folks are contemplating transferring flow through entity interest into dynasty and other sophisticated irrevocable trusts in 2012 to use their gift exemption. Should you be in the game? How do these transfers affect trust distributions and related decisions? Can you get money out of such a trust?

√ If you transfer entity interests in 2012 any entity distributions paid after the transfer should be paid to the then record owner which will be the trust. Prior to transfer of a flow through entity to the trust all distributions should be paid to the then member of record, you, in your personal capacity. Some transfers may result in an interim closing of the entities books and a pro-ration between you and the trust.
√ Since most dynasty trusts, DAPTs and BDITs (Beneficiary Defective Irrevocable Trusts), are grantor trusts, all income will be reported on your personal income tax return. Your CPA should file a form 1041 tax return for the trust including a statement that income earned by the trust is reported on your personal return. President Obama has recommended legislation undermining grantor trust benefits.
√ Distributions to fund tax payments are common. Example: Family S corporation distributes 40% of income so shareholders as a distribution so each will have enough cash to pay income taxes. The estate plan of transferring interests to a trust will complicate this mechanism. Once the flow through entity interests have been transferred to the trust all distributions must be made to the dynasty trust as the record owner (member, partner, S shareholder). That won’t infuse funds into your bank account for you to pay your income tax on the earnings of the flow through entity. The income, however, will still pass to your personal return since the trust is likely a grantor trust.
√ The optimal means of handling this situation from a tax and asset protection perspective is to not make any distribution from the trust to fund your income taxes because the tax payments you make will reduce the size of your estate. This is one of the key leveraging benefits of these trusts being structured as a grantor trusts. The greater the unreimbursed tax burn the lower your estate.
√ Some advisers include a provision in such trusts permitting the trustee to reimburse you for income taxes paid (this is OK under some state laws, like Delaware). Other advisers shun such provisions because of concerns the IRS will argue that there was an implied agreement to reimburse for taxes if the provision were activated. Like many complex tax issues – ask different advisers and you’ll get different opinions.
√ So, like the old Wendy’s commercial, “Where’s the beef?” Well Clara, here it is, and they’re Hot ’N Juicy:
► Salary and compensation may still be paid from the entities given or sold to the trust, when appropriate.
► Distributions may be able to be made to your spouse from your trust.
► Distributions may be able to be made from your spouse’s trust to you and perhaps your spouse (if it’s a DAPT – a Domestic Asset Protection Trust of which your spouse is a beneficiary and the grantor).
► The trust could make a loan for adequate interest to your or perhaps your spouse. This is a great mechanism as it retains the values intact inside the protective envelope of the trust, and if properly handled like a loan should not seem to raise the specter of the tools the IRS uses to pull these transfers back into your estate.
√ Caution, if any of the above possible distributions follow a pattern or appear to correlate with your tax or other expenditures the IRS may argue that there was an implied understanding between the trustee and family on these distributions. This could be used as a means to disregard the trust and pull all trust assets back into your estate.
√ The valuation of the interests to be transferred may have to consider forthcoming distribution, and if there is a pattern of making distributions so members can pay income tax on their pro-rata share of income, that pattern of payments may be viewed as reducing discounts.

Recent Developments Article 1/3 Page [about 18 lines]:

■ Beneficiaries on the Hook: A recent case held that the beneficiaries of an estate who were serving as trustees were liable for unpaid estate taxes. Johnson, DC Utah, May 30, 2012. )
■ Trustee Not Liable on Change in Insurance Policies: Wachovia was the trustee on an insurance trust and structured a 1035 exchange through its insurance subsidiary. Trust beneficiaries challenged Wachovia for self dealing, the loss in cash value and more. The court found Wachovia had done its job right and held it had no liability. However, there are some important lessons in this case for anyone serving as trustee. The most obvious and most important lesson, which few individual trustees seem to get, is that being a trustee is serious stuff. Wachovia did the job right, but few individual trustees seem to. First, the trust agreement permitted self dealing. Few individual trustees really understand the trust documents and fewer still meet periodically with an estate attorney to review their responsibilities under the trust. French v. Wachovia Bank, N.A., 2011 U.S. Dist. LEXIS 72808 (E.D. Wisconsin 2011)
■ Employer Owned Life Insurance: EOLI has strict reporting requirements in order to avoid having insurance proceeds taxable. In a recent ruling the IRS gave an employer some leeway in accepting the agreement between the employer and employees as meeting the notice requirements although the employer failed to obtain from its employees the specific documentation required by the “notice and consent” requirements of Code Sec. 101(j)(4). PLR 201217017. While the ruling was quite favorable to the taxpayer it points out what could be an extraordinarily costly tax trap for many businesses who have been lax with the 101(j) requirements, or even ignored them. This should serve as a reminder call for any business owner with life insurance on the lives of any employee, even key owners.

Potpourri ½ Page:
■ Standby-BDIT: With 2013 potentially bringing whopping estate tax increases, bolstered by President Obama’s proposals to zap lots of fun estate planning toys (GRATs, discounts, grantor trusts, dynastic planning), what can rich folk do to protect their kiddies future estate plans? Set up a beneficiary defective irrevocable trust (“BDIT”) today for each kid and gift $5,000 to it. Use the cheapest trustee you can find in Alaska, Delaware, Nevada or South Dakota. That will create for kid a trust, the Standby-BDIT, that will hopefully grandfather grantor trust status, GST/dynastic tax benefits, and more. Wow! But just like with the Sham Wow infomercials…There’s more! Read on…
■ The Gift that Keeps on Giving: While the average rich kid should get the folks to set up a BDIT described above, here’s an idea that could be waaaay better than a Standby-BDIT (Sorry Dick!)? Richie Rich can’t get his folks to make him a gift since they’ve likely used up their $5.12M exemptions on non-reciprocal dynasty trusts or DAPTs. So how can Richie Rich, the poor little rich boy, take advantage of his $5.12M exemption and grandfather all the great benefits of the Standby BDIT technique above? Try this one on for size. Richie Rich should get his dad Richard Rich Sr. to loan him say $6M so Richie could make a gift to a Richie DAPT. But that loan won’t be respected ‘cause Richie doesn’t have enough assets in his own right to support the repayment of the loan. The IRS would challenge the purported loan as a taxable gift. Ouch, even Richard Rich Sr. wouldn’t find that painful. Enter SuperInsuranceMan! Neato, Presto, Zap! Zowie. If Richie will buy a big permanent life insurance policy the loan can be structured as a split-dollar loan with the appropriate elections filed as required by the split-dollar Regs. Gee, now the IRS has to recognize the transfer as a loan ‘cause its own Regs say it has to. Richie can gift the $5.12M to his very own DAPT. Years from now the DAPT, as a grantor trust, could buy the insurance from Richie, if advisable. Now Richie has a fully funded $5.12M grantor, dynastic trust that hopefully will be grandfathered if the laws are all changed. This will be the keystone for all of Richie’s future planning. Oh, but what if Richie dies while the policy is held by his estate? Gee, everyone will still be way better off as a result of the large policy they he owned. If this idea doesn’t get your insurance agent smiling, check his pulse!
■ Rewrite Your Living Will: Hey wanna save the kids some estate tax dollars? Update your living will and health proxy to provide that if you have anything worse than a cold or hangnail, your heirs should pull the plug before New Years. Dying in 2012 with a $5.12 million exclusion and 35% rate, versus checking out in 2013 with only a $1 million exclusion and 55% rate, could mean big bucks to Junior. Horrific and unconscionable? Sure, but worse has and will happen for money. If you’d rather not become fish food to save Junior a few bucks, some of you had best change your health care agents to someone who won’t stand to inherit the tax savings.

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Lead Article Title: 2012 – Act Now

Summary: Unless you’re hiding under a rock, you’ve been bombarded with email newsletters, mailings and more from your CPA, investment adviser, the 100s of people who want to be your investment adviser and more, cajoling you to make gifts before the end of 2012. Well this article is one more of ‘em. And you should pay heed. While the main drift of this message is clear, make gifts before the law changes in 2013, there are a number of important nuances to the message that the media blitz had not addressed: Lot’s of people, not just the ultra-high net worth folks, should be doing this. So if you’ve tuned out these messages because you’re not a zillionaire, tune back in! So, “I’ll bet you think this song is about you Don’t you? Don’t you?” Well Carly, it is! No one should just make a gift, the gifts should be in trust (your lawyer won’t make any money on the deal if it’s just a simple gift!). These trusts raise a host of issues, many of which have special implication to 2012 planning. So, we’re going to try to convey these key points in a really succinct amount of space, so lots of details will be left out, but hopefully enough can be conveyed to motivate you to act now, and act prudently.

■ Point 1: Uncertainty shouldn’t be an excuse for inaction. If the weatherman says 20% change of a horrible storm, you’d carry an umbrella. Uncertainty may also mean opportunity. If you don’t act now 2013 is scheduled to bring a $1 million exemption and 55% rate. President Obama has continued to propose estate and gift tax changes that will undermine much of the planning arsenal, making his proposed 45% rate and $3.5 million exemption far more costly than most imagine. Consider that the left end of the tax continuum. True, the future is uncertain. Maybe the Republicans will sweep the election and repeal the estate tax. Consider that the right end of the tax continuum. If you don’t act now and the left end materializes you (not only your heirs) may lose out big time. If the right happens worst case you’ve wasted the cost of the planning, but have you? The trust planning that will serve your estate planning needs will also provide asset protection benefits, provide divorce protection for heirs, and better control and management of your assets. So the planning in the best tax case scenario won’t be for naught, you’ll just have one less benefit. And by the way, even if the estate tax is repealed (and ya shouldn’t hold your breath hoping for that one) the gift tax may remain intact with a $1 million exemption even under Republican control. Most folks forget that the gift tax is an integral backstop for the income tax, not only for the estate tax. Just look at what happened in 2010 with the gift tax for proof.
■ Point 2: Planning is not only for Richie Rich. If you have a non-married partner a $1 million gift exemption in 2013 will make it costly to shuffle ownership of assets between you and your partner. Everyone, not just surgeons, should be concerned about asset protection. Nothing anyone in Washington does will change the litigious nature of our society. About a score of states have decoupled from the federal estate tax system so that lower amounts of wealth may trigger a tax. A simple gift today might be all it takes in many situations to reduce or eliminate state estate tax. Use the current favorable tax environment to shift assets into protective structures before the party ends. A $1 million gift exemption will render much of this planning costly, impractical, or impossible. Remember at midnight 12/31/12 the carriage turns back into a pumpkin and the ride is over.
■ Point 3: Start with a Financial Plan. While your estate planner might think he or she holds the keys to the planning kingdom, this kinda planning should have at its foundation a well thought out financial plan. Does this suggest your wealth manager should be driving the bus? Nah, but they should be a co-pilot. How much can you afford to give away and be really assured that you won’t be asking the kids for a loan? Which assets can or should you give away? Do you need additional life insurance for coverage in light of components of the plan? Do you need access to the money you give away and if so how much? This analysis will support your potion that you’re left with more than adequate assets for your lifestyle after the transfers. This can deflect an IRS challenge that you had an implied understanding with the trustees (or managers of an LLC) to get money back because you left yourself with insufficient resources. It can also make it harder for a creditor to prove at a later date that your transfers constituted a fraudulent conveyance.
■ Point 4: Make Gifts in Trust. Whatever amount you determine to give away, give it to one or more trusts, not direct to an heir. Trusts provide assets protection, divorce protection, preserve generation skipping transfer tax benefits (in English they can keep the assets out of the transfer tax system forever). Trusts can be structured as “grantor trusts” so you can sell assets to them without trigger capital gains and you can pay the income tax on trust income thereby growing the value of the assets inside the trust faster while shrinking the assets left in your name to reduce assets reachable by creditors or subject to estate tax. Both of these bennies are on President Obama’s hit list, so get ‘em while you can. Perhaps the biggest vig of gifting to a trust is you can retain the ability to benefit from the assets in trust. Say you set up a trust for your spouse/partner and all future descendants. So long as your spouse/partner is a beneficiary you can indirectly benefit. You can set up a Domestic Asset Protection Trust (DAPT) and be a beneficiary of your own trust. Even if you’re mega rich, but much of your wealth is concentrated in a business, be very cautious about cutting off your access to any trust assets. Don’t forget the harsh economic lessons of 2008-, and remember the Boy Scout motto “Be Prepared.”
■ Point 5: Transfer Assets to Trusts. It’s not only gifts to take advantage of the current exemption, but sales of assets to trusts that can provide a huge benefit now, that may disappear when the ball drops in Times Square. If you sell 45% of your interest in a family business valued with a 40% non-marketability and lack of control discount, that’s huge leverage. Discounts may head the way of the Dodo bird. Since few trusts will have cash to pay for the purchase these sales are structured as note sales. Interest rates remain at historic lows. So transfers well beyond the $5.12 million are “can do.” For many folks the better approach is a technique described in prior newsletters called a Beneficiary Defective Irrevocable Trust (BDIT) that will depend on this sale technique. Sell ‘em while you can!
■ Point 6: Plan the Trusts Right. The trust or trusts you’ll use should not be off the rack. This is the time to step up to the custom tailored suit. Navigating Scylla and Charybdis is child’s play by comparison. Some of the issues to consider include: ►Should you be a beneficiary or not? If yes, there are precautions to take and only certain states in which the trust can be established. ►Is there any reason the trust should not be a grantor trust? Unlikely, but ask. If it is a grantor trust what happens if there is a big gain? Example – you transfer your family business to the trust and 5 years from now sell out to a public company for big bucks. You have to pay the gain but the bucks are in the trust. Some practitioners use a tax reimbursement clause but caution is in order. These clauses have to be handled correctly and the trust must be in a state with appropriate laws. It is worrisome is that if the trustee just so happens to reimburse you, the IRS might argue that you had an implied agreement with the trustee to reimburse you for the capital gains on a big sale. There may be better approaches. ►If you and your spouse/partner both set up trusts, the trusts need to be sufficiently different to avoid the IRS arguing what is called the “reciprocal trust doctrine” — that they are so identical that they should be “uncrossed” so that the trusts are included back in your respective estates. That would entirely negate the planning. Differentiate the trusts using different powers, different distribution standards, set them up in different states, sign them on different dates, use different assets, print them on different color paper (just kidding on that one), etc. ►If you own all the assets to be given can you set up a trust and gift $10.24 million and have your spouse treat the gift as if it is ½ his thereby using up his exemption? While spouses can gift split, if your spouse is a beneficiary of the trust which is the recipient of the gift, that is a no-no. ►What if you gift $5.12 million to your spouse, and he then gifts it to his trust to avoid the gift splitting issue? Nice try but maybe no cigar. The IRS could attack that one using the “step transaction doctrine.” If the IRS wins the duel they might treat your gift to your spouse and his gift to the trust as really an indirect gift by you to his trust. Thus, you’d be treated as making two $5.12 million gifts and owe about $1.8 million in gift tax. Ouch! ►There has never been a time in history when so many taxpayers may feel so compelled to make so many large transfers in such a short time period. Big brother will be watching so more caution and planning then ever before should be exercised. ►#You want to fund a FLP or LLC with assets then make gifts and thereby secure discounts. Time is short. If the assets are not inside the entity long enough the IRS will argue that the gifts were of the underlying assets, not the FLP/LLC – no discount.
■ Point 7: Operate the Plan and Trusts Right. Signing a trust and consummating a transfer is only the beginning of the show. You need to administer and monitor the plan and trust in future years meeting not less than annually with all your advisers to make sure all formalities are adhered to. Be certain the administrative requirements of how the trusts are to be operated is adhered to. If differences were created to reduce the risk of the reciprocal trust doctrine applying monitor to be sure they are not circumvented. Be sure the CPA is in the loop to monitor the gift and income tax returns so they all correctly reflect the reality of the transfers. Revise asset allocation models to better coordinate asset location decisions. Be sure property, casualty and liability coverage reflect the realities of trusts owning interests in entities or assets.
■ Bottom Line: Just Do It! Time is fleeting. Everyone should review planning options for themselves and their family/loved ones to ascertain what might be beneficial and how to expedite the process so planning is completed in advance of year end, preferably before the election.

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Checklist Article Title: Testamentary Capacity and Undue Influence

Summary: By 2030 it is estimated that 1/5th of all Americans will be age 65 or older. Age brings challenges, that are often compounded by more health challenges. These make confirming that you have adequate ability, called “testamentary capacity,” to sign a will, more important. But even if you’re sufficiently competent, were you unduly influenced to leave your son/caretaker double what his siblings get? Consider:

√ Many chronic illnesses, in addition to physical or other symptoms, are coexistent with depression. Depression can be part of the symptoms of the illness itself, or as the result of the impact of the illness on the client’s quality of life, or a consequence of medication used to treat the illness, or a combination of all three factors. Depression may affect your objectives, capacity, and risk for being unduly influenced. With depression sleep may be impaired, you may see the world through dark colored classes, you may have little energy and no ability to concentrate, etc. Depression may make you more susceptible to undue influence. If concentration is significantly impacted, your cognitive function may also be affected.
√ Consider who is making the assessment of your competency (capacity). Many primary care physicians don’t have the expertise to make these diagnosis, yet often lawyers rely on reports from primary care physicians to support their ultimate legal determination as to capacity. For patients with known depression, less than 25% were documented as being depressed in their primary physicians’ charts. Less than 10% were taking medication for depression. The statistics concerning the diagnosis of cognitive impairment are similarly weak. For a proper diagnosis, a number of different disciplines might be tapped. The basic analysis should include a bio-psycho-social framework. It is important to look at the entire person and not just a part. Evaluating medical records might be a good start, but when a full picture, including the patient’s social environment, is obtained, everything is put in context.
√ The testing process itself may yield a false positive. If someone age 85 is put through a 6 hour neuropsychological test, at the end of the test his performance could be affected as a result of the fatigue caused by the testing process itself!
√ How at risk are you to undue influence? What can be done to ascertain or corroborate you true wishes? Even if there is a strong risk of undue influence, if you’ve been consistent for decades (e.g., your will has always left your son a double portion), your wishes may be clear. The real challenge is in assessing the reality of undue influence if you’re living with moderate dementia. While changes in your historical pattern of disposition of assets might suggest an issue, is it?
√ A court might find that you had sufficient capacity to make a will, but then disqualify the will because of undue influence. In re Estate of H. Earl Hoover, no. 73519, Illinois, 6/17/93. Since capacity is a continuum, even if capacity is diminished, it may prove easier to challenge the will by demonstrating undue influence.
√ In early stages of even Alzheimer’s disease no one should assume that sufficient capacity does, or does not, exist. If the diagnosis was made by a primary care physician, what reliance is reasonable to place on the conclusion? What precautions should your lawyer take? The fact that you were prescribed a drug, such as Aricept, does not necessarily prove your cognitive status.
√ Competency is also situational. You may be insufficiently competent at one point time, may be competent at another point. For example, you might feel so anxious in your attorney’s office that you cannot adequately respond to the queries your attorney believes essential to the demonstration of adequate capacity. Perhaps your lawyer should have a therapy dog present and serve lots of great snacks to put you at ease! Documenting the situational impact on competency presents another type of challenge.

Thanks to Sanford I. F, MD, Clinical Professor of Psychiatry at the University of Chicago Medical School and William Andrews, Esq. of Santa Rosa, California,
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■ Obama Greenbook proposal: This calls for the reduction of the gift exemption to $1 million instead of the current $5 million. GRATs may require 10 year terms. GST tax will be imposed every 90-years limiting the dynastic planning so many are pursuing. Discounts, the nectar of planning, may be eliminated on transfers between family members. This would overrule Rev. Rul. 93-12 which stated that fair value is a “willing buyer, willing seller” test for related parties. This may come about by new regulations under IRC Sec. 2704. Grantor trusts, the cornerstone of much of today’s planning, are proposed to be hammered. This had not been proposed before. The law would provide that a trust that is a grantor trust for income tax purposes, the assets of that trust would be included in your estate. This would be a Zap Zow Blam! *!*# (think Batman) sales to IDIGITs. If you made a distribution from the trust it will be a deemed a completed gift. Almost every life insurance trust could be nailed, but some exceptions should be provided. The effective date for this provision is trusts created after the date of enactment, or for gifts made to such a trust after the date of enactment. So everyone should consider making a large gifts now to grantor to avoid this. While there is no assurance how grandfathering will work, and there is no way to guesstimate the likelihood of this even being enacted, moving now sure seems the best option. If you fail to fully fund an ILIT now, you might be able to convert the policy, graft a split-dollar loan onto the arrangement to avoid the need for future gifts. Complicated. This change will zap Rev. Rul. 2004-64 which had held that the payment of the tax on income earned by a grantor trust is not an additional gift by the grantor. That will relegate to one of the hottest tax burns to the dustbin.

■ Non-Married Couples the unfairness grows. So you can’t get a marital deduction for gift/estate tax purposes, but now you cannot treat mortgage interest like you’re separate! Home mortgage interests is only deductible for the first $1M mortgage and on $100,000 of home equity line debt. The Tax Court just ruled that unmarried co-owners can’t each get a $1M/$100,000 amount since the limit applies on a per-residence basis, not a per person basis. IRC Sec. 163(h)(3); Sophy (2012), 138 TC No. 8.

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Lead Article Title: Family FeudsSummary: Estate litigation can be ugly! Nobody wants their kids to fight over their estate, but estate battles are more common than Republican Primary debates! But you can lessen the risk of antagonism and these mud hurling brawls (were talkin’ about estate litigation not the debates). But you have to use the Dr. Phil approach and start by getting “real.” Stop using estate taxes, legal fees, complexity, or other excuses to avoid dealing with the tough personal issues.

Team Up: If only your hair dresser knows for sure, that won’t really help minimize the carnage. Here’s another reality check. If you just hired a new estate planner, or only meet your planner every five years (once a year is vital), how can he or she realistically get sufficient perspective on your family’s dynamics (or dysfunction)? If you’ve worked with the same CPA for decades, or have met with the same wealth manager quarterly for many years, they each will have different and often deeper insights to add to your estate planner’s own observation. Including all key advisers at one estate planning meeting year will greatly increase the likelihood that flashpoint issues will be identified and dealt with.

Ultimate Fighting Championship: Will your supposedly loving kids play their version of Family Feud when you’re not here to referee? Does “UFC” stand for Ultimate Family Carnage? Will contests can become quite acrimonious and generate significant legal and other fees. Surprisingly, airing family squabbles in the public forum of a courtroom doesn’t seem to dissuade irate heirs. Most estate fights never make it to court because it is just so costly. But these battles can be bloodier than a UFC challenge without formal court proceedings.

Minimizing Battles: There are lots of steps to reduce the likelihood of battles. While these will vary depending on family circumstances, use these as discussion points with your advisers:
◙ Keep your planning and documents current. Outdated dispositive schemes, formula clauses that don’t work, fiduciaries that are no longer advisable, can increase the likelihood of estate administration Armageddon. Keep your planning and documents current. It’s not only outdated tax and legal matters that can torpedo your plan, its failing to address ever-changing family dynamics.
◙ Economic changes must be addressed. A real problem for many heirs is the toll the recession and tepid recovery have taken on their inheritance. If this is coupled with a poorly designed will, havoc may ensue. If the will bequeaths large specific bequests, and asset values have declined, what happens? “Abatement” is the mechanism of adjusting certain bequests in a will (and the order and proportion of the reduction or elimination) when the bequests under the will are greater than the assets in the estate. For example, if you provide a large list of specific dollar bequests, but the value of your home and vacation home are only about half what they were 5 years earlier when you signed the will, problems could follow. Drafting a will to deal clearly and fairly with the impact of the economic rollercoaster can minimize or avoid will contests. You can cap certain tiers of bequests, use percentages so relative distributions remain the same regardless of values, etc.
◙ Keep your planning consistent. If there are inconsistencies, make it clear if they were intentional. Example: Your will bequeaths your estate to your 3 children equally. But only your daughter Jane is listed as beneficiary on your large IRA. Your other two kids, David and Sam, are listed as contingent beneficiaries. Well, was it really your intent to benefit Jane more than your sons? Was it because she lived nearby, was your caregiver, and she is the child with the least secure financial standing? Or was it an oversight and you had really meant to list all three children but the beneficiary designation form from the mutual fund looked a bit confusing and you mistakenly listed your sons as contingent beneficiaries (only to receive an inheritance if your daughter pre-deceased) instead of as primary to share equally with Jane. Which was it? Mistake? Intentional? A recitation in your will, re-execution periodically of the beneficiary designation, and a letter of instruction might all help confirm your real intent.
◙ Patterns are good for more than knitting. If you executed a will leaving assets 60% to one child and 40% to your other child. A year later you execute a new will adding $10,000 to a charity, but retaining the same percentage distributions to your children. You are creating a pattern to demonstrate consistent intent as to the primary dispositive provisions for your estate. That reinforces what you intended and makes a challenge more difficult.
◙ Will contracts can be used to bolster your intent. If you and your spouse/partner have a specific dispositive approach, both of you can sign a will contract agreeing not to change the provisions of your will. This will prevent your spouse, following your death, from changing his or her will and thereby undermining your previously agreed to plan. The will contract will also serve as another means of corroborating your intent for anyone else as well.
◙ In Terrorem clauses are provisions included in wills that provide that anyone who challenges your will should be disinherited. If the person considering the challenge could face the loss of a significant bequest the In Terrorem clause will give them pause. The validity of these provisions, and requirements for them, vary by state so be certain to review them with your local estate planning attorney. But even if state law won’t respect such a provision, many lawyers still include them, since they certainly make your feelings known.

Living Trusts: Contrary to the hype that living trusts solve every estate planning problem, and eliminate cellulite too, living trusts can be problematic. When a will or living trust is challenged, it’s often for lack of capacity or undue influence. A living trust, however, faces a tougher standard. The law generally requires a very low level of competency to sign a will because the law wants to facilitate peoples’ right to make a will even when they are ailing and frail. Many people simply don’t address their final planning until the end is staring them in the face. But a revocable trust is a contract, not a will. You must have “contractual capacity” which is a higher standard of competency then testamentary capacity required for a will. Example: Someone recently diagnosed with Alzheimer’s may have sufficient capacity to sign a will, but possibly questionable capacity to sign a complex trust. If a revocable trust would be helpful in the circumstances, the pour-over will that accompanies the trust (transfers all assets of the estate to the trust) should also recite the identical dispositive provisions as the trust. For a more complex trust, care could be taken to corroborate sufficient competency when a trust is being signed.

Beneficiary Designations (BD): Substantial assets are often held in retirement accounts, how do they fit into the will challenge UFC? BDs are a contractual arrangement and an heir could challenge a BD much as they would any contract. But they can be slippery. If Mom named her latest home health aid, Snidely Whiplash, as sole beneficiary of her IRA, the IRA passes by operation of law. With a death certificate Snidely can probably get the IRA and roll it over very quickly into an account in his name, pull the money from the account and gift it to his 2nd cousin who lives in Russia and is best known as peggy in the Capital One commercial. Snidely can then move far away from Frostbite Falls, Minnesota. Will Dudley Do-Right find Snidely? Even if Dudley succeeds, Snidely may already be judgment proof. The cost of finding his cousin Peggy and pursuing him overseas could be prohibitive. Most IRAs are likely well under the dollar threshold to make this battle worthwhile. Again, proper planning, documentation and monitoring, is vital to avoid having Peggy as your heir.

Gunslingers: If an estate of which you’re a beneficiary or fiduciary shows even small signs that litigation might occur, involve an estate litigator early in the process to better handle strategic decisions in case litigation in fact cannot be avoided. Many estate and probate attorneys are really tax attorneys and don’t have the litigation expertise of a litigation specialist.

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Checklist Article Title: 2011 Lessons

Summary: 2011 was a banner year for …well, read on… What lessons can we dredge from this stellar year?

√ Basketball Lock Out: 2011 brought the 4th lockout in the National Basketball Association (NBA) history. The work stoppage ran from July 1, 2011, through December 15. For young players who haven’t accumulated much wealth, or older ones who’ve been imprudent (Scottie Pippen had lifetime earnings of $120 million and ended up broke, and sadly that’s common), that’s a long dry period. If NBA players need a budget and financial plan, don’t you? ◙ Many people who view themselves as “wealthy” think they’re immune from budget drudgery, but in reality have burn rates that will wipe them out financially while they may live much longer. Finding wealthy retirees spending almost 10% of their capital is not rare. ◙ Budgeting mistakes are common. Many people don’t factor in periodic costs. If you own a home, every say 10 years they’ll need new appliances, perhaps an updated kitchen, etc. Too often people budget the costs of maintaining a car but not the cost say every so many years for a new car. ◙ Don’t use rules of thumb when budgeting, unless its your thumb. Common assumptions can be a great simplifier, but if they don’t reflect your lifestyle they can be more misleading that even a bad estimate of your real expenses. Do the homework and figure out what is real for you. ◙ When many people analyze their finances they err on the side of dying too young, say life expectancy (1/2 the people living longer). When pushed to do estate planning the same people might defer planning as if they’ll live forever. The disjointed assumptions can be quite damaging. ◙ Do few people address plan “B” and plan “C.” If your main plan don’t work, what is your fallback position? What is your fall-fallback position?

√ Stuntmen Really Do Get Hurt: While filming a scene with an explosion on a rubber boat for the movie “The Expendables” one stuntman was killed, and another was left in critical condition. These are pros folks and with all the precautions they take, accidents happen. The odds of disability are really high. An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65. 1 in 7 workers can expect to be disabled for five years or more before retirement. Yet disability planning is often a 3rd stringer in most estate and financial plans. Evaluate disability income replacement insurance, overhead interruption insurance for your closely held business, disability provisions in employee and shareholder agreements, etc. Watch the lingo. Many clauses have short fuses before you’re tossed. Others ignore the entire concept of partial disability.

√ Demi and Ashton ooooh! Moore says she’s ending her marriage “with great sadness and a heavy heart.” A heavy wallet too at a purported $290M to haggle over. Prenuptial agreements, BDITs and other planning should be the rage in Hollywood and for you too! Parents leaving money should leave it in a lifetime trust designed to protect it from the kiddies divorce.
If you’re getting married, especially for the 2nd or later time (the divorce rate for second marriages is 67% for third marriages it’s 74%), backstop a prenup by transferring wealth to a domestic asset protection trust (DAPT) before the marriage, or a beneficiary defective irrevocable trust (BDIT) after.

√ Marathon Estate Plans √ Mary Keitany of Kenya seemingly defied history and logic in the 2011 NYC Marathon, until she learned the age old adage about the tortoise and hare. Pace yourself. If you want to create and implement a complex financial and estate plan and attempt to do it all at one time, you’ll likely burn out like Mary. Tackle a couple of steps at a time. Persistence, not speed, will get you to the estate planning finish line.

√ 9/9/9 Yes, sometimes you really do have to say no! Kid wants another loan? Nein, Nein, Nein.

√ Define Heirs How do you define who is an heir in your will? Is your definition as broad as Arnold Schwarzenegger’s? Most wills continue to use archaic definitions of heirs. Should children out of wedlock be treated as heirs? Up to what age should an adopted child be permitted to be an heir? What about a child born after your natural heir dies? How should reproductive contracts or frozen genetic material be addressed?

Recent Developments Article 1/3 Page [about 18 lines]:
■ Intercompany Management Fees: Lots of moguls have scores of entities that own separate retail operations or rental properties, management or holding companies, and other ancillary entities. Often these entities pay management fees to assure outside owners fair economic treatment, or simply to comport with arm’s length commercial practices. Sometimes, the fees are instead based on achieving personal goals, benefiting a particular child, or an entity owned by another family member. Caution is in order. In a recent case, the taxpayer’s business consisted of 5 operating corporations and a limited liability company (LLC) that leased trucks to the operating entities. The leasing LLC paid management fees of $9,000 per month to the operating entities for accounting, management, and safety and driver relations. The Tax Court denied half of the management fees because the taxpayer could not demonstrate how the fees were determined and whether they were at arm’s length. The taxpayer could not convince the court that the management fees were ordinary and necessary trade or business expenses under Code Section 162 . Daniel Fuhrman , TC Memo 2011-236 (Tax Ct.). This taxpayer might have gotten off easy. What if interests in the various entities were owned by GRATs, or other tax oriented trusts. Would the payment of a excessive non-arm’s length management fee be tantamount to an impermissible additional contribution that could torpedo the entire GRAT? The moral of the intercompany fee story is that as the interconnectedness of your entities grows, and anytime tax oriented trusts are involved as owners, have your CPA or an independent consultant corroborate the reasonableness of the fees.
■ Passive Loss Rules: The tax laws often use a limited partnership paradigm to ascertain limited liability company (LLC) results. Sometimes the model works, but often it’s not good. The Regulations had generally used a number of factors including the presence of limited liability for determining whether a member of an LLC “materially participated.” Temp. Reg. 1.469-5T(e). If so, losses from the LLC would be deemed active and could be used to offset other active income, such as wages. The IRS has realized that the right to participate in management is a better litmus test and issued Prop. Reg. 1.469-5.

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■ Competency: For a complex estate plan to be respected you have to be competent when you sign all those legal documents. Importantly, competency is a legal matter, not a medical decision. When assessing competency some use the Folstein Mini Mental exam. That might not really be optimal for more highly educated consumers. Instead the St. Louis University Mental Status Exam (SLOMS) which evaluates cognitive decline in individuals with a higher education, may be better barometer to test cognitive status.
■ When trusts are too costly: Trusts are the default answer for how to structure any gift or inheritance. But sometimes, trusts are just too costly or cumbersome for the amounts involved or objectives. For younger donees/heirs transfers can be made to what are referred to as custodian accounts. These include a Uniform Gifts to Minors Act (UGMA) its kid sister, a Uniform Transfers to Minors Act (UTMA) account. While limited in scope and far from perfect there is no cost and they permit assets to be held at least until the age of majority. In some instances, a bequest might mandate that the executor purchase an immediate non-cancellable annuity. This can be structured to provide a beneficiary with a consistent cash flow for life and achieve other goals without the administrative costs and burdens of a trust. This is practical for dollar bequests (or gifts) that are too small to interest an institutional trustee, or too small to justify the costs of even a family trustee, or if no one is willing to serve as trustee (e.g. when the beneficiary is particularly difficult).
■ Safer Checks: If Junior needs a raise in his allowance can rub the dollar amount on his allowance check it with a nickel then use Scotch brand tape to take off the numbers. Neato Presto he can then type in the allowance figure he needs to afford Justin Bieber’s Under The Mistletoe Ultimate Gift Box. Need a cool stocking stuffer? New checks are available that have valuable security features, like a treasury approved bond paper with fibers (similar to paper money), multi-prismatic ink (which cannot be copied), and more absorbent (no, they’re not printed on Bounty). The ink absorbs into the paper and cannot be easily removed. The combination of paper, ink and other features makes it tough for the bad guys to alter checks. See Intuit (Quicken) website: www.intuitmarket.com.

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Seminars: ■Series of phone conferences for estate planners is planned for 2012 hosted the Ultimate Estate Planner. See http://ultimateestateplanner.com/ for registration details. Sign up for email announcements for each program at www.laweasy.com. ■1/23/12 – 2:00 p.m. EST Foxmoor Continuing Education (formerly PESI) sponsors a “Estate Planning for Chronic Illness: Estate, Financial and Related Planning” webinar. Register at www.foxmoor-ce.com. Use discount code: 20Shenkman for a $20 discount.

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Stairway to Estate Planning HeavenSummary: Led Zeppelin’s classic hit has remained popular with boomers as a paradigm for their estate planning. Rung by rung you can improve your tax and asset protection benefits by climbing upward towards estate planning heaven. We’ll start at the bottom and work upward.

◙ Father Knows Best Trust. Coke classic might be great, but not Trust Classic. Most folks have used for a long time in their estate plans. These antiques typically mandate that income be paid out annually, name the beneficiary as a trustee, give the beneficiary in his capacity as trustee the right to distribute money to himself (often limited to an “ascertainable standard” – health, education, maintenance and welfare). Most of these trusts ) pay out trust principal at specified ages, say as 1/2 at ages 25, and the balance at 30. Well, if you think wearing one of those Jim Anderson outfits is fresh, then this is just the type of trust you’d still want in your planning arsenal – Not! If your trust is a model T, don’t give up, you might be able to have the trust invest assets into a well crafted limited liability company (LLC) and create a new layer of control and protection. Other corrective steps might be possible. But this is not the kinda trust you want by choice.

◙ Be a Paris Hilton Trust Fund Baby. Hey being a trust fund baby ain’t a bad gig if you can get it. But too often trust fund wannabes loose out ‘cause their benefactors want their plans to be “simple,” or they “don’t want to rule from the grave.” But if you have affluent parents or other benefactors (even a spouse or partner), even if you’ll only get average gifts or bequests, they should be received by you in appropriately-structured trusts. A long term or perpetual trust, from which you can benefit and exert reasonable controls, should remain out of reach of your creditors, ex-spouse’s and the Tax Man. To be effective this has to be planned before the property reaches you. The folks can get a simple will from a legal-whiz.biz website. It will be simple, and your malpractice claimants will thank them. If the folks don’t want to “rule from the grave,” what they’ll really accomplish is limiting your flexibility. Good planning enhances the value of your inheritance and can be done with your input. That’s not “ruling” its being prudent. If the folks don’t want to deal with all this you can set up the trust yourself and just have mom bequeath your inheritance to the trust instead of you. Gee that’s so simple even a Congressman could even do it!

◙ 2011: A Trust Odyssey. We hired HAL, Esq. to design your trust so it has the best provisions. Here’s what HAL, Esq. recommended: ◙ A fully discretionary trust with no enforceable rights a ex-spouse, or malpractice claimant can enforce. ◙ You’re named management trustee so you can have reasonable input. ◙ An independent trustee located in a jurisdiction with laws favorable to trusts (the Four Tops are: Alaska, Delaware, Nevada and South Dakota). ◙ An independent trustee makes all distribution decisions. ◙ The trustee can hold assets for your benefit, enjoyment and use. So that slick Airstream trailer can be owned by the trust, used by you, but out of the reach of creditors. ◙ The trust lasts as long as state law permits so that it can appreciate as long as possible outside of the reach of the estate tax and claimants, thus providing the same protections to your heirs.

◙ A Little DAPT will Do Ya’. Who could forget the famous Brylcreem advertisement for Domestic Asset Protection Trusts! In most states you can’t transfer assets to a trust, benefit from the trust, but keep your creditors at bay. Like the Brylcreem ad: “The creditors will all pursue ya,–They’ll love to put their fingers through your hair.” But a self-settled trust, created prior to a claim, in a state with favorable trust laws, may enable you to transfer assets that are protected from creditors after a statutory number of years. While there’s no guarantees, and some risks exist (e.g., will other states respect the trust and transfers to it), many advisers are pretty confident that DAPTs will give your asset protection planning that the Brylcreem bounce. DAPTs, without more, aren’t a tax save. They’ll be included n your estate and are grantor trusts so the income is taxed to you.

◙ Completed Gift DAPT. The CGDAPT builds on the DAPT by your making the transfers to the trusts completed gifts. Giving up the control necessary to make the gift complete should remove the trust assets from your estate, saving estate taxes in the future. With the current $5 million gift exemption you can transfers a substantial amount of wealth to the DAPT. This can be followed by a sale of significant assets to the trust. This technique, a note sale to a grantor trust, may be one of the most significant ways to shift assets into a protective structure. If the value of the interests sold to the trust are discounted, further leverage and benefit is added. Your paying the income tax on earnings that remain in the trust burns assets in your estate while enhancing assets in the trust. But this party might last for long. The Democrats’ wish list of revenue proposals surfaces as super-committee convenes include rolling the estate tax rules back to 2009 levels in 2012 instead of 2013. That might include a $1 million gift exemption which will take squeeze a lot of benefit out of complete gift transfers.

◙ The “Have Your Cake and Eat it Too Trust”. In the DAPT or completed gift DAPT, you’re the settlor establishing the trust and making transfers to it. Some advisers believe having another person, say a parent, set up the trust for you, makes the trust a safer structure from both a tax and asset protection perspective. If this approach is used, the trust will still need to be characterized as a grantor trust as to you. This is essential so that you can sell assets to the trust without triggering income tax. This is achieved by your having an annual demand power (Crummey power) to withdraw annual gifts the settlor (e.g., your parent) makes to the trust. That mechanism can provide the desired status. Thus, this trust is called a Beneficiary Defective Irrevocable Trust since it is a grantor trust (defective) as to you as beneficiary. When another person is the settlor establishing the trust you can have greater powers without jeopardizing the tax and asset protection benefits. Proponents maintain you can have the use and enjoyment of the assets purchased by the BDIT, the right to change the trust through a power of appointment, and not jeopardize creditor protection and estate tax savings. But as with many planning techniques, there are differing opinions on how far you can go.

◙ Insuring the Success or Your Trust Plan. When Robert Plant crooned: “Ooh, ooh, and she’s buying the stairway to heaven,” he was referring to her purchase of a permanent life insurance policy inside the completed gift DAPT or the BDIT. If one of the assets inside these more sophisticated trust structures is an insurance policy a number of other benefits might be achieved. Insurance can provide for a tax free build up of growth inside the tax protective envelope of the insurance policy. With much talk about raising income taxes on the wealthy as part of the Budget Control Act’s directive to reduce the deficit by $1.5 trillion, the new Medicare tax on passive investment income that takes effect in 2013, and other potentially costly changes, insurance may be further enhanced as a tax favored asset class. For many investors, the conservative returns of a cash value insurance policy might provide some offset to the risk in other portions of their portfolio. Importantly, if you die prematurely, before the tax burn which the grantor trust status has on your remaining estate can be felt, the insurance may cover the estate tax that would be due. It might be possible that if the trust owns life insurance the loan used in the sale of assets to the trust might fall within the ambit of the split-dollar life insurance loan regulations. If so, and the appropriate steps required under those regulations are adhered to, the characterization of the transaction as a loan for tax purposes might be assured. So insurance can enhance the income tax, estate tax, leverage and protection that the completed gift DAPT or BDIT might offer.

◙ Conclusion. Too many taxpayers are still using Jim Anderson archaic trust structures. But to find that stairway to estate planning heaven, more sophisticated and current trust planning techniques must be employed. The benefits you and your family could be tremendous. Thanks to Dick Oshins, Esq. Las Vegas Nevada for his input.

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Checklist Article Title: Cross Purchase

Summary: Buyout agreements are vital to family and closely held businesses. With the economic turmoil and rapidly changing laws you need to ask the question of the Vikings: “What’s in your wallet?” If you haven’t reviewed your buy-sell in the past year. Jump to it. The following checklist will explore aspects of just one option, what is commonly called a trusteed cross-purchase which in ways is akin to an escrow arrangement.

√ Redemption v. Cross-Purchase: There are two categories of buyouts: (1) Redemption (entity buys equity); or (2) Cross-purchase (each equity owner, say shareholder) buys the equity (say stock) of the other. Cross-purchase can provide several advantages, namely an increase in basis. If you buy a deceased shareholder’s stock, your basis (investment) for determining capital gain if you ever sell the company is increased to reflect what you paid. Also, the shareholders, not the corporation, own the life insurance that might be used in the buyout so that the cash value isn’t exposed to corporate claimants.
√ Structural Options: Issues are legion, options are many: the shareholders can own the buyout insurance on each other, a partnership (LLC) could be used to own the insurance, a trusteed arrangement could be used, and other options have been advocated. No option is perfect, none are without risks, but all are more involved than most business owners imagine. Embrace the complexity or the downside could be tax and legal bumps.
√ Life Insurance: Will the cross-purchase be insurance funded? Partly? Entirely? Assuming all owners are reasonably insurable most opt for some insurance to minimize the financial hardship on the business of a buyout. But the value of the business will hopefully grow over time. Unfortunately, time brings age and often health issues so that additional insurance to cover that increasing value might become costly or unobtainable. Consider structuring the policy as an increasing benefit policy that grows over time.
√ More than Death: Life insurance won’t solve the buyout issues of disability (disability buyout insurance might but it can be costly), termination, retirement, disagreement, etc. Too many shareholders focus on death to the exclusion of other issues. All need to be addressed.
√ Trusteed Arrangement: If the shareholders own policies on each other’s life, with 2 shareholders you need 2 policies. With 3 shareholders 6 policies. The formula is n x (n-1) for the number of shareholders. Not only is this complex but ponder, what happens with 3 shareholders on the death of the first? The deceased shareholder’s estate owns policies on the two surviving shareholders that the survivor’s need when the next shareholder dies. How do you get those policies to the surviving shareholders? What if a shareholder tries to borrow on or cash in a policy? All these issues can be addressed to some degree by having the policies held in an escrow-like “trusteed arrangement.” What if a shareholder is sued or divorced years after the plan is put in place and the cash value of the insurance has increased? It might provide some measure of protection for the trusteed arrangement, not the individual shareholder, to hold the policies.
√ Who Should be Trustee: A bank or independent person should serve as trustee (escrow agent). It is preferable not to have the insureds serve. Independence can avoid problems if differences arise between the parties. It also lessens the risk of the IRS, ex-spouse or claimant, arguing that a shareholder has control over the policies. If the IRS could show that a shareholder/trustee could exercise control, it could pull the policy into the shareholder’s taxable estate. Some practitioners draft around these issues, avoiding streets with potholes is safer than steering around them.
√ Coordination: Be sure to coordinate the trusteed or escrow agreement and the provisions of the shareholders’ (or other) governing instrument.
√ Hybrid Buyout: The buyout might be a multi-tiered approach: corporation buys shares up to some amount, the trusteed arrangement buys the next tier of shares, the surviving shareholders then buy the final tier if the value exceeds what the corporation and trustee buy.
√ Transfer for Value: This sinister tax rule could taint insurance proceeds as being taxable. Consider a valid partnership of the shareholders to potentially mitigate these risks.
√ 101(j): These tax reporting provisions, if not complied with, can similar taint insurance proceeds as taxable income. Be sure to address them if they apply.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Taxes are a Drag: If you run a trade or business losses might be deductible. But if the IRS views the endeavor as a mere hobby, losses won’t be deductible. The Tax Court found that a taxpayer’s drag racing activities were a hobby. IRC Sec. 183. The dragster and his two kids formed a drag racing team that raced Chevrolet sports cars in local, divisional, and national racing events. Cool. But earning $2,150 in prize money while spending $117,660 didn’t get the taxpayer to the finish line with the IRS. The court found that the taxpayer had a long time interest in racing, got a lot of pleasure from it, and didn’t in good faith expect to profit, triggered the hobby loss restrictions. Reg. 1.183-2(b). Zenzen , TC Memo 2011-167.
■ Not an Easy Ride: Dennis Hopper, star of the classic film Easy Rider, filed for divorce from Victoria, wife No. 5, in January 2010. Victoria and Dennis’ daughter Marin are only six years apart in age. Dennis Hopper not only had a trust, he updated it after the relationship between he and Victoria soured (unless, of course, you believe Victoria who says the documents were only changed as an effort by Dennis’ kids to cut her inheritance). The story goes on …. But the lesson is the same. Meet with your planning team yearly. Their records of your meetings, and documented actions, and updating of your planning and documents can save tremendous costs and heartache for your loved ones (and not-so-loved ones).
■ 2011 Decedents: Recently issued instructions for the federal estate tax return require executors to file returns to secure portability. This is the benefit enacted in the 2010 Tax Act that permits a surviving spouse to use the first to die spouse’s unused federal estate tax exemption. Regardless of the size of your estate, if you don’t secure this now, it will not be available in the future if your estate needs it. The IRS has made it clear, no backsies. Consider the application of this if your family last name is not Brady. You die. Your 3rd wife gets the house which was owned jointly and an insurance policy you bought for her. Your daughter from your 1st marriage is named executrix and gets your entire estate. You carefully planned this so that your daughter and much younger new wife would not have to interact concerning your estate. Ooops. Your new wife won’t get portability benefits unless your daughter as executrix files an estate tax return. And that’s the way we became the Brady bunch!
Potpourri ½ Page:
■ Current Planning Ideas: CCH Financial and Estate Planning Advisory Board meeting occurred September 14, 2011. Here are a few tidbits from the call: ◙ Life Insurance: Put more into a trust now instead of just annual gifts. ◙ Qualified Personal Residence Trust (“QPRT”): Consider an outright gift to a trust without the QPRT retained right, then leaseback at fair value. Note that there won’t be a basis step up. ◙ Spousal Right of Election: This may not be satisfied by a typical bypass trust under some state laws (e.g. NY). Review the right of election and determine if a waiver should be signed to prevent the plan from being undermined. Which state law governs? ◙ Caps: Consider updating your will/revocable trust to set a maximum amount that can fund a bypass, marital or GST trust. ◙ 4768 Extension: To extend 2010 returns until March 2012 ◙ Form 8939: To elect into carryover basis. Was initially due with income tax return, then 90-days after a final form, then 11/15/11 now its due 1/17/12, Notice 2011-76. IRS estimates only 7,000 estates will opt for this. Are you one? ◙ State Estate Tax: 22 states have estate tax or inheritance tax and Maryland and NJ have both. Gift planning now, especially for elderly clients can solve the issue. If your estate is under $5 million a simple gift may be all it takes to reduce the estate below the state estate tax threshold. Watch out, Connecticut ($2 million) Tennessee and Puerto Rico have a gift tax that could snag that effort. ◙ Tax Burn: Grantor trust status remains a powerful technique to reduce an estate. ◙ Low Interest Rates: Sales, GRATs, CLTs are great in this environment. Current proposals will virtually destroy GRATs. Proposals to restrict discounts will take some of the benefits out of sales and gifts. ◙ Portability: It’s almost a dangerous distraction given the many limitations and should not be relied upon by taxpayers, more traditional planning should almost always (if not always) be pursued. ◙ Insurance Trusts: Make a large gift once and avoid future Crummey powers, unwind old split-dollar arrangements that don’t work well any longer.
■ Portability Fun: If your spouse dies you can use what remains of his or her unused $5M estate tax exemption. The IRS has issued instructions for Form 706 which says that you can only secure this benefit if a “timely and complete” estate tax return, Form 706. Ponder this not so unlikely hypothetical. Your estate is $2M and your child from a prior marriage is the sole beneficiary and executor of your will. You owned a brokerage account and house jointly with your new spouse, which pass to her by operation of law on your death. Your child has no reason to incur the cost of filing an estate tax return but if he doesn’t your new spouse will loose out on portability. Your child really never cared for her much anyway so why file? Does your child have a fiduciary obligation to your new wife as a result of the tax benefit she could receive from the estate? Do the CPA and attorney fry if they don’t tell the new wife about this benefit? But how can they the executor/Child is their client, not the new wife.

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Lead Article Title: Schlesinger on PLI 42nd Estate Planning InstituteSummary: Who wouldn’t want to watch CC Sabathia in action! Well, we were able to catch up with Sandy Schlesinger, Esq in the estate planning bullpen and asked him to pitch a few planning pointers that will be discussed in depth at the upcoming Practicing Law Institute’s 42nd Estate Planning Institute. So get your beer and peanuts and enjoy the 9 inning estate planning extravaganza.

◙ 1st Inning Recent Developments: The most dramatic changeup in years was the 2010 Tax Act. Its impact over the next 2 years is a wild pitch. This new season requires every estate plan with a substantial amount of wealth to be revisited especially in light of the $5M exemption. Any document with a formula may no longer be appropriate. Assume you signed a will in 2008 and Husband had $8M and Wife had $2M. At the time the unified credit was $2M. A formula clause would have meant $2M in a bypass trust on Husband’s death and $6M in a marital trust (QTIP). Assuming no change in assets wife would have $6M in a QTIP + $2M in her estate. If she died in 2011 she would have $5M of exemption and a taxable estate of only $3M (out of $10M). This plan might have been a good plan at the time. But in 2011 this plan could be a foul ball. The formula clause $5M goes into a bypass trust and Wife gets $3M outright. Wife has $2M of her own and her estate. But what if the bypass trust excluded the spouse? This might have been fine at $2M. But now at $5M the kids from a prior marriage get $5M and the spouse only $3M. This might not have been the game plan. Based on these numbers in some states the wife might have a spousal right of election. These are the hidden issues in the new tax law.

Many estates have GST trusts to take advantage of GST exemption. This has increased for 2 years to $5M. If your will has the formula from 2008 when the GST exemption was only $2M and now it is $5M you might be leaving more to grandchildren than to your children. In fact with the same $10M estate from the above example, you could leave it all to your grandchildren!

Portability is a sham since it’s only available in 2011-12. It gives some immediate gratification but not the long term security of a bypass trust. The bypass trust gives you more protection: asset protection depending on how drafted and the jurisdiction. Main issue is when you carve out bypass trust, no matter how high it grows, it is not taxable. In contrast with portability the amount exempt from tax is fixed on the first death. With portability you can’t really control the ultimate disposition of the assets. You could use a will contract but there have been too many cases challenging the enforceability of the contract and what assets are covered. See Matter of Murray NYLJ April 27, 2011, 2nd Dept. 2011 which addressed similar issues. There are also issues concerning the survivability of the spouse and the growth of assets. There are a lot of flaws in portability.

◙ 2nd Inning Generation Skipping Tax: Finding the sweet spot is tricky with the fluctuations in the GST exemption amount. The idea of planning for GST with a $1M GST exemption is in a different league then GST planning with a $5M – or $10M if a husband and wife team hit double. You don’t want to make poor children and rich grandchildren. Consider multigenerational trusts, but include the child not just the grandchild, to avoid triggering GST. In a discretionary trust the goal is to use it for a skip person (grandchild) but if your son has financial adversity you may want that money available to help him too. Exemptions went up during a period when net worth declined due to the economy. If people don’t review their documents, the dispositive provisions could prove disastrous.

◙ 3rd Inning Elder Law: Medicaid planning should be left to real experts and should not be something to dabble in. The law changes almost every legislative session. It is a combination of not only federal and state law but often county practice. People need to get a local adviser that specializes in this given the intricacies of Medicaid qualification. Do not inadvertently leave a legacy, either outright or in trust, that might disqualify someone for Medicaid or SSI. Grandparents may not know the status of a special needs grandchild, or it may be too painful for them to admit to, and the planning steps could be missed.

◙ 4th Inning Asset Protection: You generally cannot force a discretionary trustee to distribute. See In Matter of Escher, 438 N.Y.S.2d 293 (1981). Asset protection planning is a moving target. You have domestic and offshore planning. The US and in particular the IRS attitude towards offshore accounts is worrisome for asset protection planning. Some people have become concerned about all the filing requirements and that it has cast a negative view. Domestic asset protection – Delaware as an example is comfortable. The state legislature is quick to fix any problems that arise in the law. Domestic asset protection generally requires a corporate trustee and for some clients that is uncomfortable. This continues to be a developing area of the law. There remains the issue about the enforceability of one state’s judgment in another. Andy Pettitte was known for his moves to first base which were about the closest a pitcher can get to committing a balk without violating the rule. Finessing asset protection planning can require similar precision.

◙ 5th Inning Charitable Planning: If anyone says charitable giving will be increased because of the exemptions, they’re missing the point. The increased gift and estate exemption has decreased the tax benefit for giving. This has a negative impact on giving, especially testamentary giving. The government has traditionally favored voluntarism and this undermines it. All our usual charitable giving techniques are still there, just used less. The big thing in charitable giving is being able to give $100,000 if over 70 ½ from an IRA without any income limit. It is a great technique but right now only applies for one year, 2011. Hopefully it will be extended. IRA donations count toward your required minimum distribution (RMD). You don’t get a charitable deduction, but it is not included in income. The donation must be to a public charity. This is not the big number compared to large planned gifts but if you consider the number of people who might take advantage of it overall this could be a huge help to many charities.

◙ 6th Inning Distribution Strategies: Fiduciaries face a real issue as to how to invest in such a complex and volatile investment world. In the old days there was an approved or “legal” list. Now you have an endless array of possible investments and under the Prudent Investor Act there is no investment that is per se imprudent. That takes a lot of hand eye coordination. We are seeing a growth of litigation against fiduciaries. They must study the instrument carefully. There are a lot of lawsuits about non-diversified portfolios. Just because the stock came out of a long term family holding is not enough. Another area of interest is a unitrust or power to adjust. These rules vary considerably by state. Because beneficiaries are not getting the income return they need because of low interest rates, we see more people using unitrust payments which are statutorily between 3-5%. But what happens if interest rates spike? They could be getting much less than appropriate years from now. The unitrust approach could prove shortsighted. If you have a power of invasion you should not have to use the unitrust or power to adjust provision since the power to invade was meant to cover this. Transfer tax consequences could be a problem without an independent trustee. If the governing document does not provide for an ascertainable standard, it is a tougher job for the fiduciary. Flexibility in administration often means reliance on a bank that in many cases the client never knew.

◙ 7th Inning Low Interest Rate Environment: The July AFR is about 2.4% and lower rates can be charged on loans. That’s like getting A-Rod for a salary of a mere $10M. The current low rates and the 2010 Tax Act create huge opportunities. Sales to a grantor trust are a great opportunity. In a low interest environment it may be a time and place to consider forgiveness of loans. Charitable lead trusts work great in this environment and should be reviewed. 7th inning stretch get a beer and run back.

◙ 8th Inning Post-Death Elections: 6166 election is a great opportunity for clients with real estate or their own businesses. You have to work hard sometimes to get an estate into a structure to qualify to defer estate tax for 14 years. Qualifying also permits paying interest at a low rate of 45% of the then applicable IRS interest rate, although without an estate tax or an income tax deduction for the interest paid. It is a way to avoid the fire sale on family businesses or real estate. Section 303 redemptions, disclaimers, and even going to court to reform a will or trust, are all important to consider. Election of fiscal years for estates (not trusts) may provide another opportunity.
◙ 9th Inning Top Domestic Partners: New York will hopefully pass a gay marriage act. This is a developing area of the law with fascinating issues. Same sex divorce is a developing area. Domestic partners won’t qualify for joint federal income tax returns, the estate tax marital deduction and so on, because of DOMA. The Federal government said it won’t pursue DOMA so this raises even more issues. Few states recognize same sex marriages. New Hampshire/Vermont recognize a marital deduction for domestic partners for state estate tax purposes. Caution is in order. It’s harder to get out of a marriage then to get out of a non-marital relationship so making a transfer to take advantage of the current $5M gift exemption – you need to think about. Family members are often not happy about the relationships and the likelihood of will contests and litigation is significantly greater than for married couples.
◙ 9th Inning Bottom* Internet Age: Estate internet issues are about as cutting edge as you can get. When you gave someone rights in your book does it include electronic rights? When you interview a client for an estate plan do you ask them for access codes for computers? Do you know what to do with it? Your client’s life is in a machine and you may not get access to it. What is the value of intellectual property? Transferability of it is also an issue. *Yeah we needed the bottom of the 9th so readers could experience a walk off win with Sandy’s exciting planning ideas.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: I DIG IT Divorce

Summary: IDIGT (pronounced: “I dig it”) is another wonderful tax acronym for an Intentionally Defective Irrevocable Grantor Trust. Selling assets to an irrevocable trust has become the fav leisure activity of the ultra-wealthy, not only cause it makes great talk on the links, but it can provide an incredible array of tax and asset protection benefits. But rather than extol the benefits of this technique, let’s look at what happens when Jr. gets divorced and Jr.’s ex wants to Dig It too.
√ Fiduciaries. Who are the fiduciaries of the trust? Some IDIGTs are structured with an institutional trustee. That’s a good thing. Others have a family member, some have both a family member and institution. But many parents insist on naming Jr. as a fiduciary of his own trust. The ex will carefully evaluate what powers Jr. has in endeavoring to share in the IDIGT nectar. If Jr. is an investment adviser making investment decisions that might not provide much of a toe hold. But what if Jr. were a trustee and had broader powers? Might that open the door? What if Jr. were given the power to distribute to himself? Would that open the proverbial barn door to the Ex?
√ Distribution Standards. What distributions standards does the trust agreement provide? Having an independent institutional trustee with sole discretion to make distributions might be best. How could a court force an institution to make a distribution to Jr. to fund divorce obligations when the trust agreement itself doesn’t obligate the institutional trustee to do anything? On the other end of the rainbow many clients proceed AMA (not against medical advice, Against My lawyer’s Advice) and insist that the trust give Jr. the right to distribute to himself pursuant to an ascertainable standard (to make payments or distributions to maintain his lifestyle). Ouch! Might the Ex get her toe in that door? After all if Jr. can maintain his lifestyle from the trust, shouldn’t that lifestyle include paying for his Ex? Safer trusts continue for life or in perpetuity. But many benefactors liken that to controlling from the grave and prefer to pay out the trust to Jr. at some specified age. According to Murphy’s Law that distribution birthday is usually just prior to the Ex filing so she might end up getting some of Jr.’s trust birthday presents.
√ Actual Distributions. What distributions have actually been made? Yes, odd for tax folks to actually consider reality, but what exactly has that trust been paying for? Shocking as it might seem some trusts, especially when Uncle Joe or Aunt Jane are a trustee, pay for stuff the trust instrument just never authorized. Gee, might the Ex ask for the trust check register and bank statements and demonstrate that the Trust has basically been making regular distributions to Jr. for a decade to support his ne’er-do-well habits? Might a court consider that a pattern that it will use to justify a result that is more supportive to Ex that Jr. and his family might have anticipated?
√ Look Under the Hood. Well what does that IDIGT own anyhow? In many cases mom sells interests in the family business or real estate LLCs to the trust (ya know, after having an appraiser confirm the 80% discount and all that other fun stuff). What does that have to do with divorce? What does the operating agreement for the LLC provide for? Some operating agreements mandate certain minimum distributions. This might be done to qualify gifts of LLC interests for the annual gift tax exclusion. Others might contain a mandated distribution requirement pegged to the approximate state and federal income tax rate of the members to avoid phantom income. This is when a member might have to report income on her tax return but not get a cash distribution that is even sufficient to pay the tax. This type of clause is often negotiated by unrelated minority partners. If the operating agreement mandates distributions and there is a history of cash flow (e.g., rental stream) might that create a different result for the Ex’s attack? Contrast that with an operating agreement that has no requirements for distributions and has harsh restrictions on transferability. If cash flow has to end up in the trust then Jr. may loose the belt and have to rely only on his trust suspenders (yes, Brooks Brothers sells them in plaid). If the trust has some of the cracks in its armor described above, that could be trouble for Jr.’s matrimonial negotiations.
√ Really Look Under the Hood. Well what does that LLC actually do? What does the tax return and financial data for the LLC show? Does Jr. have a car, cell phone, travel and entertainment and other goodies run through the LLCs books? Might that discovery enable the Ex to torpedo the entire structure on the basis that Jr. was using and abusing it all? What about compensation? Might Jr. have taken no compensation from the family Widget LLC and instead let all profits flow through the LLC to the trust in an attempt to characterize all economic benefits as passive return on immune assets? Might the court believe that Jr. should have been paid a fair wage from the LLC for running the Widget business? Might that fair wage look like something that should be considered for alimony and child support?
√ Smell Test. Tax courts love applying what is really a smell test (but of course disguised in more sophisticated garb). Might a matrimonial court apply a smell test to Jr.’s trust? If Jr. and all involved with the trust disregarded all the formalities might the Ex increase the likelihood of piercing the entire structure trust, LLCs and all? Say Jr. was named manager and operated the LLC but ignored many LLC formalities (undocumented loans, personal expenses, etc.), and this was coupled with a trust that was not operated in conformity with the governing legal documents (did not pay the note pursuant to its terms from the family business it purchased, did not issue Crummey powers if required, had a blank Schedule A, did not have appropriate documentation for the purchase of assets), and so forth. What quantum of disregard would persuade a court to dismiss the shield the structure might otherwise provide against the Ex? After all, if Jr. and the other fiduciaries disregarded many or even most formalities, why should the court respect the entities as against the Ex if Jr. himself did not respect them?

Conclusion: Not all IDIGTs were created equal, and certainly not all are operated like the pristine trusts and LLCs of textbook case studies. Depending on the terms of the governing instruments (trust, underlying entity, sale documents and more) and the actuality of how the entire structure was operated, there will be a wide range of potential divorce consequences to such structures. While the intent of many such plans is to protect assets from a child or other heir’s future divorce, the effectiveness of the structure will depend on the details of the documents and operation. The devil truly is in the details, especially in a divorce challenge to an IDIGT.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Florida amended its power of attorney law. Since most folks living in high tax decoupled states (e.g. NY, NJ…) claim to live in Florida  this change in law will affect more than just Floridians.
■ Powers must be signed by the principal and by two subscribing witnesses and be acknowledged by the principal before a notary public. 709.2105. Powers signed before 10/1/11 will be grandfathered. A power executed in another state which does not comply with the new Florida execution requirements is valid if, when the power of attorney was executed, it complied with the law of the state of execution. A third person who is requested to accept such a power may in good faith request, and rely upon, without further investigation, an opinion of counsel as to any matter of law concerning the power of attorney. 709.2106. Might this mean that any bank or person in Florida asked to accept a power prepared in, for example NY, will only do so if they are provided a legal opinion that the power was valid in NY? Yep. Might that make the cost and time delays of using a NY power in Florida significant. Yep. Does that mean that if you’re a New Yorker wintering in Florida you might want to have a Florida compliant power just in case of an emergency? Yep.
■ Powers signed on or after Oct. 1, 2011 may not be contingent on some future event (e.g., incapacity of the maker). Powers signed prior to 10/1/11 are grandfathered but catch this: a springing power (conditioned on the principal’s lack of capacity) is only exercisable upon delivery of an affidavit of a physician that must state: (1) the physician is licensed to practice under chapter 458/459 (what’s that mean to a NY doc?); (2) the physician is the “primary physician who has responsibility for the treatment and care of the principal”; and (3) the principal lacks “the capacity to manage property.” 709.2108. What doc will be comfortable signing that? How much time will this take? When a Yankee fan hangs out in Marlin territory they might want to get a Florida power to avoid this.
■ See Chapter 709, Florida Statutes, ss. 709.2101–709.2402. Thanks to Benjamin P. Shenkman, Esq. Wellington, FL.

Potpourri ½ Page:
■Have Your Tax Cake and Eat it Too. So you want to fund a $5M bypass trust on the first death to maximize GST benefits and growth outside your estate. But you live in a state that has decoupled from the federal estate tax and which only has a $1M exemption. So it would cost nearly $400,000 to fully fund the bypass trust. Is there a better option? If the surviving spouse can use the exemption from the deceased spouse to protect an inter-vivos gift, this may provide a valuable cure to an outdated will. The surviving spouse could choose not to disclaim into a less then optimal bypass trust and then to simply gift the assets, protected by the same exemption that would have protected the bypass trust from estate tax, and then gift to a new trust formed to meet the current planning objectives. This may also provide a practical solution to fully funding a trust without triggering state estate tax in a decoupled estate on the first spouse’s death. Few states that have decoupled have a gift tax. So rather than fund a bypass trust on the first spouse’s death that might require the payment of a state estate tax, the surviving spouse should endeavor to inherit outright and then immediately gift the assets to a newly formed inter-vivos trust. However, the deceased spouse runs the risk that the surviving spouse will not make the intended gift but instead make a different disposition of the inherited assets. But hey, that’s what makes reality shows exciting!

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Seminars: PLIs 42nd Annual Estate Planning Institute September 12 and 13, 2011 in NYC and New Brunswick, NJ and via webcast. Contact Meghan C. Forgione, Esq. via Email mforgione@pli.edu or call 212.824.5839 for info. The program will cover in depth each of the topics in the lead article and more.

Freebies: Thanks to Neil Mendelowitz, Rich Greenberg and Pam Benson for their baseball consultations – they had a tough job all, but they pulled through.

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Lead Article Title: Ode to the Trust – 2nd SonataSummary: Here’s part two of the exciting, can’t catch your breath topic, how to operate your trusts. Many folks seem to think if they’ve signed a trust they’ve done the deed, but as the Carpenter’s song goes: “We’ve only just begun.” Just like a good golf swing, follow through is essential to achieve any of your personal, tax, legal or other objectives. The 2nd part of this article highlights a few of the myriad of matters to address. If you don’t heed the follow up warning, you’ll be relying on the line from the Carpenter’s song: “A kiss for luck and you’re on your way,” when the IRS or a claimant come’s a knockin, your estate planner will be singing the Buddy Holly words back at ya: “Don’t come back knockin’ at my offices’ closed door.”

♪ Income Tax Filings: ♫Form 56 notice of a fiduciary relationship should be filed with the IRS office where the income tax Form 1041 is filed. File Form 56 When: The first return for a trust is filed; When there is a change in trustees (as a new trustee you have personal liability for unpaid taxes and if the IRS has no notice of the trustee name and address tax notices could be missed); On termination of a trust (attach the document terminating the trust). Keep a copy of every Form 56 in the trust permanent file. ♫ Estimated Tax non-grantor trusts may be required to make estimated tax payments. Determine whether the fiduciary should elect to have any of the estimated tax allocated the beneficiary (e.g., if distributions result in the income being passed out to the beneficiary who as a result may have underpaid his/her estimated tax). File Form 1041-T by the 65th day after the trust’s tax year. ♫ Grantor Trust Reporting – which method will be used to report income: 1) some accountants don’t file – bad move; 2) some CPAs use a bare bones “skeleton” return – a Form 1041 with only a statement: “This trust is a grantor trust and all income and deductions are reported on the grantor’s income tax return Form 1040, Social Security No. 111-22-3333); 3) Some CPAs attach a complete schedule of income, deductions, etc. with a statement – better still. For legal and tax purposes detailed disclosure demonstrate the independent operation of the trust, and confirm which assets the trust owns.

♪ Grantor Trust Status. ♫ Is it or Isn’t It: Determine whether the trust is properly characterized as a grantor trust for income tax purposes. ♫ Tax Version of the Clapper: “Clap on Clap off, the Clapper!” Who could forget that memorable moment of Americana. Some grantor trusts are inadvertent, others intentionally include provisions to turn grantor trust status on or off (toggle) and you must confirm which direction the switch is flipped to for the tax year you are preparing a return for. ♫ Lay Down Sally: Bet you never knew Eric Clapton was a CPA? “SALY” (same as last year) the favorite phrase young CPAs use in their work papers, is not a valid explanation, for why a trust is a grantor trust. Too often the prior year return may not have reached the appropriate conclusion. Confirm whether grantor trust status has changed from prior years. Obviously if the grantor has died grantor trust status will terminate, but there are less obvious ways the trust’s status can change that require inquiry. If the trust relies on a particular mechanism to achieve grantor trust status, such as the right to substitute assets or add charitable beneficiaries, if those rights were waived, grantor trust status might have terminated. There should be a clear note in the trust records as to why the trust is classified as grantor or non-grantor trust. Ideally, obtain a confirmation for the trust records from the various fiduciaries as to which specific powers were waived, exercised or not exercised. This extends well beyond the determination of grantor trust status and can affect many significant aspects of the trust. For example, if a person is granted the authority to add a charitable or other beneficiary, did they? An affirmative executed statement confirming that they did not is probably necessary to determine with certainty who the beneficiaries were for the year. The ideal approach is to have an annual trust meeting and have every fiduciary execute a statement annually as to the status of their position and any actions, or confirmation of no actions, during the prior period.

♪ Passive Loss If the trust owns interests in entities that generate losses a determination has to be made as to whether the trust is a material participant in those activities such that the losses will be deductible against passive income. In evaluating whether a particular taxpayer has materially participated the participation of that taxpayer’s spouse is attributed to the taxpayer. Temp. Reg. Sec. 1.469-5T (f) (3). How this test should be addressed in the context of trusts is uncertain. The IRS in TAM 200733023 reached the opposite conclusion as to how this should be determined from the court in The Mattie K. Carter Trust v. US., 256 F. Supp. 2d 536 (Tex. 2003). Advise the trustee of uncertainty in the law and determine what types of disclosure should be made with the return. Time has not resolved this dichotomy. The IRS is sticking to its tough passive loss guns requiring trustees to materially participate. PLR 201029014.

♪ Non-Resident Beneficiary If there are non-resident alien beneficiaries the trust may be required to withhold income tax on certain distributions. The trustee should be certain to confirm the requirements and have the trust CPA file Forms 1042 and 1042-S if required. The trustee may also have an obligation to file Form 1040-NR for that foreign beneficiary unless the alien has handled the filing or has appointed an agent to do so.

♪ State Income Tax Status Determine in which states the trust must report income or file returns. Don’t assume that last year’s determinations necessarily apply. If a trustee, or depending on the state another fiduciary like the investment adviser, moved to a different residence, the determination of which states can tax the trust income may have also changed. ♫The general paradigm (subject to many exceptions and variations) is that a state will tax a resident trust on world-wide income, and a non-resident trust only on income within the state. ♫A trust is characterized as a resident trust based on the residence of the grantor, beneficiaries and/or trustees, and/or on the basis of the situs of trust assets or the specifications in the trust agreement. Some states tax based on residency of the fiduciaries. So depending on the state if a fiduciary moved his or her home to a different state, the old state may no longer tax the trust, or tax it less, while the new state may for the first time exert tax authority. Trustees should document the residence of beneficiaries and other factors that may affect this before filing returns. ♫ A change in fiduciaries (trustee, trust protector, investment adviser, etc.), or the location of trust real estate assets, or the operations of an active business in which the trust owns an interest could all affect state tax nexus. If there is no requirement to file in a particular state it is best not to do so. It will prove much more difficult to cease filing, then never to have filed if not necessary.

♪ Investment and Other Deductions ♫ Expenses of a non-grantor trust may be subject to the 2% of adjusted gross income floor. IRC Sec. 67(e)(1). The rules as to which expenses are unique to the administration of a trust and not subject to this have been subject to considerable controversy.

♪ Gift Tax Filings: ♫Form 709 Filing gift tax return should be considered more broadly then many CPAs have done in the past. It might have been common in the past for many CPAs to encourage gifts under the annual gift tax exclusion (now $13,000) to avoid filing returns. On the other hand, as Bob Dylan croons: “The Times They Are A-Changin’.” Many practitioners would now recommend a more pro-active approach to filing gift tax returns, attaching a complete trust, reporting annual gifts under Crummey powers, attach full appraisals of the assets given, affirmatively allocating generation skipping transfer (“GST”) tax exemption (or affirmatively not), and more. ♫Adequate Disclosure Telling all (your accountant would call this “adequate disclosure”) will begin the running of the period of time (tolling the statute of limitations) for an IRS audit of the return.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Physician Letters

Summary: Physician letters are commonly obtained for a myriad of estate and financial planning matters. Determining maximum sustainable spending rates should not ignore real life expectancy. If you’re planning a sale of assets for a private annuity your current medical status is important. If you have a shortened life expectancy the actuarial tables that are normally used to calculate the annuity amount may be inappropriate. Rev. Rul. 66-307, 1966-2 C.B. 429; Treas. Reg. Sec. 1.7520-3; 20.7520-3(b)(3). But too often medical letters are a generic non-committal paragraph that get stuck in a file but don’t really corroborate what is required. What should these medical letters address? Consider the following checklist as a starting point to be tailored to the particular planning goal and your health situation.

√ Medical History. Provide a general medical history beginning at least several years prior to any contemplated transactions, not merely a current snapshot. Too often medical letters describe a patient’s current status and nothing more. This can often be inadequate. The history will help establish a baseline of the status of your medical health. It also provides a context to the progression (or stability as the case may be) of your health status.
√ Acute Conditions. If you had or have any acute medical conditions, e.g. pneumonia, these should be indicated and their status explained. Explain the course, medical management and whether or not there are (or expected to be) any residual affects, or instead was there (or is there expected to be) complete resolution? A conclusion that the acute condition should not have a significant negative impact on life expectancy may be helpful.
√ Chronic Conditions. If you have any chronic medical conditions these should be indicated and their status explained. Are they stable? How are they medically managed?
√ Stability. Describe whether from all indications you were in reasonably stable medical condition despite the chronic illnesses or other health issues you were living with and that are described in the letter.
√ Life Expectancy: Do any of your known health conditions independently, or will several in the aggregate, significantly shorten your life expectancy? Specifically, which if any of conditions create life expectancy limitations?
√ Attention to Medical Care: Do you visit your physician on a regular basis for health care maintenance? How often? Do you see any specialists? Have you sought and received appropriate medical treatment for any health conditions.
√ Medical Regime: What is your medical regime? This should describe what medications you take, how often you take them, when you began taking them, whether you have a special diet (and what it is) or regular exercise program (and what it is)? Are you were compliant with your medical regime? Providing some level of detail, rather than just broad statements, is preferable.
√ Future Testing: Is there any planned medical testing or monitoring that has been scheduled or even recommended after the date of your last complete physical examination? What tests have been recommended, when and for what purpose. Example: If you had an abnormal EKG, is a stress test planned to rule out the presence of ischemic heart disease? What follow is recommended? Oftentimes when a patient enters the hospital for even routine surgery, studies are done to rule out pre-existing diseases. Be certain your physician summarizes the results of any such tests as part of the medical letter. This can be valuable if a later acute condition occurs by corroborating that there was no knowledge or even anticipation of that acute condition at the earlier test date.
√ Social Habits: Do you smoke, drink alcohol, are significantly overweight, and how regularly you tend to your medical needs. An affirmative statement that you do not smoke or drink in any excess, or use recreational drugs, can be important. If you had engaged in these, or other, activities in the past, the letter should provide a history and indication of when you stopped.
√ Conclusions: If feasible, an affirmative statement that you do not have “an incurable illness or other deteriorating physical condition such that there would be a meaningful impact on life expectancy. If the purpose of the letter is to support a sale of your assets for a private annuity, if feasible a conclusion that there is not “a 50 percent or greater probability that you will die within 1 ½ years as a result of any identified medical conditions,” Example: “Although the patient has a history of multiple medical problems, all are stable and managed appropriately. The patient’s chronic health issues so not present any specific life expectancy limitations. I expect to be serving the patient for years to come.”
Recent Developments Article 1/3 Page [about 18 lines]:
■ The Cost of Love: Cora lived with Bernie for 22 years handling all household matters, including, cooking, cleaning, and so forth. Bernie must’ve been listening to Paul Simon’s tune (50 ways to leave your lover…) and the couple broke up. Cora filed a palimony suit but Bernie died before the matter resolved. Bernie’s estate claimed a deduction for the palimony claim. The IRS disagreed and the case ended up before the 9th Circuit which held that it was likely that Nevada would join other states (e.g., Arizona and California) in finding that homemaking services like those rendered by Cora can be adequate consideration for a property-sharing agreement between cohabitants, and hence a palimony claim. That claim had to be valued as of the date of Bernie’s death. Estate of Bernard Shapiro v. U.S. , 107 AFTR 2d 2011-XXXX (9th Cir.).
■ Time in a Bottle: So you beef ‘cause your lawyer keeps time records, but you had best do the same. Losses on passive activities, like owning a limited partnership interest in a real estate rental partnership, are limited as to how they can be deducted. One out is if you meet the requirements to be classified as a real estate professional. IRC Sec. 469(c)(7). This exception from the harsh passive loss rules requires that more than half of personal services performed during a tax year are real property businesses with “material participation”, and that you provide more than 750 hours of service for those businesses during the year. The taxpayer kept detailed time records, but failed to meet the 750 hour test. Taxpayer spent 1,003 hours managing real estate, but 324 of the hours were spent on operating a short-term (less than 7 day rentals, like a hotel) rental property. Short term rentals aren’t considered a rental activity under the IRS rules. Temp. Reg. 1.469-1T(e)(3)(ii) . 1,003 – 324 = only 679 < 750! Bailey , TC Summ. Op. 2011-22 (Tax Ct.) Remember Jim Croce’s lyrics: “If I could save time in a bottle the first thing that I’d like to do is meet the passive loss rules…”

Potpourri ½ Page:
■ Gift Tax Blues: So you filed a gift tax return to report the zillion dollar zeroed out GRAT (say the gift value was a buck so you could report it). Good move (even better move to make the annuity payments on a timely basis!). Your CPA attached so many documents to meet the adequate disclosure rules that a fork lift was used to file the return with the IRS. Good move. But as Charlie Tuna knows not every Tuna gets to be Starkist and toll the statute of limitations (the time period when the IRS can assess a gift tax). Did you report all your charitable gifts? According to some commentators the tax Regulations suggest that the gift tax return charitable deduction requires donations be reported. What if you don’t? Code Section 6501(e) says that if you don’t report more than 25% of your gifts the statute of limitations on the entire return is extended from 3 to 6 years. So the IRS might be given 6 years instead of 3 to bond with you over the gift tax return you filed reporting a zillion dollar GRAT. Avoid this risk by fully reporting gift charitable deductions.
■ Care Bear: Everyone thinks of their attorney, insurance agent, and CPA when thinking of their estate planning team. But many folks need a bigger cast to make the playoffs. Effective planning may not be achieved, if you’re on in years, have a significant health issue, or don’t have close reliable family members. More is needed. In many instances adding a care manager (RN, social worker, geriatric consultant or similar professional) to your team can be the key to your security. Helping you better present and explain health issues to those you must interact with, even direct consultation with key family members, can be an important role for the care manager to fulfill. A care manager describing the physical and psychological implications of your health status to others on your estate planning team can be invaluable in assuring that documents and planning are tailored to best server your evolving needs. The care manager can help develop a plan for your care for the future, and help your estate planners craft the mechanisms to assure that the plan will be implemented.

■ 2010 Trusts: If you signed a trust in 2010 but before the 2010 Tax Act was passed (and understood!) call your estate planner and confirm what must be done, if anything, to be sure your trust has the desired GST status. Planners tried to anticipate the unknown tax law in lots of creative ways and some of these require post-2010 Tax Act actions to get the result you want.

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Lead Article Title: Ode to the Trust – 1st SonataSummary: So here’s a topic almost as exciting as watching paint dry — how you operate your trusts. You know so much about seed gifts, guarantees, and grantor trust status, that you’ve become the fav guest on the cocktail party circuit. But will your fans go for something more basic? The fun part is planning and signing your trust, but then the mundane but essential part begins – having your trust – be a trust. What does that take? Paying attention to lots of mundane details. To have a shot at your trust getting the respect that eluded Rodney Dangerfield, an annual meeting of the fiduciaries and advisers (CPA, investment manager, attorney, etc.), is a must. What about the Congressional tax cacophony? While we only know what the estate tax looks likes for 2 years, most of the tunes that follow are classics that you’ll have to hum for many seasons regardless of the Congressional tax winds, oldies but goodies.

♪ Type of Trust: Understand the nature or type of trust involved. This will help you identify many other issues you will have to address to properly operate your trust: tax filing requirements (grantor trust, split-dollar loan statement, gift tax return, etc.). The tune of your trust can be classified in a myriad of ways: ♫ Revocable versus irrevocable (can’t change); ♫ Grantor (person establishing the trust is taxed on the trust) versus non-grantor (trust pays its tax, subject to the complex “DNI” rules on when distributions carry income out to beneficiaries); ♫ Testamentary (formed at death) or inter-vivos (formed while you’re alive); etc. ♫ The type of assets held by a trust can have a significant impact on the terms of the trust and required operational steps: life insurance, S corporation stock, etc. ♫Each note has importance to operational steps: ♫ Life Insurance Trust: In most instances, Irrevocable Life Insurance Trusts (“ILITs”) are grantor trusts. This means that income (which is usually negligible) is taxed to the grantor/insured. It also can have benefits to minimizing tax rules when transferring or selling policies. ILITs are typically set up to assure that the proceeds are excluded from the grantor/insured’s estate and not reachable by creditors or ex-spouses. These latter benefits will remain vital whatever the tax finale Congress sings. There are many variations on this type of planning and the types of trusts that might own insurance. Evaluate transferring new policies to the ILIT in light of the large $5M exemption, or unwinding split dollar loans. ♫ Dynasty/GST Trusts: These perpetual trusts are typically (2010 remains an oddity) intended to continue for a loooong time, often in perpetuity, without triggering estate or GST tax at generational levels. This may require an allocation of GST exemption on a gift tax return unless it is confirmed that the GST automatic allocation rules apply. Plan now, the Obama budget has proposed limitations on these trusts. ♫Child’s Trust: Confirm whether Crummey powers are used, whether the trust fulfills a parent’s obligation to support income may be reported to the parent. Alternatively, the trust may have intentionally been structured as a grantor trust so that the parent/grantor’s payment of income tax leverages greater asset growth in the child’s trust.

♪ Payments to Be Made: ♫ Many trusts require exacting payment schedules. ♫Are they monthly, quarterly or annually? What date are they due? The anniversary date of the funding of the trust or year end? ♫Charitable Remainder Trusts (“CRTs”), Grantor Retained Annuity Trusts (“GRATs”) require payments be made to you as grantor. If not made as required the trust will hit a flat note for tax purposes. Identify the amount and timing of the required payment and set up procedures to assure they’re sung in tune. ♫If there is a unitrust payment, or inflation adjustment, be certain the calculations follow the trust terms. ♫If an appraisal is necessary to calculate a payment, get the process going far enough in advance so that the trustee can make a timely payment. ♫ Have your CPA set up a chart of all payments and collect proof of payments now, so you’re ready when Uncle comes knockin’.

♪ Trust Permanent File: Every fiduciary and adviser should have a file of critical trust documents. Once this file is set up in an organized fashion, tailored to the specific trust involved, operating your trust becomes as simple as playing Choptstix. Consider: ♫Trust agreement. This is the key to all operational decisions from investments to distributions. Be certain you have the entire trust and all ancillary documents, including: schedules listing assets transferred, amendments (if not irrevocable), etc. ♫ Fiduciary actions. The fiduciaries (trustees, investment advisors, distribution committee, someone holding a power to designate a charitable beneficiary, etc.) of a trust may have the authority to take certain actions that affect the trust. You need to maintain copies of all these actions. Sometimes it is essential to confirm that anyone holding a power has not exercised that power (e.g., if someone has a power to substitute assets whether or not they have done so is essential to confirming the assets of the trust). Periodic confirmations of actions not taken can be as important as copies o factual written actions taken. ♫ Beneficiaries. Current data on trust beneficiaries should be maintained: addresses, Social Security numbers, residency/domicile which may affect how the trust is taxed as well the marginal state/federal income tax rate to be considered in planning investments, etc. ♫ Crummey Powers: If gifts to the trust require notices of annual demand powers be issue to qualify for the annual gift tax exclusion records confirming that these notices were properly issued must be maintained in order to support favorable gift tax treatment. The trust CPA should consider whether a gift tax return can be filed reporting all gifts to toll the statute of limitations on an IRS audit. Too often, years after a trust has been established, notices are lost, not sent, or wind up being handled in a manner contrary to either the terms of the trust or the law. Even if you are sure that estate taxes will never matter (the exemption is still scheduled to plummet to $1M in 2013) failing to adhere to the terms of an irrevocable trust may still create liability for the trustee, demonstrate to a court that you have ignored the formalities of the trust in the event of a future suit or claim, etc. The trust permanent file should include copies of all Crummey notices since inception, and demonstrate that they were properly prepared and acknowledged. ♫ Trust assets. Understanding trust assets is essential to a host of planning issues. Are the assets properly insured with the trustee properly covered? Too many people have residential real estate that is owned by a trust but insured as if owned by them personally. Will that suffice to protect the asset and trustee in the event of a casualty or suit? The assets may determine which fiduciary (e.g., investment advisers) has responsibility. Assets can impact state tax filing requirements. Assets should be consistent with the trust Investment Policy Statement (IPS). Should assets be supplemented by additional gifts be made to existing trusts to capture the new $5M gift exemption? The Obama budget proposal calls for a reduction to a $1M gift exemption.

♪ Ancillary Transactions: Ancillary transactions affect the necessary legal documentation, trust income tax return, and more. ♫ Split-dollar insurance. A split-dollar arrangement may have been used to pay for a portion of life insurance premiums. Split-dollar loans require a statement to be filed with the trust and premium payor’s tax returns. If the trust involved is not an insurance trust, it might be the party advancing premiums for the policy owned by an insurance trust or family business. Split-dollar arrangements all need to be reassessed, and many unwound using the new $5M gift exemption. ♫ Guarantee. If the family engaged in any intra-family sales (e.g. a note sale to a grantor trust) a trust other than the purchasing trust may have guaranteed a portion of the payments. Are guarantee fees advisable? Were they in fact paid and reported appropriately? The $5M gift exemption gives leeway to make gifts to reduce or eliminate the need for guarantees. ♫ Loan Arrangements. With historically low interest rates many family entities have engaged in intra-family loans. Proper documentation, payment and reporting of interest, etc. is essential. Post tax season be certain you have all relevant documents that the interest rate charged is adequate, and that other formalities are adhered to. ♫ Personal use assets. If a trust purchases a house for a beneficiary, be certain that property tax and mortgage interest deductions are being properly handled both for the trust and those using the property. Clients often seek to deduct property taxes for a personal property that may be owned by a trust (e.g., the surviving spouse resides in the marital residence now owned by a bypass trust).

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: 2010-11 Tax Plan

Summary: Lots of tax uncertainty and change. But there is one certainty, doing nothing won’t help you, and may prove the worst “strategy” of all. “Wait and see,” may well become “wait and pay.” Most importantly, the $5M gift exemption enacted at the end of 2011 presents for some the greatest tax, estate and asset protection planning opportunity in many decades, and that opportunity may not be around for long.

√ Change in Venue: So your income oriented stocks were snug in your personal account where the Taxman only could tag them at a 15% rate. Bam Zap Zowie (think old Batman Shows) — the Bush 15% tax siesta for dividends may end in 2013 and dividends may be nailed at a 39.6% rate. So dividend paying stocks may morph from tax efficient to tax costly. So, just like hermit crabs who need to find a larger shell when they want to grow, your dividend paying stocks may need to slither into your IRA or other qualified plan shell to avoid a tax rate that more than doubles. Consider this possibility as you plan investments in the coming years. Asset location is as important as asset allocation to maximize your net returns.
√ Late for Supper but not for GST: So you made gifts in early 2010 to your children or trusts, but now that you know 2010 has a zero percent GST tax rate, what can you do? It might be possible through disclaimers (renouncing an interest in a gift or bequest) for grandchildren (“skip persons” in GST parlance) to become the donees or beneficiaries of certain 2010 transfers that would then be subject to a 0% GST tax rate (can’t get lower than that!). The GST rules also permit you to make a late allocation in 2011 of GST exemption to 2010 gifts. That might be a good fix. You have to act after 4/15/11. IRC Sec. 2642(g); Treas. Reg. Sec. 26.2642-2(a)(2).
√ Carryover Basis Allocation to LLCs: LLCs (and partnerships) have inside basis (LLCs’ investment in its assets that determine gain/loss if the LLC sells the asset) and outside basis (your investment in the LLC interest which determines your gain/loss if you sell). If someone died bequeathing you an interest in an LLC you might get to increase (step-up) the basis in their LLC membership interest, but that won’t cut the tax mustard unless the LLC can also give you an adjustment for the inside basis in asset it owns (otherwise if the LLC sells a building you’d still get tagged with gain). But before the executor makes an allocation to you be sure you can get the LLC manager (or partnership’s GP) to make a special tax election under Code Section 754 to adjust the inside basis. Otherwise, you might never get the benefit hoped for. If the basis adjustment for the estate is less than the gain involved confirming this in advance of filing an allocation with the IRS is key.
√ Attorney Employment: Most executors hire an attorney and CPA to represent the estate and the probate process, and tax returns are handled. In 2010 with a choice of having the estate tax or the carryover basis rules apply, each beneficiary affected really needs to hire their own counsel to represent their interests. The choice may affect how assets are distributed, not just tax issues. The receipts and releases typically signed at the end of the probate process in contrast to more typical years, for 2010 estates should include attachments clarifying how the executor selected the estate tax or carryover basis (and if the latter, how the basis adjustments were allocated). 2010 is a unique year and extra measures are warranted. Estates paying no estate tax will be perplexed by more costly professional fees when there is no tax, but alas, such is the Alice in Wonderland logic of our tax system.
√ Give it Away: Its not just your kid yelling give it away, your tax advisers will be joining the chorus in 2011. The $5M gift exemption creates sizzling tax opportunities. President Obama’s 2011 budget proposal already calls for a reduction in the gift exemption to $1M. Why is this so vital? ■ State Tax: For folks living in high tax states that don’t follow the federal estate tax rules (“decoupled”) giving it away before they check out could leave no assets in the state estate tax vice. Example: You have a $5M estate and live in NY which has only a $1M estate tax exemption. Give away $4M and there is no gift tax (unless Obama’s change goes through in which case this planning opportunity evaporates). On death if you’re under $1M there is no state estate tax either. If instead you do nothing, on death your $5M estate will trigger more than $400,000 in NY tax. Ouch. ■ Non-Married Partners: The gift tax has always been a tough impediment to non-married partners equalizing wealth. For most, the $5M gift exemption obviates the issue. Gift now before Congress turns the tax spigot off. ■ Asset Protection: Shifting assets into a protective structure had to plan around the $1M gift exemption. With $5M and $10M for a couple there might no longer be any tax impediment to shifting assets. Go for it while you can.
√ Calendar Roth Conversion Re-characterization: Many folks converted some or all of their IRAs to Roth’s in 2010 (and others will follow suit). Don’t forget to calendar October 1, 2011 to meet with your investment adviser and CPA to determine if your Roth conversion was an investment success. If not you have until October 17, 2011 (the 15th is a Saturday) to reconvert or recharacterize the Roth back to a regular IRA and avoid paying the income tax on the conversion of assets that declined in value post-conversion. You can also Roth an inherited 401(k). Notice 2008-30, IRB 2008-12, 638.

Recent Developments Article 1/3 Page [about 18 lines]:
■ S Corp 2nd Class of Stock: Although LLCs are the entity of choice, 2 million+ S corporations still exist. One of the many requirement to qualify and maintain tax favored S corporation status is that the corporation can only have one class of stock. Economic turmoil has forced many S corporations to restructure debt. While that could run afoul of the single class of stock rule, there is some leeway. In a recent private letter ruling the IRS held that the restructure of debt in which the lender negotiated warrants to receive Class B non-voting common stock did not constitute a disqualifying second class of stock. Reg. 1.1361-1(l)(4)(iii)(b)(1). The IRS cited 3 factors influencing the favorable result: (1) The warrants were issued to induce the lender to restructure debt; (2) The lender is regularly engaged in the business of commercial lending; and (3) The warrants were issued in connection with a commercially reasonable loan. PLR 201043015 .
■ Split Dollar Loan Filings: A loan can be made under the split-dollar life insurance loan regime but it must have interest paid or accrued at the applicable federal rate (“AFR”). Most of these loans are non-recourse to the borrower, and the lender can only look to the life insurance policy and proceeds for repayment of the loan. This makes the loan contingent with adverse tax consequences. However, this unfavorable characterization can be avoided the borrower and lender must file a written statement (representation) with their tax returns in which they state that a reasonable person would expect the loan to be repaid. In these rulings neither the employer or employees filed the required representations concerning the nonrecourse nature of the split-dollar loans with their tax returns. The IRS has recently afforded some leniency by providing an extension of time to meet these filing requirements. PLR 201041006 – 201041024.
Potpourri ½ Page:
■ “Live long and prosper” is said after a Vulcan salute, but all you Tax Trekkies knew that! But did Spock or Mrs. Spock actually first stay it? Estate planners typically represent the family so that coordinated and better results can be achieved. But if women outlive men on average by six years who should be calling the final shots? Is the female living long but not prospering because the shorter lived male pushes estate and gift planning? Perhaps dad is feeling more generous about gifts for the grandkids ‘cause dad won’t be around to need the money, but mom might be left trying to make ends meet. Six years is a long time. Just a thought.
■ Is 4% the Magic Number: Some folks test your ability to retire by estimating 3-5% of your investable assets and then comparing it to your budget. Not a bad rule of thumb for a preliminary chat before you crunch the real numbers with your CPA or financial planner. But is that budget number really right? Many magazines and financial gurus espouse that you should “need” say 75% of your pre retirement income to support your post-retirement lifestyle. But according to a recent article in Investment Advisor magazine quoting researcher Dan Ariely folks “want” a lifestyle that might require 130% of pre-retirement salary. So it’s not only teenagers who confuse “need” and “want.” But think about the implications to retirement planning! Think about the implications of estate planning, especially gifts and other wealth transfers! What numbers must remain for the female of the couple (+ 6 years) to have the lifestyle she “wants” before gifts can be made? Are estate planners pushing clients to make tax advantaged wealth transfers before reviewing stress tested numbers with the client’s wealth manager? Are advisers reasonably assuring that their client/parents have economic security first? The answer in too many cases is negative. The reluctant planning client may be the prudent client. Just a thought.
■ Trustees of Insurance Trusts: Watch your fiduciary back! If an insurance policy will be replaced have an independent insurance consultant, in addition to the broker, provide a written analysis confirming the advisability of the change. Cochran v. Keybank, 901 NE2nd 1128 (Ind. App. 2009).
■Low Interest Rates: Great for GRATs, lousy for CRATs. Charitable Remainder Annuity Trusts don’t work well when interest rates are low because the value of what the charity gets when the CRAT ends is low and the requirement that the charity get 10% of the value of the property given to the CRAT is tough to meet. A taxpayer recently missed the mark and the IRS permitted the CRAT to be rescinded and the property returned to the taxpayer. PLR 201040021. Sometimes “backsies” is allowed! But to get this result the taxpayer had to obtain the consent of the charity, the trustee and the state’s attorney general.

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Lead Article Title: FLP UpdateSummary: FLPs and LLCs remain the focus of many estate plans, and the tax implications are significant. Common use, however, does not imply simple or assured tax results. The following comments were gleaned from a presentation by a panel consisting of Michael Mulligan, Esq., Richard Oshins, Esq., John Porter, Esq., Sanford Schlesinger, Esq. and Martin Shenkman, Esq., at the recent NYU Institute of Taxation in NYC.

◙ Creative Auditing 101: On some audits the IRS has started arguing a new position. If you sell FLP/LLC interests to a trust for a note interest should be set at the Applicable Federal Rate (“AFR”), an interest rate prescribed under the Code. The IRS has argued in some cases that the AFR is not sufficient and that the difference between the AFR and the fair market interest rate is a gift.

◙ The Dating Game: In Pierre v. Commr. 133 TC No. 21, No. 753-07, 8/24/09) the taxpayer
gave 5% of an FLP and sold 45%. The taxpayer’s valuation expert set a 45% discount on FLP interests. Since the IRS said both transfers were made the same day to the same transferee it was really equivalent to a transfer of a 50% interest which should not be afforded that discount. The Tax Court agreed, reasoning that transfers on the same day when nothing of tax significance occurred between the transfers, should be aggregated. So, a seed gift to a trust (e.g. $250,000 of interests in an FLP), followed by sale of interests in same FLP to the trust, may be aggregated. If the combined FLP interests gives you supermajority power you might even get tagged with a control premium instead of the sought after discount elixir. So how long does your seed gift have to bake before you can consummate a transaction? In the Holman case the Court looked at the underlying FLP asset, Dell stock, and felt it was sufficiently volatile that a 6 day wait sufficed. Some chefs recommend 30 or 60 days between the transfers. Some recommend using a guarantee in lieu of seed gift since you cannot aggregate a guarantee for a note given by a trust with the FLP interests sold to a trust. Other gurus suggest a tax year so an intervening income tax return is filed (e.g., make the seed gift in November and the sale the following February). There is no shortage of opinions. The more time between the gift and sale the better. Finally, when you’re a contestant on the Dating Game documents should be signed and notarized as of the date they were signed. This is preferable to signing a document when the only dates is an “effective as of” date. Having documents notarized gives independent corroborating evidence that it was transferred as of that date. That’s why all important documents are always notarized by the taxpayer’s personal secretary or the lawyers secretary — independent corroboration.

◙ Indirect Gift Argument. If you gift assets to an FLP (e.g. rental real estate), and on the same day gift limited partnership interests in the FLP owning the real estate to your heirs, the IRS and some courts wills view this no differently than if you had simply given the underlying real estate assets directly to your heirs. The IRS position is that the transfer of assets to the FLP (funding) and gifts pf the FLP should be collapsed. The more time that passes between funding the FLP and the gifts of FLP interest (sounds a tad like the time recipe above), the better your tax cake will be baked. Time in between is good. Independent risk during that time period (e.g. volatility of the assets) is good. In the Gross case 11 days baking with ingredients consisting of a mixed portfolio was a sufficient recipe. In Senda interests transferred at same time the entity was funded were viewed by the IRS as a transfer of the underlying assets. The documents were not sufficient to show that the transfers of assets to the FLP occurred before the transfers of interests in the FLP to the family members. If viewed as an indirect gift, the transfer won’t support discounts for lack of control or marketability. While Holman and Gross permitted a short waiting period for volatile assets, a longer time is required for non-volatile assets. What is volatile and how long do you wait? Ah, that is the question for your tax psychic. The moral of this tax tale: Maintain a clear paper trail proving your FLP was funded before the transfer of your FLP interests.

◙ Annual Gifts: Many folks make annual gifts of interests in family business entities, FLPs, etc. It’s a simple and inexpensive (so you thought) way to use your annual exclusion, conserve cash, and shift wealth to the next generation. In 2002 the Hackl case nailed a taxpayer trying annual gift planning. The Hackl court held that the gifts did not qualify for the annual exclusion because they were not gifts of a “present interest.” The Hackl LLC owned raw land that had once been a tree farm but the trees were cut and it would take 30 years for new trees to grow. Mr. Hackl made 200+ gifts to family members. But the IRS argued that none of these gifts constituted present interests because of nature of LLC assets (growing trees) and the restrictions on transfer in the LLC operating agreement. The Tax Court agreed with the IRS, and the Sixth Circuit affirmed. T.C. Memo 2010-2 (1/4/10). Recently in the Price case, an FLP held marketable securities and the partnership agreement included common transfer restrictions (e.g. consent of all partners is required for a transfer, there was no right to withdraw capital, distributions could only be made in the discretion of the GP, etc.) There were even significant actual distributions made. Nevertheless, the IRS argued that the gifts of LP interests should not qualify for the annual exclusion since the LP interests given did not satisfy the “present interest” requirement. This was because the donees did not have a right to the immediate enjoyment of the LP interests given to them. The Tax Court agreed because the LP interests were subject to tough restrictions on transfer. No capital could be withdrawn. The LPs were mere assignees. This reasoning is disturbing because real partnership agreements between unrelated folks commonly have these clauses (don’t confuse “tax reality” with “real reality”). How can a typical FLP survive the Price test? Consider including a “put” right (partners can sell their interests back to the partnership). This might be similar to the annual demand or “Crummey power” withdrawal right included in many trusts to support characterization of gifts to the trust as constituting present interest gifts. Perhaps you can give an LP the right to put back an amount of the LP interest at a fair market value for a specified period of time. But this isn’t a cake walk either. The IRS has argued that a put rights are not always valid. But if you win the “put” right you might sacrifice discounts, after all if the LP donee can realize the fair value of the LP interest how can you argue its value is reduced as not being marketable? The IRS may get you coming or going! The IRS can argue that the put right makes the interest more liquid and hence worth more (i.e., lower discount). Giving LPs a right to sell subject to a right of first refusal with reasonable provisions might provide another option.

◙ Costs: Is it even worth making an annual gift of $13,000 of FLP interests? You need an appraisal for the gift. The fact that you are only making $13,000 annual gifts doesn’t absolve you from needing a proper appraisal to determine the percentage interest in the FLP that is worth $13,000. It is probably advisable to file a gift tax return reporting the gift of the partnership interest in order to toll the statute of limitations. If you “adequately disclose” the gift on the return after there years you’re entitled to a “Get out of Audit Free” Monopoly card. This is all quite cumbersome and costly for a mere $13,000 annual gift. Seems that the time honored way most small family businesses were passed to the succeeding generation is under harsh and unfair attack.

◙ Buy Sell Agreements. Rights of first refusal and transfer restriction were ignored in Holman. IRC Sec. 2703. In the Blount case, rights of first refusal in buy sell agreement that would have reduced the value of the interests, were ignored for valuation purposes. The IRS had argued that the FLP itself should be ignored for valuation purposes but lost that argument in Strangi and other cases. So the IRS has refocused on a new approach, attacking not the FLP but the transfer restrictions in the partnership agreement that restrict an owner’s ability to transfer interests in the entity. To be respected the restrictions must: (1) be a bona fide business arrangement; (2) not be a device to transfer interests to heirs; (3) be comparable to arm’s length agreements between unrelated parties. There is a shortcoming to the IRS attack. Even if you ignore all these restrictions, what is left is an LP interest that has only limited rights under state law, so that it still must be worth substantially less than full underlying asset values. But in some instances this risk could have a substantial tax impact. Stay tuned!

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Checklist Article Title: Health Proxy Basics

Summary: R. Edward Townsend, Esq. suggested that we make a few more points on living wills and health proxies. Ed offers his comments from a New York law perspective but the comments really have wide applicability to wherever you might be. The comments, as is Ed’s style, are practical, to the point (well before I threw in my two cents) and real. Ed, in offering his practical insights, continues a process begun many decades ago. I clerked with Ed and his firm in law school, and no young attorney could find a finer mentor then Ed. We appreciate the input.
√ Make certain the health care proxy addresses nutrition and hydration (required by New York law). 2¢ Be really careful of “standard” forms and especially cheapo internet documents. The provisions are often woefully inadequate with respect to this important point, and in some cases horrific in application.
√ Make certain the health care proxy contains HIPAA language. 2¢ That’s the Health Insurance Portability and Accountability Act which created specific requirements for authorizing a person to access your medical information. The language should clearly authorize an agent to access your records and should include specific references to HIPAA.
√ Don’t designate multiple agents. Doctors don’t like this, and I believe it is not allowed in some states. I sometimes have clients who want two or more kids involved in the decision making, in which case I designate a primary health care agent (e.g., the older child), and then a successor (e.g., the younger child), and then provide that the former should consult with the latter. Sometimes you have one kid in New York and one in California. In this case, I might provide that the kid in New York has the power when the parent is in New York, and vice versa when the parent is with the kid on the West Coast. 2¢ Even if multiple agents are permitted under your state law, don’t do it. Emotions run high when these issues arise and even children who always were of like mind could differ in dramatic ways making decision making impossible.
√ I steer clients away from overly specific living wills. I find they only confuse the health care agent, the doctor and the hospital, and the health care problem that eventuates is invariably one which is not specifically addressed. Then everyone gets into the act with an opinion as to how the exact language should be interpreted, etc. I stress that the client should set forth his/her basic wishes, and then select a health care agent with judgment to act on this when necessary. 2¢ We’ve advocated in prior articles to be quite clear about religious issues, organ donations and burial instructions, but those are different. We fully agree with Ed. The Myriad of medical possibilities make it inadvisable to get specific. Often when people do get specific, the actual situation that arises is different than the details specified in the document and confusion results.
√ Make certain the living will is not part of the health care proxy. The doctor never needs to see the living will. Keep it simple. The only thing the doctor/hospital needs to know is who will be making the decisions. 2¢ Agreed again, but we like to list the powers and authorities the agent has in the proxy to endeavor to minimize situations where a medical provider questions the scope of authority.
√ A client should never appoint as health care agent anyone, even a spouse or child, if the client remotely feels he/she will let his/her religion get in the way. Accordingly, no special language is needed. 2¢ We’ve opted for the opposite approach. Ed is right, simplicity is best, but we’ve seen situations where a client’s religious views may not be known, or erroneous assumptions made, or the professed views of the agent are not reflective of their real attitude.
√ In New York, use the statutory form. The hospitals are familiar with it and, therefore, can more readily accept the designated health care agent. I even have my New Jersey clients sign a New York statutory form, since there is significant chance they will be treated in a New York hospital. 2¢ Good point. We haven’t done this but will offer it to clients in the future if they wish. We haven’t had much kickback on lawyer prepared forms that were comprehensive in the powers they’ve granted the agent.

Recent Developments Article 1/3 Page [about 18 lines]:
John Porter’s Partial Checklist of FLP ideas and tips:

Summary: John Porter, the maestro of FLP and LLC litigation, offered some key planning tips for practitioners helping clients with FLPs and LLCs at the recent NYU Institute of Taxation in NYC. Here’s a few of them.

■ Document non tax reasons for the transaction. 2¢ Use the Dr. Phil, CPA approach “Make it real.” Adding a laundry list of reasons to the recital clauses of a partnership agreement won’t cut the mustard. Courts have looked through claimed non-tax reasons that had little substance.
■ Partnership agreement. Understand the terms of the agreement, and be certain that the terms are adhered to in the operation of the partnership. Example. The GP is required in the partnership agreement to disseminate partnership income tax returns no later than June 30th of each year. If this is not done the IRS will argue a failure to adhere to the terms of the agreement. The boilerplate provisions must be adhered to. 2¢ Clients have a tough timing getting the message – when you’re done setting up the partnership, you need to sit down with your attorney, accountant, and investment manager (and anyone else involved in the operations and compliance for the partnership) and re-read the partnership agreement. The perspective is different when reading the agreement for operational directions then the focus when the agreement is initially finalized. Set up checklists of who will be responsible for what steps.
■ Accurate books and records. Some do it on Quicken, Quickbooks, others have CPA do it. However you handle it, the FLP must have an accurate P&L and balance sheet. 2¢ The cost of having a CPA who prepares the annual Form 1065 partnership income tax return also maintain regular books and records is really a modest incremental cost. The benefits of this for tax, asset protection, and even management and control, are significant.
■ Pro-rata distributions if required must be made. 2¢ This should be addressed proactively, not correctively. Have your advisers plan to avoid inappropriate distributions, not endeavor to clean up inappropriate transfers after the fact. An ounce of prevention is worth more than a pound of cure on this factor.
■ Never distribute all income. A retained right under 2036 is a retained right to income. In the Black case, most of dividends were distributed out to Mr. Black. Similar arguments appeared in the Schutt case.
■ No personal use assets should be held in the FLP.
■ Avoid “as needed” distributions. Example, no distributions for years then Mom wants to build a vacation home and a distribution is made before the purchase. “As needed” distributions that correlate with personal uses give the IRS fodder to argue that there was a retained right. If there is a cash flow need a better approach is to set up a distribution policy and distribute according to that policy on a regular basis. This might detract from discounts but may salvage the entity overall.
■ If family respects the integrity of the entity there is a good likelihood of success. Many of the 2036 cases the have been lost on bad facts.
■ Don’t give a senior family member sole distribution discretion.

Potpourri ½ Page:
■ Reminder that GRATs as we know them may no longer be available if pending legislation is passed. Any GRATs in progress that need to be funded by year end should be pushed as banks require time to open accounts, due to the Patriots Act and other regulations.
■ Citizens for Tax Justice noted IRS data showing only 0.6 percent of deaths resulted in an estate tax payment in 2009 so the estate taxes could be strengthened beyond what President Obama proposed without harming American families and small businesses. He recommended making permanent the 2009 estate tax rate of 45% and a $3.5 million exemption level indexed for inflation. Sen. Bernie Sanders proposed a tiered tax with higher rates on the wealthiest estates. The “Responsible Estate Tax Act” (S. 3533) would raise the tax rate to 50% for estates between $10-$20 million, for those over $20 million a 55% tax, and for those over $500 million, an additional 10% surtax.
■ Roth Conversion Guru Ed Slott suggested some interesting tips at a recent conference: ►Should you recharacterize because the market declines? If you recharacterize you cannot re-convert until 2011 and you won’t get the 2 year tax deferral. So unless the decline is a biggie, you may still not want to reconvert. ►Watch the impact of conversion on the income tax return return that is used for college aid or elect to get it into years you are not showing for financial aid.#Ed Slot
■Year End Tips: ► No one knows what the law will be in 2011 so planning that makes sense whether there is a $1M exclusion or a $5M exclusion will be the most flexible and perhaps best. ► If you gift to a trust that is supposed to be for later generations (GST tax exempt) few advisers believe that future law will let you get away with a freebie so that if you want to really maximize tax benefits on gifts to grandchildren (“skip persons” in GST “speak”) do it out right, not to trusts. ► Discounts on family entities and GRATs have all been proposed to be repealed or greatly restricted so the planning consensus is do those now. ► Reasons to make taxable gifts now: 1) get assets out that still have unusually low values because of the economy out of your estate; 2) pay tax at 35% instead of 55% next year; 3) if you survive 3 years the gift tax paid will be out of your estate too.
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Lead Article Title: Trusts: Situs, Star Wars, and State TaxationSummary: All you Wookies hear about is estate tax repeal. Be on guard, a Jedi Light Tax Saber can nick your money when and where you least expect it. So you followed the advice of the legendary Jedi Tax Master Obi-Wan Kenobi: “Let go, Luke. Luke, trust me,” and you set up a trust. Ahh, but it will take the likes of Jedi Master to sort out the myriad of state tax issues affecting your trusts.
Change Situs of Real Estate
State “B” may assess a state estate tax on real estate (and tangible personal property) located in its jurisdiction. If you live in (domiciled) State “A” your real estate in State “B” may thus be taxed. However, it may be possible to avoid State “B” estate tax on your real estate there by transferring title to the real or tangible personal property located in State “B” into a trust. If you (grantor) and perhaps the trustee live in State “A” this might convert the asset in State “B” from real estate into an intangible interest that State “A” won’t tax for a non-domiciliary. This bit of tax alchemy can save a bundle of galactic credits. But Hans, if you thought Jabba the Hutt was a tough creditor – some states will disregard a living trust (some might disregard a single member LLC) as not sufficing to transform real estate into a non-taxable intangible interest.
An LLC May Change Situs of Trust Real Estate
State tax laws differ considerably on these issues, but since NY tends to lead the way in state tax sophistication (and baseball teams), let’s look at a recent Empire State pronouncement. The decedent was not resident in NY. Decedent had interest in a revocable living trust which owned interests in several limited liability companies (LLCs) that owned NY real estate. NY held that he was is not subject to NY estate tax. The issue was whether the nonresident decedent’s interest in a revocable trust should be characterized as intangible. The conclusion depends on the nature of the property in the revocable trust. Here the nonresident decedent’s revocable trust owned interests in LLCs that own NY realty. The LLCs in question were multiple member LLCs that have chosen to be treated as partnerships under the federal income tax check-the-box regulations. Note the implication is that a single member LLC may not have the same positive NY tax result. Assuming that IRC § 2036 or related economic substance doctrines do not apply, an LLC taxed as a partnership is considered to be separate from its owner. Therefore, the estate’s interest in the revocable trust constituted an intangible asset and was not included in the estate’s NY gross estate. NY Advisory Opinion TSB-A-10(1)M, 04/08/2010.
Investment Advisers and State Law
Under some state laws the trustee can transfer (direct) full responsibility and liability of trust investment decisions to an investment adviser. If the state law does not include such a provision, then the trustee may merely retain (delegate) an investment adviser, but will be left with some level of residual liability. OK Chewbacca this gets a bit hairy. ◙ The laws in various states differ considerably as to the impact on a trustee for following the direction of a designated person. ◙ The distinctions could be critical if a major goal of the grantor is to have a family business, or other concentrated position, retained. ◙ In states with the most liberal directed trust statues the trustee following the direction will have no liability unless the trustee commits willful misconduct. ◙ In many other jurisdictions the protection afforded a trustee following investment direction is less secure. ◙ Some states follow the Uniform Trust Code (UTC). Article 808(b) of the UTC provides: “Powers to direct are most effective when the trustee is not deterred from exercising the power by fear of possible liability. On the other hand, the trustee does have overall responsibility for seeing that the terms of the trust are honored….A trustee must generally act in accordance with the direction. A trustee may refuse the direction only if the attempted exercise would be manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty owed by the holder of the power to the beneficiaries of the trust. The provisions of this section may be altered in the terms of the trust….” While a trustee can find some comfort in following direction to retain an investment under a trust with a situs in a jurisdiction adhering to the UTC that comfort must be guarded. The trustee must still demonstrate that adhering to the direction would not be “manifestly contrary to the terms of the trust,” or a “serious breech of the duty owed.” While this is clearly less oversight than a trustee must exercise without a direction statute, it is not a guarantee escape from the Death Star. ◙ In a situation where one beneficiary is active in the business the trust owns, and other beneficiaries are not, the risks associated with the interpretation and application of these standards could be significant. Some states, such as Delaware, have created far more secure standards.
Investment Adviser Can Be Tax’n
Caution should be exercised in retaining an investment adviser since the impact can extend beyond mere legal liability issues. For example, if a trust protector for a Delaware directed trust designates a NY person as investment adviser, NY may seek to tax the income of the trust even though, but for that investment adviser, the trust would not have any tax nexus to NY. TSB-A-04(7) I, 2004 N.Y. Tax Lexis 259 (Nov. 12, 2004). It is not clear how many states may view investment advisers and other quasi-fiduciaries.
NY View of Intangibles and Trustees
Real estate was discussed above. Now consider intangible assets and the NY tax paradigm. The situs of intangible assets is deemed to be the domicile of the trustee. See TSB-A-94(7) I, 4/8/94. In this Advisory Opinion the assets involved were cash, money market accounts, marketable securities, etc. most held by a NY trust company. None were connected with or derived from a business carried on in NY. The Opinion held that the situs of intangible assets of a trust is deemed to be at the domicile of the trustee.
Trustee Domicile
And how can a CPA confirm where the Trustee hangs his hat? NY, similar to many states, is becoming increasingly aggressive in arguing that NY’ers remain domiciled in NY even if they are absent. NYS Taxation of Nonresidents, Pub. 88, says: “In general, your domicile is the place you intend to have as your permanent home. Your domicile is, in effect, where your permanent home is located. It is the place you intend to return to after being away (as on vacation abroad, business assignments, educational leave, or military assignment). You can have only one domicile. Your NY domicile does not change until you can demonstrate that you have abandoned your NY domicile and established a new domicile outside NY State…A change of domicile must be clear and convincing. Easily controlled factors such as where you vote, where your driver’s license and registration are issued, or where your will is located are not primary factors establishing domicile… A change of domicile is clear and convincing only when your primary ties are clearly greater in the new location.” How will this new aggressiveness impact trust taxation? Is it ever safe to use an individual trustee that may be subject to the uncertainty of where they’re domiciled? Why not always use an institutional trustee that’s based in a tax favored state? Should lawyers draft provisions that if a trustee moves into a bad tax state they’ll be removed automatically as trustee the prior to the move?
If the assets are intangible and the trustee is domiciled outside NY you’re still not NY tax free yet. There’s a 3rd test: “All income and gains of the trust are derived from or connected with sources outside of the NY state…” While this has been liberally interpreted landmines do exist. For example, in a series of Advisory Opinions NY has consistently held that managing bank accounts and trading securities for ones own account “does not constitute the carrying on of a business, trade, profession or occupation in NY State…” In this particular ruling the taxpayer lived in NY City. She formed and funded an LLC, then transferred 99% of the LLC to a trust, retaining 1%. The trustee of the trust owned 99% of the LLC but was not a NY resident. The taxpayer remained the managing member of the LLC, conducted all LLC business, and the LLC had a NY post office box as its address, etc. The trust LLC income was deemed not connected and NY tax was avoided. TSB-A-00(2)I, 3/29/00.
State’s Want More Info
Trust income tax reporting to the state of NY has been broadened. TSB-M 10(5)I issued July 23, 2010. The purpose of this pronouncement is undoubtedly to improve tax compliance and identify trusts that are taking the position that they are not subject to NY income tax when in fact they may be. Effective 1/1/10 if the trustee believes that the trust is not subject to NY income tax under 605(b)3)(D) it must file Form IT-205-C, “NY State Resident Trust Nontaxable Certification.”
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Religious Estate Planning

Summary: Estate planning should be a holistic multi-disciplinary process that addresses all of your important goals. Here’s a general list of concepts to begin the process:
√ Religion Counts: according to many surveys, 95+ percent of Americans believe in God or some type of higher power. While some define religion as a belief in God, not all religions do. While Buddhism and Scientology are considered religions, Buddhism does not teach its adherents to believe in God; and Scientology does not necessarily require a belief in God. For some, spirituality may be a vital part of their lives, but not include a belief in God. Whatever your religious views or spiritual nature, your estate planning should be consistent with your beliefs and preferences, or even lack thereof.
√ Think Broadly: Religion can broadly be viewed to encompass your life philosophy, spirituality and values. This inadequacy has tremendous personal impact, because no area of the law is more fraught with religious issues than estate planning. If you endeavored to live your life in conformity with your religious beliefs or philosophy, then your final medical decisions, funeral arrangements and the distributions under your will, the overall “tone” of your documents, should be consistent with those beliefs.
√ Not Interested? Even if you’re personally indifferent, ignoring religious issues can lead to painful family strife. Make the effort to specify what you do and don’t want. Say you’ve become more “modern” and less observant in your faith, out of respect for family at least consider addressing religious considerations. If you’re debating whether to conform your estate plan to the doctrines of your faith, consider the solace that religious traditions, and the guidance of a priest, rabbi, imam or other religious figure, can bring to a family suffering through tragedy.
√ No Religious Restrictions: f you’re not religious don’t assume that nothing needs to be addressed in your documents. This is a dangerously incorrect assumption. If you’ve determined you do not want the traditions of a particular faith, or any faith, adhered to, then it’s incumbent upon you to make that point clear to avoid incorrect assumptions by family and others that religious restrictions or customs should be applied. The diversity of religious affiliation and observance among family members can be substantial. If you don’t want religious observances of other family members imposed you, then a statement that certain rituals should not be followed is vital.
√ Tailored Wishes: It seems that the most common approach is often a hybrid. Some people will have their documents adhere to all the strictures of their faith, but exclude restrictions on cessation of heroic medical measures for fear of being kept alive in a vegetative state. Others prefer no religious customs or restrictions in any of their planning, but wish only that a funeral and burial be in accordance with their religious traditions. The key is to tailor your documents and communications to accomplish your goals, but with sensitivity and compassion to minimize the potential for negative impact on others.
√ Details: Agents and fiduciaries should be given guidance, and granted legal authority, to disburse funds for religious education (e.g. supplemental religious education or private school), religious travel (pilgrimages to holy sites), charitable giving (to inculcate a core religious value in heirs), and other purposes consistent with your religious goals. Boilerplate distribution provisions in many documents just won’t suffice.
√ Will: You secular will may have to be modified to reflect the Baha’i, Jewish, Islamic, or other religious laws of inheritance. The Quran and Old Testament include detailed provisions as to how inheritance must be handled. While there is similarity to both, they are typically addressed in quite different manners in will drafting. These provisions need to be coordinated with tax, estate, financial and succession planning, and ethical issues. For the Christian Orthodox, if you do not provide for your family and relatives, it is as if you have disowned the faith, and you are worse than a non-believer. For Catholics, general guidelines of charity and justice are vital.
√ Fiduciaries: Your selection of trustees will have a profound impact on the transmission of values. Providing a detailed and personal letter of instruction about the care and upbringing of young children is essential to transmit values.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Small Business Jobs Act of 2010, P.L. 111-240, was signed September 27, 2010. The Act contains countless provisions intended to goose up the economy and cover some of the costs of doing so. The Act is so long and complex that the following is barely a tasting menu.
General Business Incentives
◙ Expensing: If you buy equipment you have to depreciate it over a number of years, but Code Section 179 may permit you to write it off in the year of purchase. The maximum is increased retroactively to $500,000 for 2010 and 2011 ($25,000 after 2011). If you bought over $800,000 this bennie was phased out. That threshold is increased to $2M of annual purchases ($200,000 after 2011). Previously only tangible personal property qualified (e.g., a machine). Now up to $250,000 of certain real estate, qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property (as defined in Code Sec. 168(e)(6),(7) and (8)), may also be expensed.
◙ Bonus Depreciation: If you buy “qualified property” ½ can be deducted (“bonus depreciation”) in the year placed in service (your tax basis is reduced by this so you can’t double dip with big depreciation deductions later). 50% bonus depreciation will be allowed retroactively for certain property purchased and placed in service during 2010 (2011 for certain property) including most types of new property and qualified leasehold improvements other than buildings. Contractors using percentage of completion method are allowed to treat qualified property as if bonus depreciation did not apply permitting them to benefit from bonus depreciation even if they do not complete their contracts within the same year. Effective for property placed in service in 2010. Bonus depreciation of up to $8,000 allowed for luxury automobiles purchased and placed in service during calendar year 2010 (thus making the total first year depreciation for luxury automobiles $11,060).
Continued on back page Potpourri
Potpourri ½ Page:
■ Continued from Page 3 Current Developments
◙ S Corp: S Corporation built-in gains holding period reduced from 10 years to 5 years for sales occurring in 2011 if the 5th year in the recognition period precedes the taxable year beginning in 2011 (generally companies electing S status before 2006).
◙ PDAs: Deductions for cell phones, PDAs and the Blackberry surgically glued to my hip, all had required detailed logs proving business use. The Act eliminated these burdensome rules by no longer treating them as “listed property.”
Small Business Incentives
◙ Credits: Carryback period for general business credits extended to five years for eligible small businesses including non­publicly traded corporations, partnerships and sole proprietorships; average annual gross receipts for the prior three tax years cannot exceed $50 million (flow through owner must also meet gross receipts test). Effective for first tax year beginning after 12/31/09. Eligible small business credits are allowed to offset Alternative Minimum Tax.
◙ Capital Gains: 100% exclusion for capital gain from the sale of qualified small business stock acquired after September 27, 2010 and before January 1, 2011 if the stock is owned longer than five years. Additionally the Alternative Minimum Tax preference item attributable for that sale has been eliminated.
◙ Start Up Costs: Prior law let you deduct up to $5,000 of “start-up expenses” in the year your new business launched and amortize the balance over 180 months. The $5,000 figure was reduced by the excess of total start-up costs over $50,000. Deduction for start-up expenditures is increased to $10,000 for 2010, and phase-out threshold increased to $60,000.
◙ Health Insurance: Deduction for health insurance of business owners (sole proprietors, partners, members, and >2% S Corporation shareholders) allowed in calculating self-employment tax for 2010 (first tax year beginning after December 31, 2009).
Thanks to Julie A. Welch (Runtz) [Julie@meara.com].
■ Probate: If you have few or no family or relatives consider executing an affidavit of kinship confirming this while you are alive to make the eventual probate process easier. Proactively call the probate (surrogate) court and ask what other steps might prove helpful.

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Living Will and Health Proxy RamblingsSummary: Living wills, health proxies and HIPAA releases are all essential documents everyone over age 18 must have. Since it seems that the only planning topic folks can talk about lately is estate tax repeal we hope this topic is a break from “repeal” and will serve to emphasize that tax issues remain but one part of the much larger estate planning picture. There have been a number of recent articles in general media that raise some interesting questions about health care decision making.

Basics and Definitions
While everyone knows what these 3 documents are, let’s define them quickly before exploring some of the issues that can arise. A living will is a statement of your health care wishes. What do you believe, how do you view end of life decisions from a religious, philosophical and personal perspective? Although not recognized in some states signing a personalized (not boilerplate got it off the internet cheap) living will can serve as a wonderful tool for communicating in clear written terms what you do and don’t want done. A health care proxy is a document in which you appoint an agent to make medical decisions for you. You should also name several successors and be certain to enumerate in some detail powers or rights you do, or don’t, want your agent to have. A HIPAA release is an authorization that can be used to authorize medical providers to release private health information. While all this sounds simple the complexities and potential for problems are huge. Let’s explore some of these.

Communicate!
How important is specifying your wishes in these documents and discussing your feelings with loved ones? Plenty! A recent blurb in Bottom Line Personal newsletter noted that hospital delirium is common. 25%-50% of older adults admitted to general medical wards are affected and 68-80% of those on surgical floors or in intensive care experience delirium. The delirium includes reduced ability to focus, disorientation, agitation, etc.

Religious Differences
Religious considerations can be very important to consider when preparing your living will, in selecting an agent for your health proxy, and in delineating the authority granted to that agent. Too often people rely on standard forms and never address religious issues. That’s a problem. If there is no mention of religion in the documents your wishes cannot realistically be interpreted. If coupled with unclear appointment of agents and family differences concerning religion, it could be a tinderbox. But does specifying your religious preferences in these documents avoid any conflict? Unfortunately not. It is a good start but differences between the religious views of family and loved ones may need to be addressed to minimize conflict. Grandson is quite devout, while mother is barely observant. How might this play out? Do religious undercurrents exist? Great care should be taken to be very specific in mom’s living will and health proxy about any matters pertaining to religion, and issues that might raise religious differences. Generic statements as to religious observance can sometimes be more difficult to interpret and apply than documents that don’t address the issue. The health proxy should be very clear about the appointment of agents: Who is to serve? Is a single agent instead of multiple agents? Is there consistency in your religious views and those of the agents? If your living will violates the family’s overall religious beliefs tremendous conflict may follow. Can you mitigate this by discussing these issues in advance? Can you slightly modify your statements so that you remain generally true to your feelings while creating less offense to others?

No Religious Adherence
If you do not wish your faith’s restrictions and rituals to apply, can you address this in a manner to at least limit the collateral damage? Consider: “I am of the X faith and wish to expressly state that I do not wish X faith religious law to apply in the determination of end of life medical and related decisions. Those decisions shall be made in accordance with the provisions of this Living Will regardless of the impact of X faith law. I do not lightly make this statement, and I am aware that this statement may offend the religious perspectives of some of my descendants. It is not my intent to offend or hurt anyone in any manner, but merely to carry out my personal beliefs in what I believe to be very private matters. If any particular agent is unable to carry out the wishes I have set forth because they view them as inappropriate, I respect that decision and merely request that they resign as agent.”

Whacky Personal Provisions
Tailoring your documents to reflect your personal wishes can be a good thing. But too often attorneys will seemingly put anything a client suggests in a document with little discussion of the impact. Tailor yes, but don’t suspend reason. The following provision was found in an existing health proxy. While this one might make the Guinness Book for the worst provision the issues raised are instructive in a broader context: “Therefore, at the onset of a disease such as Alzheimer’s, and if it doesn’t entail undue legal risk, I request that my health care providers or health care attorney-in-fact assist me in the termination my life in a painless, dignified and private manner.” Whoa! ◙ At what point does the “onset” of a disease occur? A recent New York Times article discussed a possible genetic test to determine 10 years in advance of symptoms that a person has Alzheimer’s disease. Would that be “onset”? ◙ Alzheimer’s is a chronic illness that progresses over time. It progresses at different rates for different people. Research studies have shown that the level of care that a person receives impacts life expectancy. The average life expectancy for someone diagnosed with Alzheimer’s disease is approximately 4.5 years. Apart from possible religious principals, would anyone willingly give up 4.5+ years of life? ◙ Aricept, as an example, a drug currently indicated for mild to moderate Alzheimer’s, may be effective for moderate to severe disease. Other drugs are also in development. Should current and future drug therapies be left out of the equation? ◙ What is a disease “such as Alzheimer’s”? Every chronic illness has a different disease course. Is Parkinson’s disease sufficiently similar to Alzheimer’s? What of vascular dementia? The terminology is so vague as to be impossible to appropriately interpret. ◙ What is undue legal risk? Should your agent first relocate your domicile to a state like Washington, or a country like Holland, were assisted suicide is permitted under certain conditions?

Of Nutrition and Feeding Tubes
Ask almost anyone if they want to be kept alive on feeding tubes and you’ll hear a definite “No!” But it is far from simple. Just what is a “feeding tube?” Is the reference to the feeding tube you don’t want a temporary naso-gastric tube inserted through the nose into the stomach while you are awake? Or is it a PEG (Percutaneous Endoscopic Gastric) tube which is inserted in a more invasive procedure? Were you aware of these when you made a generic objection? Under what circumstances would you really not want or not wish one or the other? If you are conscious and aware, would you really turn down measures that would prolong your life? Most people when asked the questions assume, erroneously, that they are in a vegetative state when a feeding tube would be administered. Details are important. Many faiths have issues with not providing nutrition. A concern of some religious advisers is that if a feeding tube is inserted its later removal would be an affirmative act to cause starvation. They might contrast this to a decision not to insert the tube initially as being a passive act that may be less objectionable from a religious perspective. There was recently an article in the New York Times about palliative feeding that might change this entire analysis from both a practical drafting and religious perspective. The article concluded based on various studies that feeding tubes do not in fact prolong life. Instead, careful hand feeding to the extent the patient will take food, a tedious but perhaps loving process, can maintain life for just as long. What does this suggest for re-evaluating the entire process? Should living wills from a humane and religious perspective suggest the use of palliative feeding in lieu of more invasive procedures? Whatever you decide, communicate it clearly and in writing.

Conclusions
Communicating your health care wishes is vital. The details are often complex, and deserve more attention than many people give.
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: 2010 Probate

Summary: Carryover basis is the law for those decedents who died in 2010. While the media has hyped the lucky heirs of billionaires who died in 2010 without an estate tax, the tax picture doesn’t stop with the No Estate Tax Party those kids are hosting. The CPAs for these lucky heirs have a lot of work ahead of them and the deadline clock is ticking.
√ The tax basis of assets inherited from a decedent is the lower of the decedent’s adjusted basis (cost, less depreciation, plus improvements) or the fair market value of the asset on the date of death. To figure this out estates need both: (1) Appraisals of all assets to demonstrate fair value at death; and (2) Corroboration of the decedent’s basis. This all will require a lot of work and some big bills. The toughest challenge may be convincing heirs to spend the dough to do the necessary work, after all there is no tax in 2010! True, but even more complex tax filings and calculations are required. If capital gains rates rise in the future this homework will be really important to minimize future taxes.
√ Don’t wait for forms. Tax filings are due 4/15/11 and the allocation of basis adjustments will have to be reported 5/15/11.
√ The tax basis in a 2010 decedent’s assets may qualify to be increased (adjusted) to eliminate unrecognized gain of up to $1.3 million on property passing to anyone, and up to $3 million for property passing outright to a spouse or in a trust that meets the requirements of Qualified Spousal Property.
√ If the estate has less appreciation then the available adjustments ($1.3M + $3M + others) then the incentive might be to value assets as high as possible to obtain the maximum basis step up to minimize future capital gains. That might be tempered if there is a state level estate tax. If the appreciation is greater than the available basis adjustments, then the fun really begins. Which assets do you allocate the adjustment to? If the assets are distributed disproportionately to different heirs (e.g., business to one heir, family cottage to another) the fun might become fireworks! Read on for factors to consider.
√ What is the expected holding period for the property? If property, such as a family cottage, is intended to remain for generations in the family it is less in need of an allocation to increase basis than are other assets which are more likely to be sold.
√ Are other avenues to avoid, defer or minimize the potential future capital gains tax available and how does their availability compare to other assets in the estate if the maximum basis adjustment has to be rationed to the various assets?
√ Will a CRT defer the tax so long that basis adjustment should be allocated elsewhere? If the estate holds raw land that is likely to be donated to the local church for an expansion project the basis adjustment is less important as compared to other assets if a charitable remainder trust or outright donation is used.
√ Might a 1031 tax free exchange change the analysis? If the estate owns a shopping center and rather than sell it, if a tax deferred Code Section 1031 exchange is a likely possibility, then the allocation of basis to the shopping center may be less advantageous than an allocation to other assets.
√ Exchange funds might be part of the plan. If highly appreciated securities could be contributed to an exchange fund to diversify without incurring capital gains then these assets would be less in need of an allocation.
√ If the decedent’s principal residence can be sold and exclude gain under the home sale exclusion rules then to the extent that that exclusion will avoid taxable gain, basis adjustment should not favor the residence.
√ What will the capital gains tax rates be when the assets are sold in the future? Get out your crystal ball and your abacus and guess which rates apply at which income levels, how the Medicare tax on investment income factors into the calculus, and more!
√ What will the tax bracket and status of the beneficiaries receiving the property be?
The myriad of factors and competing interests of different beneficiaries will also make it difficult for advisers to evaluate and weigh the many options. Many states have enacted laws that provide that formula clauses under a will (e.g., give the largest amount that won’t create a federal estate tax to a credit shelter trust) should be interpreted based on 2009 estate tax rules. Executors may have to apply and interpret state statutes enacted to deal with formula clauses to determine who receives which assets even before they evaluate options for allocating the $1.3 million or $3 million basis adjustment.

√ The estate’s CPA should prepare a worksheet identifying every asset and listing: ◙ Tax basis ◙ Corroboration or estimates of how tax basis was determined (there will be some fancy footwork to come up with these numbers) ◙ Fair market value of each asset with a reference to the appraisal or other source of the determination of value ◙ Classification of the asset (e.g., certain assets such as IRD won’t qualify for basis step up), whether the asset qualifies for the general basis adjustment of $1.3 million and/or the spousal adjustment of $3 million ◙ Other possible basis adjustments (special rules are provided for NOLs, homes, etc.) ◙ Factors considered in allocating the basis adjustment to each asset ◙ The actual allocated basis adjustment ◙ Final tax basis for each asset. Totals for the worksheet should tie out to the value of the entire estate, the maximum basis adjustments, etc. to prove compliance with the new law. This spreadsheet will be somewhat analogous to worksheets CPAs prepare to allocate 754 basis adjustments.

√ Even if Congress gives 2010 estates the option of using carryover basis or 2009 rules you’ll still need calculations to confirm the decision.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Bad Bad Sinbad! Comedian Sinbad Liable for Unpaid Taxes: The IRS can seize assets held by a third party to satisfy a taxpayer’s tax debt if the third party is an alter ego or nominee of the taxpayer. For example, a California District Court recently found that comedian Sinbad Adkins (aka David Adkins) had unpaid income tax liabilities exceeding $8 million (including interest, penalties, fees, and collection costs) for tax years 1998–2006. It also found that Michael Adkins held bare legal title to real property in Hidden Hills, California as nominee for Sinbad. The court held that a lien for Sinbad Adkins’ unpaid tax liabilities attached to the property as of the dates of assessment. It then allocated proceeds of a future sale of the property to various parties (which may explain why the IRS filed suit instead of exercising its administrative lien and levy collection powers), including the mortgage holder, the IRS and California Franchise Board, and the local homeowner’s association. U.S. v. Adkins , 106 AFTR 2d 2010-XXXX (D.C. Cent. Cal.).

■ Estate Tax—Executor’s Reliance on Adviser: Sometimes taxpayers can blame a bad adviser (but wouldn’t it just be easier to start with a capable professional in the first place?). Decedent’s estate conceded it owed a $380,514 estate tax deficiency, but argued that it was not liable for a $76,103 Section 6662 accuracy-related penalty for negligence or disregard of rules or regulations. In waiving the penalty because the estate’s executor acted with reasonable cause and good faith in relying on the Form 706 preparer, the Tax Court found that the executor (1) was unsophisticated in tax matters; (2) believed that the preparer was competent in estate planning because his business card included the words “Estate Planning,” and he was an enrolled agent who knew how to file “every return the IRS has;” and (3) provided the preparer with “all relevant financial data in his possession needed to determine the correct amount of estate tax.” Estate of Ralph Robinson , TC Memo 2010-168 (Tax Ct.).

■ Estate Tax—Beneficiaries Liable as Transferees: Don’t think estate taxes are only the executor’s headache. The IRS determined that Carl and Bruce Upchurch were liable under Code Section 6901(a) for a $46,758 estate tax deficiency plus interest as transferees of the assets of the Estate of Judith Upchurch. After holding that the two were liable as transferees of estate property under state (Illinois) equity principles, the Tax Court found that they were individually liable up to the value of the property transferred to each of them. This equaled the full amount of their settlement payments ($53,500 each) without reduction for the $17,833 each paid to his attorney. Carl Upchurch , TC Memo 2010-169 (Tax Ct.).

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■ Estate Tax—Inclusion of Transferred Interest: Taxpayers need to follow and respect the formalities of ownership and the independence of the entities they own interests in if they wish the IRS and Courts to do so. The decedent gifted a 49% interest in a brownstone to her son. The two lived in part of the building and rented the remaining space to office tenants. Until the time of her death, decedent received all of the rent from the office space. The Tax Court previously ruled that the full value of the property was includable in decedent’s gross estate, reasoning that the continued receipt of rental income showed possession and enjoyment of the property under Code Section 2036 . However, the 2nd Circuit found that the Tax Court erred in finding the decedent enjoyed substantial benefit in all of the son’s 49% interest, and remanded the case for the Tax Court to determine the net income from the son’s 49% interest enjoyed by the decedent and the corresponding value to be included in her gross estate. Estate of Margot Stewart v. Comm., 106 AFTR 2d 2010-XXXX (2nd Cir.).

Potpourri ½ Page:
■ Letters of Instruction: Minimize family issues by writing a clear letter of instruction as to your wishes and intent. Often the fights among heirs are over what each side believes are legitimate and supportable beliefs about what the parent or other benefactor wanted. Was the loan to help sis buy a house really intended to be paid back? Who did mom really want to give that diamond necklace to? Sure, these issues can be addressed (and often should) in a formal legalistic manner to avoid issues. However, the reality is that many family disputes could be avoided if the intent were only clear. Many heirs will respect mom’s wishes, if they only really knew what they were. Write a letter and discuss it with your estate planner. Have it held in a manner that assures its privacy until needed (so you can revise it if circumstances change).

■ Special Needs Considerations: Undertaking specific planning to protect current/future SSI or Medicaid benefits is often the focus of planning. However, ultra affluent clients might think that they don’t have a “need” to protect a special heir from the loss of government assistance. But qualification may not only be about money, but about entry to vital programs. For affluent clients, especially business owners facing a lack of liquidity, life insurance held in a trust (ILIT) might nicely fund a special needs trust (SNT), but then there is the issue of Crummey powers. You cannot grant the special heir the right to withdraw gifts to the trust since that may jeopardize qualification. Other approaches to consider might include: split-dollar loans to minimize gifts to the trust; judicious use of the lifetime gift exemption for gifts; GRATs and other planning technique that roll into the trust at future dates to unwind the split-dollar arrangement and fund other premiums; using the ILIT to guarantee other family loan and sale transactions for a fee; and so on. Thanks to Catherine G. Turner, CFP, Atlanta, Georgia.

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Lead Article Title: Estate Tax Ride at Cedar Point!Summary: Summer time is big at Cedar Point, in Sandusky, Ohio, has long been known as the haven for roller coasters, more than any other park in the world. Rides like the “Disaster Transport,” thrill visitors. Their website describes the ride: “Take a journey into the unknown! Disaster Transport takes you through time and space – and in complete darkness!” Tell me doesn’t that sound like a description of the state of the estate tax. Double dare ya!

Wherever You Go, There You Are
Mindfulness and tax planning: Repeal; Retroactive reinstatement; $1 million exclusion next year… Wherever you go for estate planning, there you are…confused. Well, there is no estate tax today, we’re living under the so called carry over basis regime under which assets held on death are not subject to the estate tax. The quid pro quo is that the tax basis (investment) in assets is not increased at death but retains the same tax or cost basis as the decedent had. There are a host of complex exceptions to this that permit a limited amount of appreciation to be eliminated (i.e., a step up) at death. In simple terms, $1.3 million of appreciation on any estate plus $3 million on property passing to a spouse. A detailed analysis of these rules can be found on www.laweasy.com in a white paper initially published by www.leimbergservices.com. While everyone was convinced that the absurdly complex carry over basis rules would retroactively repealed, the same everybody was positive that we’d never have estate tax repeal. So much for positive thinking!

Roller Coaster Tax Bills
The Rolling Thunder roller coaster at Six Flags is a dual-track wooden roller coaster with a nearly 8- story drop and 10 great hills. Kids stuff. Consider these drops and hills: The estate tax exemption in 2001 was $675,000. It rose up hill to a whopping $3.5 million in 2009, then a drop to oblivion in 2010 with repeal (try to beat that Six Flags!) and now a cliffhanger of potentially $1 million in 2011. Boy, depending on when you checkout what the kids get will vary dramatically. The federal estate tax on a $4 million estate in 2009 would have been about $225,000. If the kids kept you on the respirator until 2010 the tax would be zip when you code [sorry!]. If the kids forgot about you too long and you squeaked into 2011, the tax on the same $4 million estate would nearly hit $1.5 million in 2011.

Food Court Fun
After a wild morning on the roller coasters, its time to hit the food court for some refreshments to get you through what a taxing afternoon might bring. What might you do not knowing what’s around the next bend?

GRATs. Gifts to grantor retained annuity trusts have received so much press that we won’t belabor them here again but suffice to say that most advisers believe that this technique will be restricted significantly in the near future (perhaps before you read this!). So if GRATs are on your planning menu, eat quickly! Consider whether there is an advantage to you to using a longer than two year GRAT to lock in today’s low interest rates.

Crummey Gifts. Gifts to trusts are often structured so that the beneficiaries have a right to withdraw the money for a brief period of time. This enables the gift to qualify for the annual gift tax exclusion, $13,000 this year. There are some rumblings about Crummey’s being restricted so consider maxing out on their use while you can.

Gift of Property. Gift the vacation home to your kids to get it out of your estate. So your condo on the beach is worth about ½ of what it was a few years back so perhaps you give that away to the kids. ◙ If the gift won’t exceed what remains of your million dollar gift exemption that might be a shrewd move. ◙ Even if it does, paying gift tax at 35% might itself be tax beneficial if the estate tax rate in fact climbs to 55% next year. But what if your estate is worth $4.5 million? If the estate tax exclusion is $1 million next year getting the condo out of your estate might be looking good, especially if it appreciates in value. However, if Congress gooses the exclusion up to $5 million you’ll might have possibly paid a gift tax to save an estate tax that no longer applies to you. That’ll leave you with the same feeling as a ride on the Corkscrew (that’s three inversions!) after a Big Mac at the food court. ◙ The focal point shouldn’t be the decline in value, that’s history. Will the condo appreciate post-gift? That will depend not only on inflation generally but the sales overhang for similar properties. If your resort area has hundreds of depressed vacant condos on the market, getting the condo out of your estate at a value less than what it was worth a few years ago may not be a winner since it may take many years for the market to recover and the property to appreciate. ◙ What about probate and domicile? If you gift away a vacation condo in another state, that might save your heirs the cost and hassle of probate in that state. But if it’s a close call as to whether you may qualify as domiciled in that other state, gifting away the condo might undermine your ability to claim domicile there. That could have a far more costly impact. ◙ Giving away a condo is not quite as simple as writing out a check. You’ll need a deed prepared by counsel in that state. There may be transfer taxes, estimated or withholding taxes, etc. depending on state law. ◙ If there is a mortgage you’ll need lender approval. It might be advisable to sign a gift letter confirming the transfer by gift. If you’re giving the condo to one kid, do you want to equalize the other kids? ◙ You’ll have to obtain an independent written appraisal of the value of the condo given. Your property tax bill don’t cut the mustard. ◙ You will probably have to file a gift tax return for this. ◙ The property will have carryover basis so if your kids later sell it they’ll pay capital gains on the excess of the sales proceeds over what you paid. If capital gains increase enough that could offset much of the perceived tax benefit.

Split-Dollar Life Insurance Loans. If you loan $1 million to your daughter’s insurance trust so that it can buy life insurance on your daughter’s life, how does that help your estate? Split-dollar life insurance loans, under Treasury Regulation §1.7872-15(d) might just provide that unexpected thrill when you thought the ride was nearly over. The split-dollar loan can accrue interest and mature on the death of the child/insured. Both the borrower and the lender must sign a written representation. This must be included with their tax returns filed not later than the last day (including extensions) for filing the Federal income tax return of the borrower or lender, whichever is earlier, for the taxable year in which the lender makes the first split-dollar loan under the split-dollar life insurance arrangement. ◙ The estate tax vig might come from the determination of what the fair value of the loan is in parent’s estate on death. If daughter is age 40 and mom age 84, on mom’s demise her estate will hold a loan that pays no interest or principal until daughter’s death when the insurance policy pays. ◙ What is a reasonable market based rate of interest would be as of the valuation date? ◙ What will the present value of the split-dollar note be? ◙ Given the estate tax uncertainty, if the few plays out differently the loan might be repaid to unwind the loan transaction.

Beneficiary Defective Inheritor’s Trust (BDIT). The key to the BDIT is that someone other than you sets up the trust to benefit you. If mom establishes your trust and makes a $5,000 gift, and you never gift to the trust, you may have more flexibility to be a beneficiary and trustee of the trust as compared to the more common grantor trust arrangement. For example, if you gave gifts to fund the trust and retained rights to enjoy the assets transferred, the full value of those assets will be included in you estate. The BDIT uses the annual Crummey power in your favor to make the trust a grantor trust for income tax purposes as to you, even though mom was the settlor. This structure permits you to sell assets to the BDIT a still depressed prices, for a note at today’s still historically low interest rates, be a discretionary beneficiary of the trust (with an independent preferably institutional trustee making distribution decisions), yet freeze the value included in your estate in case the $1 million exclusion becomes a reality.

Conclusion. Taxpayers considering estate planning should wear Nike’s “Just Do It!”
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Charitable Gift Letters

Summary: When planning a significant charitable gift or bequest consider a letter agreement with the charity clarifying for all involved what your intent is, how the charity will use the funds, and addressing other issues. The following checklist will provide a starting point for some of the many issues you may want to address.

√ Be specific as to when the bequest to the charity shall take place. If the bequest is made under your will, state the date of the will that governs the bequest and what will happen if you revise your will? Refer to the correct nature of a bequest your will provides that the named charity will receive the intended bequest only your children die not survived by issue, that is a contingent bequest. Imprecise wording, e.g., listing the bequest as one of your remainder estate, might be misleading and create an incorrect inference.

√ Have the charity provide a copy of the letter they receive from the IRS granting them tax exempt status. Occasionally, the name the charity is known by (the one commonly used) and you want to be certain the correct organization, and one which is tax exempt, is properly named. Example: “ABC Charity, Inc., which is recognized by the IRS as qualifying for the unlimited estate tax charitable contribution deduction. A copy of its tax exemption letter from the IRS is attached.”

√ If your bequest is under a will consider whether the language of the gift letter should, or should not, make the bequest a binding commitment. Any charity will opt for the latter. If in fact the charity is starting a program or making commitments today based on your pledge, making it binding might be only fair (and might be the only way to encourage the charity to proceed with the program you wish). However, if there is no current change in position by the charity, consider whether you should expressly state that the pledge is not biding. This way, as circumstances change, you may revise your will and the bequest. “I recognize that this pledged gift is a not a binding obligation of my estate, but merely a statement of my current wishes which may change.”

√ If the charity has oversees offices, specify whether you wish the funds to be retained and used within the U.S. Be certain that if you want the funds used overseas that your charitable deduction is not jeopardized. Example, you might need to make your gift to a U.S. “feeder organization” that qualifies within the U.S. and distributes funds overseas.

√ Consider whether you want to designate specific goals for the bequest. (e.g. held as part of the charity’s endowment fund to support services for those living with Parkinson’s disease.) Work out language with the charity that is specific enough to assure that your charitable intent is adhered to, but within those agreed parameters as flexible as possible to give the charity the latitude to adopt to changed circumstances to assure the longevity and effectiveness of your gift.

√ You should confirm the arrangements for you to be informed of, or even participate in, the selection of specific expenditures, or making other decisions. Consider whether you want the charity to report to anyone on the use of the funds after your disability or demise, who that should be and how it should be handled.

√ Bear in mind there is no estate tax chartable contribution deduction in 2010, but charitable gifts by you during your lifetime, or by your children from an inheritance after your death, will qualify for income tax benefits.

√ If you designated that income from this fund shall be used for a specific purpose you should also to provide flexibility for future years if the goal is no longer relevant (e.g., a cure for Parkinson’s disease is discovered), or in case the size of the fund declines to the point at which it is not feasible to maintain.

√ What happens to a dedicated project if there are changes. For example, you donate a waiting room in a new wing of a hospital. 5 years later the hospital is redesigned and your waiting room moved. Does the dedication continue? What about 15 years? What if you donated funds for a research lab and the hospital ceased engaging in research as part of a strategic restructuring? There is no longer a lab to bear the plaque. Does the plaque acknowledging the gift get thrown out? Displayed? Where? Often significant charitable gifts are intended to honor a particular cause or individual as well as accomplish the good the funds contributed will achieve. Address these matters in reasonable detail and be sure that if other components of a letter are non-binding, that these guidelines are binding if the charity accepts the gift.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Estates, Trusts and Tax Matters Partner (TMP). Partnerships (including LLCs taxed as partnerships) with more than 10 partners are subject to consolidated audit procedures. IRC Sec. 6221. Partnerships/LLCs can designate a single partner as the TMP to receive notice and make certain decisions. Treas. Reg. Sec. 301.6231. The TMP acts on behalf of the partners in dealing with the IRS in a unified partnership proceeding. The TMP is the general partner the partnership designates as such on its return (Form 1065). If no designation is made the general partner with the largest profits interest is the TMP. If the GP dies the remaining partners with a majority interest in a partnership can designate a TMP. Treas. Reg. Sec. 301.6231(a)(7)-1(f). In a recent IRS field advice the GP/TMP of multiple LLCs treated as partnerships died. The IRS determined that the partnerships could select the trust to which the majority of property passed as the new TMP, provided the trust is the general partner in each of the partnerships at the time of designation. FAA 20103001F.
■ NY Trust Change Sign of Things to Come. States remain hungry for revenues. Who better to tax than a non-resident individual or trust. NY taxes the income of any NY resident trust. This generally includes a trust established under the Will of a NY domiciliary, an inter-vivos trust by a NY domiciliary. A NY resident trust doesn’t pay tax if: (i) none of the trustees are NY domiciliaries, (ii) no trust assets are located in NY, and (iii) the trust doesn’t have NY source income. NY resident trusts that are exempt from tax must now file NY income tax returns. This isn’t a tax increase but a clear effort to catch non-filers who owe many. TSB-M-10(5)I, 7/23/10. This and other trust taxation/situs issues will be discussed at PLI’s “41st Annual Estate Planning Institute,” on September 13-14, 2010 in NYC. Call 212-824-5700 for info.

Potpourri ½ Page:
■ Roth IRA Conversions and Charity: They’re the rage. But you can do good too while planning your conversion. ◙ When converting you IRA or qualified plan to a Roth make a donation to charity to offset much of the income tax cost generated by the conversion. ◙ Example: Convert over 5 years so spread the tax cost and make a corresponding charitable gift reducing the tax. ◙ Example: Instead of an outright gift contribute to a charitable remainder trust (CRT) sufficient appreciated non-IRA assets to reduce your Roth conversion tax and increase your yearly cash flow. ◙ Example: Combine the Roth conversion with grandchildren as beneficiaries and life insurance held in an insurance trust (ILIT) to provide more inheritance for your children to make up for the converted Roth being stretched for your grandchildren. Thanks to Henry Rubin of Yeshiva University, NYC.
■ Power Roths. Not a new kind of Roth, just a headache that will hit some. So when you convert your IRA you first split your regular IRA into say 5 smaller IRAs and convert each separately. Each post-conversion Roth is invested in a different asset class. You then use hindsight on your extended income tax return to determine which to leave converted and which to choose to recharacterize. See Practical Planner November 2009. If you’re disabled when recharacterization has to happen, will your wealth manager respond to your agent? Do you have a durable power of attorney that expressly authorizes an agent to reconvert? What does it say about naming beneficiaries? Some wealth management firms continue to refuse to respect powers of attorney other than their own forms. The forms we’ve seen have never expressly addressed Roth conversions. Could this become a problem?
■ New Charity. A new charitable/educational endeavor, RV4TheCure. See www.rv4thecure.com and join our Facebook page (search “rv4thecure”) in Facebook. Our mission is simple: educate professional advisers (CPAs, attorneys and financial planners) on estate, tax and financial planning for those living with chronic illness. Courtesy of Lorman Education Services we’ll be able to give free CPE, CLE and CFP credits for most programs. NAPFA has joined us and is encouraging members to host our programs around the country. AICPA-PFP division hosted a free webinar on the topic (the podcast will be posted on www.rv4thecure.com) and will be hosting on October a free webinar for consumers on October 6. Sample forms, power points, planning memos and more have been posted to the website for your use. We’re NOT asking anyone for money, just support in spreading the word, hosting or attending programs, and using our materials to run your own seminars for your prospective clients so you can help us disseminate helpful planning information to the public.

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Lead Article Title: Cool Tool: Private AnnuitySummary: What’s better than a Slap Chop (sorry Vince)? Could it be a private annuity? While your wealth manager that told you never to buy an annuity (that’s another topic for someone else’s newsletter) she wasn’t talking about this estate planning technique. Finally, if you expect the estate tax to roar back with a vengeance in 2011, private annuities may warrant another look.

Who, What, Why: ◙ Who: In a private annuity transaction you sell an asset, say an interest in a family business, to a grantor trust that will benefit your heirs. If this sounds a little funky and differs from the description of a private annuity deal in your old accounting course books, that because the IRS issued proposed private annuity Regulations, Prop. Reg. Sec. 1.72-6; 1.1001-1 that changed how these deals are typically done. These regs remain in the “proposed” mode, because, the IRS often uses the Orson Welles Paul Masson commercial paradigm: “We will finalize no regulation before its time.” ◙ What: The trust will promise to pay you for the business specific, periodic payments for the rest of your life. Yes folks, that’s an annuity, and because it is your trust paying for it, it’s a “private” annuity in contrast to an annuity an insurance or investment firm sells you. You can even structure the deal as a joint annuity to pay for the lives of both you and your spouse. ◙ Why: When you die the annuity payments are over and there should be nothing left in your estate for Uncle Sam to tax (with a $1 million estate tax inclusion on the books for next year, ya better start your tax engines revving).

Buzz: Now, clearly this can’t be an exciting tax technique without some confusing jargon (Hey Dr. Ray, you had to call my knee a patella so don’t bust my chops). You’re called the “annuitant.” The trust who is buying your business is called the “obligor.” More buzz to come. Private annuities may be an excellent tool for removing a significant asset from your gross estate for estate tax purposes, while simultaneously providing you with a lifetime source of cash flow.

The Good, The Bad & The Ugly: You didn’t know that Clint was an estate planner?

◙ The Good: When you’re gone it’s gone! Nothing left to tax in your estate if you spend each year’s annuity payments. If you sold assets to a trust for a note, the value of the note is still included in your estate (unless you use a note that by it terms cancels on your death, called a “SCIN”). You can keep the asset, like a closely held business, within family control through the use of the family trust as the purchaser. But perhaps for most folks, getting a fixed quarterly or annual payment for their lives is exactly the financial simplification and security they want. Mom can sell the family widget business to a trust for the kids and head off to sunny Florida to the carefree golfing lifestyle and just check her mailbox once a quarter. Since the buying trust is a “grantor” trust mom will pay all the income tax on the trust earnings, thus further depleting her future taxable estate.

◙ The Bad: No, it’s not all peaches and cream. Once you’re done wincing at the professional fees, there are some real issues to consider. You’re getting a fixed annuity for life. What if inflation ramps up to 10%+ a year? Have your CPA generate some projections of future cash flows, inflation assumptions and then stress test the model. Be sure you leave enough off the table that you don’t have to ask your son-in-law for grocery money. For the kiddies, if you surprise them and ‘dif-tor heh smusma’ [for you non-Trekkies that’s Vulcan for live long and prosper] Junior could be paying you a boat load more for the Widget business than he thought. Remember, if you live to 120 Junior pays the annuity to 120 even though the calculations were based on life expectancy tables. Is that a bad thing? The flip side is that if you die earlier than your life expectancy Junior makes out like a bandit. However, if you die too soon after the annuity sale the IRS may argue that the transaction was a set up and the health issues known. Perhaps Junior should not be your health care proxy. What if Junior ruins the business while you’re on the links? But that risk is an issue when any technique is used to transition significant business or investment interests to an heir.

◙The Ugly: Code Section 2036 is Freddy Krueger of the tax world. If your annuity payments are tied to closely to the income from the Widget business sold to the trust, the IRS will argue that the transaction should be treated as if you made a gift to a trust in which you retained an interest in the income for life. Under Code Section 2036 that puts the entire Widget empire back in your taxable estate (think 55% rates next year!). If you succeed in removing family business interests from your estate sounds like a win, but the IRS has the home team advantage. The benefits from removing the family business interests from your estate with a private annuity means those assets will not be available to qualify for estate tax deferral under Code Sec. 6166 (permits paying the estate tax in installments over 14 years), or the alternate valuation rules (value the assets 6 months after death if the value is lower than the date of death value), the use of a Graegin loan (non-pre-payable loan with all interest deducted as an estate administration expense), and other possible estate tax benefits. If the annuitant has a shortened life expectancy, the IRS can argue that the tables normally used to calculate the annuity amount are inappropriate to use. Rev. Rul. 66-307, 1966-2 C.B. 429; Treas. Reg. Sec. 1.7520-3; 20.7520-3(b)(3). This issue can be addressed in appropriate physician letters.

Drafting Considerations

◙ Some practitioners suggest avoiding Freddy by crafting the trust to conform to the requirements of a GRAT by including in the trust the requirements for the private annuity payments to be a “qualified interest” under Chapter 14. Other GRAT terms might include a prohibition of additional contributions, prohibit distributions from the trust to anyone other than the Seller during the term of the interest, and prohibit commutation. Even with the inclusion of these provisions, there is no assurance that the transaction could also meet the requirements of a “qualified interest.”

◙ The Trust has to be characterized as a grantor trust for income tax purposes to avoid your triggering a large tax cost on the sale (with the proposed regs, there is no other way). The most common approach is for the seller to retain a right to substitute property of an equal value to the Trust assets (i.e., the Widget business you sold to the trust). However, the right to substitute raises an issue in the context of a sale for a private annuity to a trust in that it could be viewed by the IRS as a retained interest that could taint the assets sold to the trust as included in your estate. Other mechanisms are used by some practitioners to create grantor trust status (e.g. the right to borrow without adequate security, or the right to add a charitable beneficiary).

◙ If the a typical buyer defaults the seller would, among other remedies, reserve the right to reclaim the assets sold to the trust under a typical contractual default provisions. But in structuring a private annuity one of the estate tax risks is the IRS asserting that you as seller have retained excessive interests in the assets sold to the trust so that they should be included in your estate. Therefore, your planner might suggest expressly excluding this remedy in the sale documents. On the other hand, limiting what might otherwise be a common remedy might make the transaction look less like a typical sale. This could be problematic from the perspective of “bona fide” sale under IRC 2036, etc. In a typical arm’s length sale transaction default provisions, including a right to reclaim the assets sold in the event of default, is the norm.

◙ To qualify as a private annuity no third party should have the ability to render the annuity obligation worthless. See Rev. Rul. 76-491, 1976-2, C.B. 301. If FLP or LLC interests are sold to the trust for the private annuity, consider including provisions in the entity governing documents assuring arm’s length payments of compensation and other fees and expenses to related parties, and requiring the manager to respect his fiduciary responsibility to all of the members. Might this help might help defeat an argument by the IRS that a third party could defeat the private annuity.

◙ Traditionally private annuities were expressly structured without any security. Prior to the proposed Regulations Sec. 1.72-6; 1.1001-1 the use of security arrangements would have caused the transaction to be taxed in full to the Seller at inception. However, under the new paradigm of the proposed Regulations all private annuity transactions are taxed immediately to the Seller in all events (other than a sale to a grantor trust, if respected) so that there appears to be no detriment to adding security interests.
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Checklist Article Title: GLBT Planning

Summary: Planning if you’re Gay, Lesbian, bi-sexual and transgender have many special planning considerations, only the most obvious being the lack of a marital deduction for federal gift and estate tax purposes. Consider the following:

√ Act Now. Doing nothing, which is the un-plan most folks opt for really just won’t do. Without your taking specific actions your partner won’t have the right to inherit your assets, raise your children, or other things married couples can count on. If you’re GLBT and single, planning is just as important to assure your financial and legal security through illness and aging.
√ Standard Forms. These won’t address your unique needs. If you cannot get forms that are tailored to your situation they won’t work. Yes, tailored forms cost more, but a custom made shirt will fit better than an off the rack one from GAP.
√ Plan. You need planning first, forms second. What personal goals do you have? What tax and financial issues do you face. You have to first delineate your unique circumstances and goals before attempting to create documents.
√ Rules. Understand the rules, if any, your states has that may govern your relationship. Does your state have a domestic partnership, civil union, or same-sex marriage statute? What does it provide? Do the benefits of moving to a state that has more favorable law outweigh the negative impacts (job loss, costs of move, etc.)? Regardless of state law the federal Defense of Marriage Act will prevent you from obtaining federal tax treatment comparable to a married couple.
√ Get Real. You need to honestly assess your situation, not a hypothetical or idealized situation and communicate it clearly to the professionals you are working with. How does your family and others deal with your lifestyle choice? What type of safety net and support do you have in the event of illness? Is your family really going to be cooperative with your partner if you are ill or die? Remember difficult times bring out tough emotions so what might be OK now may not be if a traumatic event occurs.
√ Contract. Use a living together or other contractual agreements to bolster and corroborate the decisions set forth in your will in case family or others seek to challenge your plans. A well crafted living together agreement can also minimize the difficulties if your relationship with a significant other terminates. You will not have the benefits of state law that govern the dissolution of marriage, so a contractual arrangement is important to fill in those and other gaps.
√ Hostile Family. Take extra steps to fend off a potential future challenge by hostile family members. Revise documents periodically to create a history confirming your wishes. Consider inter-vivos gifts to those you name as heirs to establish a pattern.
√ Trustee. Consider the benefits of using an institutional trustee in your documents. They are not subject to the emotional whims or issue that a family member or friend may be. They can provide the objective and professionalism you may need.
√ Agent. Carefully evaluate who you would give the power to handle your financial matters if you are too ill. Read carefully the document that will be used, you may not really want or need a broad general power that gives your agent every conceivable power over your assets. A more restrictive durable power of attorney may be preferable. The best approach for many is a living trust with an independent or institutional trustee as the primary tool for disposing of your assets in the event of a problem.
√ Health. Be sure to clearly indicate your wishes in your living will and health proxy. Address religious considerations specifically (what you do and what you don’t want). If you have a partner specifically mention that your partner is your agent and that you want your partner to have all the same rights and privileges afforded to a spouse. For example, if you want your partner to be afforded the same visitation rights as a spouse if you are hospitalized, state that clearly in the documents. If you have any particular health issue address it clearly what it means in your documents, again standard form language can miss what is really important to you.
√ Tax. With the federal estate tax potentially returning with a $1 million exemption next year, plan to minimize estate taxes on transfers to your partner. This is challenging without the benefit of an unlimited marital deduction. Inter-vivos gift planning, life insurance planning and other techniques need to be employed.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Surrogate Costs Not Deductible. It is not only the estate tax that presents tax challenges to GLBT couples. There are many income tax challenges as well. For example, a recent case held that the costs of hiring a surrogate to bear a child are not a deductible as a medical expense. Magdalin v. Commr., 96 TCM (CCH) 491 (2008) , aff’d without published opinion (1st Cir. 2010).
■ Who Pays the Estate Tax. Reality is that most estate planning is done by bank clerks. So if your bank clerk told you to set up the ownership (title) to a bank or brokerage account as Pay on Death (“POD”) to your named heir, who pays the estate tax? If your will doesn’t expressly make the POD beneficiary pay his or her fair share of tax, and your state law apportionment statute doesn’t address it (or perhaps there is none), they’re off the tax hook and the beneficiaries under your will (or intestacy if no will) are going to bear the cost. If we get a 55% federal estate tax rate next year, that’s a whopper. Estate of Sheppard v. Schleis, 2010 WI 32 (Wis. May 4, 2010).
■ Be Reasonable to have “Reasonable Cause”. The taxpayer had relied on his CPA to handle payroll tax payments and filings but the CPA never follow up. If a taxpayer can demonstrate that there was “reasonable cause” and not the taxpayer’s willful neglect. Penalties were imposed and the taxpayer argued that it had reasonable cause not to pay because it relied on its CPA. IRZC Sec. 6651(a)(1). To avail itself of this leniency the taxpayer must demonstrate that it exercised ordinary business care and prudence. The court noted that a failure to file on a return timely is not excused by reliance on an agent. Penalty assessments were upheld. McNair Eye Center, Inc. v. Comr., TC Memo. 2010-81.

Potpourri ½ Page:
■ Copy Cat Danger: Photocopy machine lease expiring? How can you be sure that electronic images of the confidential papers recently copied are erased from the copier drives? Have the copier lease company confirm their policies for handling the drives in writing and have your IT consultant confirm that is adequate. Better approach – buy the drives from the company. The cost is likely nominal. Then have your IT consultant destroy or erase them so you have control over the process.
■ What’s Up Doc? Lawsuits, the possibility of a million dollar estate tax exemption, your son-in-law, all have you up worrying at night? Do you count defense attorneys leaping over a fence instead of sheep when trying to fall asleep at night? Say you have an interest in the real estate management company worth only $5 million in this market, but you’re confident in 10 years it will be at $25 million. If you get hit by a bus Uncle Sam will walk with nearly $12.5 million to pay towards the cash for clunkers debt. Say your mom sets up a trust for your benefit and that is a grantor trust to you (you pay tax on trust income, not mom, even though she set it up). In tax jargon the trust is a beneficiary (you) defective (i.e., grantor) irrevocable trust, or a “BDIT.” If you get hit by a bus or sued, the entire value is at risk. If you sell the business to the BDIT for a note, no gain will be recognized for income tax purposes. In 10 years the $20 million of appreciation will be outside the gift, estate and GST tax systems and protected from claimants. Since you did not set up the trust, you can be a beneficiary of the trust as well. For physicians worried about malpractice claims, a BDIT can be the ideal approach to protecting interests in say the real estate housing the practice, an equipment leasing partnership and other assets ripe for sale to the trust. Thanks to Robert G. Alexander, JD, LLM, Milwaukee, Wisconsin.
■ Revocable Trusts and Personal Property. So you’ve set up a revocable living trust to manage your assets and provide a structure to protect you as your Parkinson’s disease or other health issues progresses, or to avoid probate. You should also transfer ownership of personal property (antiques, art, jewelry, etc.) to the trust so that these valuable assets will also be protected. This transfer is often accomplished using a “bill of sale” to transfer personal property to the trustee of the revocable trust. Compare the property in the proposed bill of sale to the listed or scheduled property on your homeowner’s insurance to verify that the ownership of all property is transferred, and to assure that any valuable property transferred is also scheduled. Be sure to notify your agent and insurance company of the re-titling to the trust.

■ S Corporations and Payroll Tax. We’ve been warning you that this is getting hotter for a while. Another case that is a sign of things to come. The IRS challenged an S corporation that paid its executive $24,000/year in salary and treated all other distributions as dividends not subject to payroll taxes. Code Section 3111 imposes Social Security taxes on wages paid to employees. No research was done to corroborate what a fair wage would be and the executive’s living expenses exceeded the $2,000/month salary. If you’ve been tax-naughty call your CPA and proactively address it before the IRS assesses you the penalties the taxpayer got hit with in this case. Watson v. U.S., (DC IA 05/27/2010) 105 AFTR 2d ¶ 2010–908; Rev Rul 74-44, 1974-1 CB 287.
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Lead Article Title: Guarantees and Guarantee FeesSummary: In the real world guarantees are used to entice a lender to lend. How much attention was paid to the details and formalities of commercial guarantees? A recent legal newspaper stated: “…guarantees were often glossed over by borrowers entering into commercial real estate loan agreements…” The use of guarantees in estate planning related transactions has grown in recent years.

◙ Why Use Guarantees?
When you sell interests in a family business to a trust, myth has it that the trust should be capitalized to the tune of 10% of value of the property sold. (FYI the folks selling home mortgages during the halcyon days of yore would make deals with less money down than it takes to be a Starbucks!) As this myth has grown in stature, those structuring these deals have run up against a hard wall of the $1 million gift exclusion. The size of the sale transaction, if you subscribe to the 10% myth, is strictly limited by how much gift exclusion you have left. If you sell a $50 million slice of your business that would mean $5 million taxable gift to the purchasing trust, and a $4 million taxable gift costing $2 million. Ouch! The magic elixir of guarantees to the rescue! Make a $1 million gift to the trust (this is called a “seed gift”) and have the beneficiaries of the trust guarantee the first $4 million tranche of the loan the trust uses to buy the $50 million of the business. Cool. While some practitioners view seed gifts and guarantees as being of biblical origin, others view them as superfluous. Suppose you subscribe to the Doctrine of Guarantees (“DOG”)? We just made that up so you could have another tax acronym.

◙ Why Do You Care?
Apart from this being the topic of locker room chat after the links, selling slices of a family business or real estate empire to a trust remain one of the hot estate tax planning techniques (that’s ‘cause no one really believes the estate tax is going away). When you factor in the possibility of discounting a non-controlling slice of the family widget company, the current depressed value resulting from the recession, historically low interest rates that can be charged on the loan, now may be the ideal window of opportunity to sell business interests and freeze the value included in your estate.

◙ The Real McCoy
The 10% myth perhaps began with Private Letter Ruling 9535026 in which the IRS suggested that 10% of the value of a trust’s assets could be used as a benchmark. However, the applicability of the PLR’s concepts to current note sale transactions is not really clear. The real issue is whether the trust (or any entity) which is going to consummate a purchase has to have some minimal level of net worth in order for the transactions to be respected. Are some amounts of seed gifts and/or guarantees necessary so that the sale to the trust will be respected by the IRS? Will the note the trust gives you in the sale be respected as a bona fide installment obligation? If the note is not respected the transaction might be recast by the IRS as a gift to the trust of the asset transferred, which could mean a huge current gift tax bill. Alternatively, the IRS may argue that the stock sold has to be included in your estate because you retained an income interest in the asset used to pay the loan.

◙ Thin is not In
This isn’t Curves. If the buying trust is too thin (thinly capitalized) adverse consequences can result The IRS’ favorite toy in the estate tax game is Code Section 2036. This provision does not apply to retained interests from lifetime transfers for “adequate and full consideration in money or money’s worth.” Thus the validity of the note becomes integral to supporting the “adequate consideration” to avert an IRC Sec. 2036 issue. Inadequate capitalization of the trust with sufficient seed money could raise the specter of Chapter 14 valuation issues. IRC Sec. 2702 applies to a transfer to a trust for the benefit of a member of the transferor’s family if the transferor retains an interest in the trust. Unless an exception applies, the retained interest is valued at zero so that the entire value of the asset is deemed a gift to the trust. If the note is a valid indebtedness, then the transferor will not be deemed to have retained an interest in the assets sold to the trust. However, if the note is not respected the “interest” payments could be argued by the IRS as constituting a retained interest thereby triggering IRC Sec. 2702 valuation rules.

◙ Bottom Line
The pertinent issue to the use of seed money and guarantees is the broader issue as to whether there was reasonable security or collateral and a reasonable ability to expect repayment. No magic formula, 10% or otherwise will alone win or loose the day. Just like Sgt. Joe Friday, “Just the facts, Ma’am.” Many tax experts advocate that guarantees be used in lieu of, or in addition to, seed gifts to enhance the economic viability of a note sale transaction, and hence the likelihood that the note should be respected

◙ Evolution of the Myth
If Joseph Campbell examined the culture of tax attorneys he would have found some interesting developments in the evolution of guarantees. First no guarantees. Second guarantees with no fees charged. Third guarantees with fees, but an offshoot group still maintaining no fees for beneficiaries providing the guarantee. Fourth guarantees with fees ascertained by appraisers. Some practitioners differentiate a beneficiary of the trust providing the guarantee and anyone else providing it. The argument is that since a beneficiary will benefit from the trust, they have an economic incentive to provide the guarantee that a third party does not. Therefore, the beneficiary should not need to be paid a guarantee fee. E.A. Bradford, 34 TC 1059 (1960), CCH Dec. 24,353 addresses a beneficiary protecting his or her interest in the trust, so that a guarantee fee may not be necessary. If the trust has ample assets to repay the loan, then what quantum of a fee is really necessary or appropriate? If there is no value of the contingent debt for estate tax purposes how much compensation should be paid for incurring it? In Cafaro Est. v. Comr., T.C. Memo 1989-348, no deduction was permitted because the loans were not in default and no payment was made.

◙ Its the weight of love, Highs and lows, it’s alright
Some practitioners have advocated using the fees a bank would charge for a letter of credit to establish the fee to be paid for a guarantee. However, it is not clear that this analogy is appropriate.
◙ Kalman Barson, CPA suggests evaluating the following in determining how to value a guarantee: ♥ The amount of the obligation, how much is being guaranteed. ♥ Repayment timeframe ♥ Anticipated cash flow from the business. ♥ Credit worthiness of the business. ♥ Remedy and rights in case of default. ♥ The value of the guarantee could be expressed as a percent of the obligation – perhaps around 2% as a base point to be adjusted for the factors noted above. ♥ The percentage may be regional, depending for instance on what is typical for banks in the area. ♥ The fee may change from time to time. This concept is similar to the build up approach used in determining discount rates for discounting future cash flows. Start with a base rate and adjust upward or downward for other relevant factors. But with transactions so unique how “solid” can the figures be for base rates or the adjustments? ◙ Another appraiser, Daniel Jordan suggests a somewhat different approach that appears more akin to a decision tree with weighted present values. ♥ Estimate the probabilities of different outcomes, e.g. a 20% chance of the guarantee being called in full, etc. ♥ Discount the expected values of each branch of the decision tree to a single net present value. ♥ The discount rate used may depend on the type of investment. ◙ Another appraiser, anonymous (don’t ya love that!) suggested that the cost of stand-by letters of credit be used as a proxy for guaranteeing the debt (a service fee) and that these range from 0.2% to 0.5%. ◙ Highs and lows, its alright.
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: CGA Checklist Charitable Gift Annuities

Summary: Charitable Gift Annuities, or CGAs, are a popular investment/charitable giving technique. CGAs can be a great tool in certain circumstances, but too often they are used, nor avoided, for the wrong reasons. The following checklist will provide some guidance in understanding and evaluating this popular tool.

√ A CGA is a contract between you and a charity (tax-exempt organization) pursuant to which you make a gift to the charity in exchange for a guaranteed cash flow stream for your life, or the joint lives of you and your spouse (or another named beneficiary).
√ Benefits of a CGA can include: a monthly or quarterly cash flow stream for the rest of the client’s life; cash flow payments that are generally fixed regardless of market performance; generally, no worries about asset allocation, monitoring a stock portfolio, market ups or downs.
√ Negatives of using CGAs include no flexibility. You cannot get at the principal you’ve given away. Your cash flow is higher, but there is an ill-liquidity. Your annuity is a fixed payment which may not keep pace with inflation. Solution — limit the portion of your investment assets you use to purchase gift annuities. The younger you are the lower the gift annuity payment rates. Under age 55 it probably doesn’t pay to buy one. At ages 55-60 it might make sense. Over 60 it makes more sense. From 65-70 on, a gift annuity can be a good deal.
√ You transfer property to the charity directly which is used to purchase a CGA. The annuity payments may begin immediately (an immediate annuity) or be deferred until some future date (a deferred annuity).
√ To more easily understand CGAs view your transfer of property to the charity as a charitable contribution and a separate investment in an annuity. The 1st part is the donation. You get a charitable contribution deduction when you donate property for the CGA based on the present value of the annuity you’ll get back. Your deduction is the excess of the value of the property you donated over the value of the annuity. The value of the annuity is calculated using the tables prescribed under Code Section 7520 (Table S for a single life; Table B for an annuity for a term certain; Table R(2) for a joint and survivor annuity).
√ The 2nd part is the purchase of an annuity. The tax basis of the property you donate for the CGA must be allocated between the portion donated to charity and the portion exchanged for the annuity. IRC Sec. 1011(b). Part of each payment is treated as a return of your investment and isn’t taxable. Part will reflect the interest (income) you’ve earned on the annuity and be taxable at ordinary income tax rates. Finally, if you donated appreciated capital gain property (e.g., stock held for investment) part may be treated long-term capital gain and taxed at more favorable rates. The gain is generally reported over your life expectancy (from Table V of Reg. 1.72-9) using an “exclusion ratio” calculated on purchase. Theory was that you’d be getting your deduction while working and subject to higher tax rates, but report the income portion of the CGA in later retirement years when in a lower tax bracket. Well folks, you may face higher rates in retirement as Uncle Sam deals with the growing deficits. CGAs can still be groovy, but don’t count on the tax arbitrage.
√ CGA rates are typically set by the American Council on Gift Annuities, and are conservative to increase the likelihood that the charity will realize a meaningful donation when the CGA ends. This is why you should have charitable intent for a CGA to be worthwhile.
√ If you name anyone, other than a spouse who is a U.S. citizen, there may be a gift tax implication to the purchase. If the value of the annuity interest exceeds the annual gift exclusion (currently $13,000) you’ll have made a taxable gift. There can be estate tax implications too. If you dies first, the discounted value of the payments to be received by the survivor annuitant are included in your estate (well, when they reinstate the estate tax). If the surviving annuitant is your spouse that amount may qualify for the estate tax marital deduction and avoid tax. If it is anyone but a spouse it will use up your remaining exclusion and if it exceeds that create an estate tax.
√ CGAs are regulated by each state so for information as to the safety of a particular charity and the requirements it must met check with the state regulatory authority.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Trust Protectors. Lot’s of folks have integrated a raft of new fangled positions into the ever increasingly complex trust instruments that have become more common. There is little law on these positions so that while potentially helpful, caution is in order. In a recent case the trust protector was sued for not monitoring trustees, not preventing theft of trust assets, breach of loyalty (they argued that the protector was more loyal to trustees then to the beneficiaries). The Court struggled with the issues since state law didn’t provide direction. See UTC Sec. 808. This was a case of first impression. The Court considered the trust document which gave powers and said trust protector was a fiduciary. It gave the protector the power to remove the trustee and appoint successor, but no standards for these acts were provided. The trust protector had power to resign and appoint a successor. The Court held that the trust protector had a fiduciary duty but did not define the scope of those duties. The trust exonerated the trust protector for acts taken in good faith. The Court said this implied that the protector would be liable for acts which were not in good faith. What if the Trust Protector doesn’t even know they are appointed trust protector. What are the duties? Are they a fiduciary? Is the protector supposed to do the same things that a trustee is required to do? Some states require that the protector submit to jurisdiction in the state of situs. Did trust protector sign document accepting the position? If not, how can you hold them liable. So given all the above, how can you protect the trust protector? Can you protect the protector by stating that if they make a mistake they should not be sued. Robert T. McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W. 3d 786 (Mo. Ct. App. 2009). Hey folks, you’ve read it hear dozens of times, hold an annual trust meeting with all advisers, fiduciaries and other key people present. You cannot operate a sophisticated trust successfully without doing this. It just won’t work! Got it?

Potpourri ½ Page:
■ Charitable Powers. Powers of attorney and Living Trusts could include the right of the agent/trustee to prepay a charitable bequest. Consider a mechanism in the document that if the donation is accompanied by an accompanying letter stating that it is a prepayment of the bequest. With the uncertainty of the estate tax this is a clever and simple technique. If there is no estate tax try to prepay the charitable bequest before death and get an income tax bennie. If estate tax is reinstated the fiduciaries can pay it as a bequest for an estate tax benefit without your changing your will back again. Thanks to Steve B. Gorin, Esq. of Thompson Coburn LLP. Smart dude!
■ Elective Share Lotto or While that Cat’s Away the Caretaker Mice Will Play. ◙ To prevent a surviving spouse from getting cut out of an inheritance state laws usually mandate that the survivor can demand some portion of their late spouse’s estate. This is called a “spousal right of election” and the survivor “elects” against the deceased spouse’s estate. ◙ Daughter was dad’s primary caretaker. Dad had dementia. ◙ While daughter was on a 1 week vacation the hired caretaker, Nidia, married dad and later asserted a spousal right of election against his estate. During that same week Nidia changed title on a $150,000 bank account to joint with her and had herself named as sole beneficiary of Howard’s retirement plan. Busy week! ◙ Based on the literal reading of the law the caretaker had the legal right to elect against the estate, but the court refused to apply the elective share law “mechanically.” The court cited as its rationale that an equitable principal of the law that no one should be able to profit from a wrong they commit. The court had to reach for this principal because technically under NY law if a marriage is annulled after death the “spouse” would still get the right of election. Campbell v. Thomas, 08-02246, App. Div. 2nd Dept., March 16, 2010. ◙ This was an appeal from Campbell v. Thomas, 36 AD3d 576! Think what this cost the family in terms of both dollars and aggravation! ◙ The court’s opinion begins by acknowledging that the abuse and financial exploitation of the elderly is a well hidden problem, and that the perpetrator is often a member of the victims own family! So when your wonderful son-in-law the lawyer wants to be the sole agent and trustee for your 2nd husband if you are not able to serve, ya gotta wonder! ◙ How can you protect yourself or a loved one? ◙ Annual meetings and coordination of all advisers is a great first step. Use an institutional co-trustee and a fully funded revocable trust (the bank won’t marry dad and that bank account would not have been changed to joint!). ◙ Have periodic visits by an independent social worker or geriatric consultant to interview the subject in their home setting. If the safety net is weak or small (e.g., when daughter is on vacation) up the frequency of such reviews. ◙ Creating an historical record makes it easier to smell the fish and to catch the vultures before their abuse gets to far along.
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Tax Tips for Uncertain TimesSummary: When we were kids we’d take turns twisting each other’s arm’s until someone screamed “uncle.” Accountants across the country are screaming “Uncle” as in “Uncle Sam” as they continue to get barraged by new tax rules and related changes, court cases and other developments. The following tidbits are barely a drop in the proverbial bucket but hopefully will alert you to some of the planning ideas or tax changes you might have missed.

◙ The Dark Side of Estate Planning. Lower the limbo stick for this one, ‘cause you’re gonna sink way low (if you miss the play on words with “limbo” Google the term). Neither Darth Vader nor Jack Kevorkian would even go where this planning tip goes. Consider the following idea that a well known estate planning guru recently advised a conference. The Guru suggested that attorneys contact any client whose age or health indicates that they may not survive the 2010 year. There is no estate tax in 2010 (well so far!). The guru recommended advising these clients of the tax consequences of dying in December 2010 versus January 2011. He then suggested that the client might make a decision about updating his living will and health care proxy. Hey what a Christmas present! Pull the plug just before year end. If there is no estate tax this year and in 2011 we get a $1 million exclusion and 55% rate that could be a whopping gift to the kids. But hey, why stop there. The guru then intimated that perhaps the client might take a trip to Washington State or Holland? Those aren’t red or blue on the CNN map. They’re Kevorkian Black. The only planning point he left out was buy a one way ticket and save a few more bucks for the grateful heirs.

◙ Re-think Testamentary Charitable Gifts. If you bequeath money to charity in your will, that bequest won’t save any estate tax as it had in the past (since there is no estate tax). So, instead of a tax-useless charitable bequest, make a specific bequest to your heirs with a non-biding request that they make the requested charitable contribution. The heir will obtain an income tax charitable contribution deduction which is quite a tax improvement. Great tax deal, but just hope Junior is able to resist writing the check out to the local Porsche dealer.

◙ Generation Skipping Transfer (GST). The GST tax remains repealed. This could mean a once-in-a-lifetime opportunity or a costly tax trap if the GST tax is retroactively reinstated. Consider out right transfers of property to skip persons (e.g., grandchildren). Simple — just write a check to a grandchild. If there is a family trust that is not exempt from the GST (perhaps a bypass trust for grandma when grandpa passed away) and grandchildren are beneficiaries, the trustee can just write check. The gift should be made outright and not to a trust (custodial accounts are treated like trusts). If the GST tax is reinstated the gift or distribution to a trust may later be subjected to GST tax so keep it simple and outright. If your gift triggers gift tax the rate now is 35% not 45% (like 2009 law) or 55% (which is what it will be next year if Congress doesn’t act). Doing an Alfred E. Neuman — “What me worry?” Then use techniques to hedge your GST tax bets. If the grandkid is tax savvy, they can refuse (renounce) the gift if the GST tax is reinstated. Don’t trust the grandkid to give the dough back? Make the gift subject to the grandkid’s obligation to pay GST tax if there is any. If you gift interests in a family rental property or business, the grandkid won’t have the cash and will have to renounce. Need to hedge the bet on a trust distribution? The trustee can make the distribution subject to a contractual arrangement that includes a formula. The grandkids get the amount of the gift x a fraction. The numerator is the maximum amount that can be given away GST tax free (that’s the whole shebang right now). The denominator is the value of interest given. If the GST is reinsated and you’ve used up all your GST exemption the grandkids get nothing but the tax is avoided. Another GST approach is to put big bucks into a marital trust (QTIP) for your spouse. The trust should say that if spouse renounces the funds go to grandchildren. If the GST is not reinstated your spouse can renounce within 9 months and the dough passes outright to grandchildren listed in the trust. This gives you a 9 month Ouija board to see the status of the GST tax. If the GST is reenacted file a gift tax return electing for the trust to qualify for the unlimited gift tax marital deduction and skip renouncing. If the GST is not retroactive then your spouse can renounce and bring Kodak smiles to all the grandkids.

◙ Carried Interests. Hedge Fund fat cats are struggling. It’s tough to get by on a few hundred million a year when you have to pay income taxes. So, they want those buckaroos taxed as favorable capital gains, not as compensation subject to ordinary income tax rates and payroll taxes. The tax tide may be turning. Movement is afoot to tax what are called “carried interests” as ordinary income regardless of character of the income at partnership the managers have interest in. HR 4213. It’s been estimated that the tax revenue from these changes could add $24 billion to the federal fisc. Green book JCX-59-09 p.5. Code Section 83 may be amended to tax partnership interests as compensation. New Code Section 710 will tax flow through items from partnerships as ordinary income without regard to normal flow through rules of partnerships. What is especially cool about this proposed new provision is it gives us tax geeks a new acronym “IPSI”. That’s important because if proposed legislation eliminates GRATs, this will avoid a disruption in the force by replacing the useless GRAT acronym with a new one of equal size. Just to give you a leg up on the others in your golf foursome, IPSI stands for Investment Services Partnership Interest. That’s an interest in a partnership attributable to services rendered with respect to “Specified Assets” (you’ll have to wait for your decoder ring to understand that one). Code Section 1402 may be amended to make carried interests subject to employment tax. While you might not loose sleep over the fat cats paying more tax, be wary of the common Congressional approach of using a sledgehammer instead of a scalpel. Lots of business deals on main street (e.g., real estate development) may get snared in these changes. There could be a lot of collateral damage on these changes.

◙ Expatriation Provision. A tough mark to market exit tax applies to US citizen and green card holders who expatriate or give up their green card. Folks may assume expatriation doesn’t apply to them but the rules cast a wide and unsuspecting net. Green card holder executives if reassigned back to their home country are in jeopardy of loosing green card when this happens. That may trigger the expatriation tax. IRC 877A; Notice 2009-85. Thanks to Michael A. Spielman, Ernst & Young LLP.

◙ FBAR Goes to Far. Persons with signature authority over foreign accounts, but no interest in them, have an extension to June 30, 2011 to file for FBAR relief. An agent holding power of attorney over foreign assets has to file even if foreign entity would not respect the US document. Notice 2010-23, 2010-11 IRB 441, 02/26/2010; IRC Sec. 6011. If you make an FBAR filing inform the people you’ve named agent under your power of attorney and possibly the trustees under your revocable trust.

◙ Probate Appraisals. If someone died in 2010 the executors may be deferring obtaining appraisals until the law becomes clear. That could be a mistake. Consider that with the law unclear it is not certain whether the appraisal obtained today is intended to maximize value under the carryover basis rules or minimize value under the estate tax rules if reinstated. Thus, any appraisal done now may have greater credibility than an appraisal done in the future when the law is clear.

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Checklist Article Title: Get Audited!

Summary: Your CPA is having a tough year. Here are steps you can take to increase the likelihood of an IRS audit of an estate tax return and the cost of handling the audit. Go ahead, help your CPA fund his kids’ 529 plans. While some of the items below might seem odd or silly, according to two IRS Appeals agents these are some of the most common and easy audit triggers to avoid.

√ Use an out of date tax form. This will pretty much assure IRS attention. Seems rather lame, but according to the IRS, not uncommon.
√ Don’t complete both the extension of time to file and the extension to pay tax on Form 4768 when you file it.
√ Don’t attach a copy of the actual fully signed will and trust of the decedent to the estate tax return. Leave out of the package key supporting and back up documents and materials.
√ Forget to include the complete appraisal for assets for which appraisals are required. A common goof is to submit the summary of the appraisal without the full report, or to enclose the complete valuation report but leave out the exhibits the report refers to.
√ Don’t use summary pages and general outlines. In other words, make it a real hassle for the reviewing IRS agent to understand the return and find the information they need when making a preliminary assessment. And definitely don’t provide a table of contents and tabs for a complete compilation of all exhibits.
√ Don’t bother verifying whether the prior gifts reported is accurate. Ignore the fact that the decedent may have gone to a prior CPA and filed gift tax returns and that current CPA/attorney doesn’t know about them. Missing that the decedent had filed prior gift tax return is apparently such a common goof that some tax experts have questioned whether there would be a negligence penalty applied for not knowing about the prior returns. So don’t make any effort to ascertain what was filed. Don’t order past returns from the IRS tax practitioners’ hotline (you’d need a Form 2848 power of attorney to do this). Skip filing a request for a transcript for gift tax returns.
√ Whenever you include assets from a joint account on the decedent’s estate tax return at less than 100% of the value of the account, don’t bother explaining why less than the entire account is reported in an attached deduction. For example, if the decedent owned an account “Don Decedent and Sam Survivor as tenants in common” and only ½ the value is included since Sam had contributed ½ the assets in the account, don’t attach that explanation or proof of Sam’s contributions.
√ If the decedent had made transfers to GRATs, CLTs and other planning vehicles, don’t attached detailed calculations and values, just pop a number on the return and leave it at that.
√ When you send a check skip putting a letter “V” at end of Social Security number to indicate it is an estate check. That way the IRS computers will assume it is from a live taxpayer, not a decedent and the likelihood of a mix up will be maximized.
√ Don’t file a proper protective claim for refund of Form 843. The Regulations under Section 2053 prohibit estates from taking an expense deduction for items that haven’t been paid. What the IRS recommends is that estates file Form 843 Claim For Refund and write in red on top “PROTECTIVE,” this will keep the time period in which the estate can file to claim the expenses once paid (the statute of limitations) open beyond the 3 year period. Then the estate can file a formal Form 843 claim for refund. Given the importance of this when you file a protective claim for refund don’t bother getting it stamped in by IRS, or sent by certified mail, so that you can prove a timely filing.
√ During planning process don’t get copies of all key documents from clients so that they will be available to submit with the estate tax return: e.g. patents, contracts, etc. Leaving out key documents will enhance the need for the IRS reviewer to seek more info.
√ Since the IRS routinely asks for all Forms 1040 and Forms 1041 for decedents for the 3 years prior to death to look for gifts or other transfers in contemplation of death. The IRS looks at checks written. They review income from assets, such as a business or rental property, and then verify that the asset is on the estate tax return and that the value on the 706 is unreasonably low relative to the prior distributions or income. You could prepare in advance, and even undertake this testing and make disclosures on the return, if you wanted to minimize the issues arising on audit. But hey, why bother.

Recent Developments Article 1/3 Page [about 18 lines]:
■ “Cadillac Tax” on High-Cost Health Plans. Recent tax changes add an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% non-deductible excise tax on insurance companies, based on premiums that exceed certain amounts. Ouch! The tax is not on employers themselves unless they are self-funded. However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers. Remember, the phrase about paying the piper? The new tax applies for tax years beginning after December 31, 2017. Gee that’s after the current administration is out of office!
The tax will apply when annual premium exceeds $10,200 for single coverage, and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Huh? Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax. Thanks to I. Jay Safier, CPA, of Rosen Seymour Shapss Martin & Company LLP.

■ Foreign Trusts. If a foreign trust holds assets used by US beneficiary or grantor it will be treated as the equivalent of a distribution to the US person equal to the fair market value of the use of that property. So if a foreign trust owns your family vacation home, and you as a beneficiary stay there, you have two choices. Treat it as if you received a distribution from that trust, or pay rent – the fair rental value for the use. The tax effect of the deemed distribution if you don’t pay rent will likely be similar to any other cash distribution you receive from the foreign trust, and a tax filing would be required.

■ Foreign Tax Surprises. Ugandan citizens moved to Belgium and elected to be subject to a community property regime. The decedent was not citizen or resident of the US but since it is a domestic corporation it is subject to US tax. Decedent and spouse had not, it was determined, taken steps to make community property election so that this was not the result. Recognize the complexity of community property laws particularly in international matters. Tricky to identify for migrant clients the appropriate matrimonial regime to apply. Inclusion in US gross estate of US situs property can be unexpected. Estate of Charania v. Comm’r 133 TC No. 7 (2009).
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■ Doctor Protection. Whatever happens with the estate tax, most physicians are more worried about malpractice then they are the estate tax (and they don’t love the estate tax!). Doc can set up a self settled trust in any jurisdiction permitting it and remain a beneficiary at the discretion of the independent trustee. There are obvious risks and issues but this can protect the dough from Doc’s future malpractice claimants. A common transaction for Doc to get assets into such a trust is for him or her to sell assets to this trust. Since it is a “grantor trust” Doc doesn’t recognize any gain on the sale. The assets, and the growth in them, should have some protection from claimants. But there’s a better approach. Dick Oshins, well tanned estate tax maven from Las Vegas, prescribes a planning approach that he affectionately refers to as a “BDIT,” to give doctors that restful night sleep. Instead of Doc setting up a trust and facing the risks involved, Mom set up the trust. Mom expressly does not reserve any of the powers that would make the trust a grantor trust to her (i.e., taxable to her for income tax purposes). The trust includes an annual demand or Crummey power. This is almost standard fare for the typical insurance or kids trust. Doc is the only beneficiary of this trust. Doc’s Crummy power withdrawal right makes the trust a grantor trust as to Doc. Doc can therefore sell assets to the trust without gain, and obtain the desired protection Doc supposedly gets in the typical asset protection trust, but perhaps better since Doc didn’t set up the trust, Mom did. Cool. But ya’d better get your BDIT while you can. Word is that Crummey powers that are a key to BDITs and many other trusts, might be put on the tax chopping block. Think about it. Give the Republicans the $5M estate tax exclusion and 35% rate they want, but eliminate all the fund estate tax toys, so most folks end up paying higher tax. And for the nervous Nellie’s in the medical world that will make it all the harder (perhaps impossible) to do asset protection as well.
■ Family Ties. If you’re not into the fireworks that accompany most estate disputes, take some proactive steps to lessen the likelihood of explosions. Here are a few ideas: ◙ A letter from the testator explaining the plan, and guiding heirs, may have a significant impact. ◙ Some experts recommend you should dictate a letter the attorney can edit. ◙ Don’t video tape without careful evaluation as it can preserve mistakes and most estate litigators caution against it. ◙ Use a no contest or mandatory mediation provision. ◙ Add conflict management provisions to the estate planning documents. ◙ Courageously have uncomfortable conversations with your advisers. Thanks to Paul Fisher of Pepperdine School of Law.

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Seminars: Monthly planning seminars begin May 26 with “Estate and Tax Update” at Bergen Community College, Bergen County Community College, 400 Paramus Road, Paramus, NJ 07652 Parking Lot B, Room TEC-128-A. 8-11 am 3 CPE and CFP credits. Call 201-201-447-715 for info. Following sessions: June 1 – Charitable Giving: Income, Gift and Estate tax Planning; July 27 -Income Taxation of Trusts: State Tax and Situs Issues; Passive Losses; Partnerships. More to follow.

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Hot TipsSummary: Every year in May CPAs from all over the country flock to Las Vegas to attend a tax conference (what did you expect they’d do in Vegas, we’re talking about CPAs). The program, “Tax Strategies for the High Income Individual” is one of the best programs of the year and attendees can glean great planning ideas form scores of expert speakers. Remember Watergate? Well, an undercover operative hired by Practical Planner has pulled off what we’ll call “Welch Gate.” We planted a hidden camera in the offices of Julie Welch, CPA, one of the key speakers at the conference, and bring to you below some of the best tips from the handout materials for the program before the conference takes place! Allen Funt couldn’t done it better.

◙ Partnership Basis Adjustments. A partnership (or an LLC taxed as a partnership) can elect under Code Section 754 to increase (step up) its tax basis. Example: LLC owns a wig business worth $2M but the LLC’s tax basis is only $1M. Jones owns ½ the LLC and dies. Jones’ heirs want to step up their interest in the wig business so if it sold they can avoid a tax haircut. Great planning step. Carol Cantrell of Briggs & Veselka. General partners and managers sing the old Simon and Garfunkel tune: “Slow down you move to fast…” You can always amend the partnership tax return and make the election at a later date. But once the election is made it cannot be changed without IRS consent. Err on the side of caution, if you want to be feeling groovy.

◙ Expensing of Business Assets. CPAs are genetically programmed to latch onto tax bennies like a pit bull on a soup bone. But, tax planning is now about the “new normal,” and that means new strategies. John Connors, Tax Educator Network. Code Section 179 lets you write-off immediately up to $250,000 qualifying property placed into service in 2010, but only $25,000 after 2010. Tangible (e.g., a chair not a contract right), personal (not an essential or immovable part of a building) property. If you don’t have adequate business income to use the write off, it may not be advisable to claim. Everyone thinks that rich folk (income over $100) will be subject to higher tax rates. Higher tax rates might make the depreciation deductions you get in future years more valuable than a current deduction under 179.

◙ C instead of S. This is like a remake of Back to the Future, for accountants. Everyone has organized new businesses as LLCs for years. Folks with S corporations feel left out. Income and deductions flow through to your personal return. But with individual marginal tax rates rising, corporate tax rates possibly declining to help businesses, businesses other than professional service corporations, might wish to convert S corporations to C corporations. John Connors. LLCs might retain hard assets like real estate but incorporate the active business operations. As a C corporation the perquisites of owners will get better treatment too.

◙ Long Term Care Insurance. Like Staples, “That was Easy.” But too many people don’t address it in their planning. Martin Finn, CPA of Lavelle & Finn. Check out a possible federal and state tax deduction or credit for the purchase. Get creative. Evaluate the role of permanent life insurance as part of long term care planning. Life insurance can enable your heirs to recover what was paid for your health care costs so it is perhaps another approach to replenish the estate.

◙ Funding Junior. Consider an ongoing aggressive gift program so that once a child attains age 18 they can fund over ½ their support. Their income won’t be subject to the Kiddie Tax and will be taxed at lower rates. Janet Hagy, CPA of Hagy & Associates. Don’t trust junior use Richard Oshins, Esq.’s favorite — a beneficiary defective trust (BDIT). Crummey powers can make the child taxable as the grantor of a trust funded by mom and dad.

◙ Don’t Forget Fido. Pet lovers don’t forget to plan for Fido (sorry Elvis!). Pet lover Rachel Hirschfeld, Esq.. Critters are considered property in the eyes of the law, even if you treat Fido better than your son. Consider setting up a trust to care for Fido after you’re gone.
◙ A Moving Experience. Evaluate whether your old or new state has a better tax rate and sell appreciated stock accordingly. Vern Hoven and Sharon Kreider. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income taxes. If you’re selling out a really large position, is it worth moving first? Pension withdrawals may offer similar planning opportunities.

◙ Smart Charity. Planning a charitable bequest under your will? Consider making the gift now to remove the asset from your estate plus garner an income tax deduction. Lawrence Katzenstein, Esq., of Thompson Coburn. With no estate tax, or if the $3.5 million exclusion is reinstated, few people will pay an estate tax. Update your durable power to permit payment of the intended bequests during your lifetime to obtain an income tax deduction when there is no estate tax deduction. If the gift is to be a prepayment of the bequest in the will, be certain that the documentation confirms that fact.

◙ Employee Savings. Occasional business trips to states other than where you reside could trigger income tax filing obligations in those states. Mark Klein, Esq. of Hodgson Russ, LLP. Worse, if you don’t file on time you could lose the ability to claim a credit for tax paid to that other state on your home state income tax return, you could be whipsawed between two state tax systems taxing the same income, and you could face criminal charges. Ouch! If you’re getting a payment on ending your employment and moving, analyze how a severance payment based on past services, versus one buying out remaining contract rights, might be taxed by each state.

◙ Estate Planning Nirvana. Most advisers are obsessed with maximizing valuation reductions for gift and estate tax purposes using discounts for lack of marketability and control. But the estate tax Holy Grail is really the leverage obtained from using grantor trusts over long time. Estate Guru Richard Oshins. With grantor trusts the grantor pays the income tax on earnings which inure to a trust for the named beneficiary. Stephen Siegel, The Siegel Group.

◙ S Corporations. If an S corporation is engaged in more than one type of business, distribute each business into a wholly owned S corporation subsidiary (affectionately, a Qsub) or an LLC. These will be disregarded for tax purposes, but you’ll insulate the liability of each business from the other and prevent a domino effect. Sydney Traum, JD, CP.

◙ Business Tips. If your business exports, look into using an IC-DISC to benefit from dividends taxed at a low 15% (proposed to be changed to 20%) instead of ordinary income tax rates. If you use an equity arrangement to compensate a key executive and values are out of whack by year end you can unwind the transaction if you do so during the same tax year. Carolyn Turnbull, CPA of Moore Stephens Tiller, LLC.

◙ Deductions. Maximize net operating losses by identifying business related deductions like income taxes, interest and professional fees. Rev. Rul. 70-40. If you’re suing try to characterize settlement proceeds as non-taxable as relating to physical injury. IRC Sec. 104. Structure settlements as employment discrimination and related matters so that the legal fees can be deducted from adjusted gross income (AGI), called “above the line.” Otherwise legal fees will be subject to limitations and reductions that might reduce or eliminate them entirely.

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Checklist Article Title: Funeral and Related Arrangements

Summary: Few events can be more emotionally traumatic than funeral and related arrangements. It behooves everyone to plan ahead and endeavor to make their wishes known. Just letting your loved ones know what you want will often be inadequate. They may not remember, others may have different understandings of your wishes and worse.

√ Service and Memorial: Do you want a particular type of service? Should any specific limitations be placed on what should be done? Consider the impact on those you leave behind.

√ Burial or Interment: Where should you be buried, or interred? If you have had multiple marriages and perhaps children with several spouses, indicating what you do and don’t want can prevent a terrible fight after you pass away. If you can purchase a family plot, or designate a specific cemetery, try to do so. The more details the better.

√ Living Will: State in a living will what wishes you have for religious matters, funeral, last rights, etc. This document confirms a statement of your wishes.

√ Letter of Instruction: Consider writing a personal letter of instruction with all the personal details of your wishes. Too often the smaller details of what you want are inappropriate to include in a legal document. The explanations of what you hope for survivors, why you want certain requests met, etc. all should be in a personal letter and rarely in a legal document. Google “ethical wills” and consider what types of messages and personal thoughts you’d like to share and leave behind. Your personal letter is a great place to do this.

√ Health Care Proxy: This is also called a medical power of attorney. You need to designate an agent to implement end of life decisions if you cannot make them on your own. Name one person to serve at a time, not joint agents. Discuss your wishes with the people you wish to name in advance and honestly assess whether they will in fact be able to carry out your desires. Will personal or religious differences prevent them from acting as you wish?

√ Will: A will is almost always found after death so that it is not the primary document people will be able to refer to in order to ascertain your wishes. So why list anything? Because indicating in your will what you want done will authorize your executor to pay for the costs of it. If you are a Hindu and wish to be cremated on the banks of the Ganges, the costs involved will have to be paid for by your estate and may be costly. Authorizing these types of plans in your will makes it clear that your executor has the authority to pay for these.

√ Deductions: Amounts paid for funeral expenses are allowed as deductions for estate tax purposes. These amounts must be actually expended. They must be properly allowable to be paid out of the property subject to claims under applicable state law. These costs must also satisfy the requirements of paragraph (c) of §20.2053-1. A reasonable expenditure for a tombstone, monument, or mausoleum, or for a burial lot, either for the decedent or his family, including a reasonable expenditure for its future care, may be deducted if allowable by state law. Included in funeral expenses is the cost of transportation of the person bringing the body to the place of burial. Treas. Reg. Sec. 20.2053-2.

√ Organ Donations: Address these in a donor card and in your living will. Be clear as to whether any organ and tissue can be donated, or only certain ones. Can they be donated from scientific research or only for transplant.

√ Donating your Body To Science: If you wish to help medical research you can donate your body to science. This process requires some advance planning and documentation. Try speaking with the institution you plan to donate to and get their advice in advance.

√ Religious Issues: You must specifically address religious issues. Whether you have a particular set of beliefs, or not, you need to confirm what your wishes are. Never assume that your family or loved ones know. Religious issues can be incredibly sensitive and there is tremendous variation in observances, differing customs, and personal wishes. Don’t leave it to chance, or worse for your heirs to fight about. Specify what religion you were raised in if any, what religion you presently observe, how that should be applied to end of life and burial or related decisions, and what specific differences or variations you wish.

Recent Developments Article 1/3 Page [about 18 lines]:

A bevy of new tax and related changes has been enacted as part of the 2010 Health Care Act (PL 111-148, 3/23/2010 ) and the 2010 Reconciliation Act. Here’s a couple:

■ Currently, wages are subject to a 2.9% Medicare payroll tax. Workers and employers each pay ½, or 1.45%. If you’re self-employed you pay it all but get an income tax write-off for ½. This Medicare tax is assessed on all earnings or wages without a cap. These taxes fund the Medicare hospital insurance trust fund which pays hospital bills for those 65+ or disabled. Starting in 2013 a .9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples. That makes the marginal tax rate 2.35% Self-employed persons will face a 3.8% on earnings over the above amounts. Look for more changes like this, a few percent here, a few percent there instead of just the rate increases needed to raise revenues. The result will make tax planning and preparing projections increasingly complex.

■ Only wages and earnings are subject to the Medicare tax above, but starting in 2013 the 3.8% Medicare tax will apply to net investment income if your adjusted gross income (AGI) is over $200,000 single ($250,000 joint) threshold amounts. These amounts are not supposed to be indexed so inflation will erode these overtime. Net investment income includes interest, dividends, royalties, rents, gross income from a passive business, and net gain from property sales. You can reduce net investment income by properly allocable deductions. Your advisers may have to allocate their bills by category to help. This tax won’t apply to retirement assets. Roth IRAs are lookin’ better. Earnings on non-IRA investments could be subject to this higher tax, but if used to pay tax on a Roth conversion the earnings will all be inside the tax deferred Roth thereafter.

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■ Another LLC Myth: Conventional wisdom may be “conventional” but not always sound. January Practical Planner evaluated the myth that using an S corporation in contrast to an LLC will save you payroll taxes and avoid IRS audits. Another LLC myth is that a one member LLCs, which is treated as a disregarded entity for income tax purposes, is cheaper then a multi-member LLC, since you don’t file a partnership tax return. Right? Look at some IRS stats: Audit rate for Schedule Cs with gross receipts of $200,000+ 3.2%, Schedule Cs with gross receipts $100,000-$200,000 4.2%. Audit rate for partnerships and S corporations 0.4%. What’s it cost to handle an audit? Do the math. A disregarded entity may not save you any accounting fees. Furthermore, adding a member adds other advantages too. While a 1 member disregarded LLC can provide asset protection for suits relating to the entity (e.g. a tenant sues you as landlord, your personal assets may be protected), it does not afford protection from outside claims (you’re sued for malpractice and own valuable real estate in a single member LLC). In contrast if you have other real members (not .001% held by a child) a claimant levying on your LLC may only be able to obtain a charging order under state law (not become a substitute member). Further, if you’re sued and have a 1 member LLC the claimant would argue to see your entire personal tax return Form 1040 to see the data relating to your LLC. However, if you have another member and file a partnership return, the claimant might be limited to seeing just that partnership return, not your personal return.
■ Dealing in Currency- Pitfalls for the Unwary: Most businessmen and women are aware that if they deposit or withdraw more than $10,000 in cash, the bank must prepare and file with the IRS a Currency Transaction Report. Similarly, if a trade or business receives more than $10,000 in cash from a customer, the business must file a Form 8300 with the IRS listing the customer, his or her address and social security number. What most of us are unaware of is that if a person “structures” a transaction by depositing or withdrawing $3,500 a day over a short period of time to avoid the $10,000 rule or pays for goods or services worth more than $10,000 by breaking down the payment into smaller amounts, that person could be prosecuted, go to federal prison and , to add insult to injury, have the government seize the entire amount. This can be clean money and the transaction can be perfectly legitimate. Structuring a transaction to avoid or evade the reporting requirements by banks or trades or businesses is illegal. Most banks file “Suspicious Activity Reports ” when its compliance departments see this type of currency activity. Additionally, it is a crime to aid and assist in structuring or for you accountants or lawyers out there to counsel someone to structure. As the duty shift officer in Hill Street Blues said before every shift: “Be careful out there.” Thanks to Lawrence S. Horn, Esq. Chair, Business Crimes and Tax Litigation Departments, Sills Cummis & Gross P.C., Newark, New Jersey.

Back Page Announcements:

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Seminars: AICPA Conference on Tax Strategies for the High Income Individual (May 2-4, 2010), Las Vegas, NV, For info or register on line at www.cpa2biz.com.

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Lead Article Title: Scheduled Maintenance Guide

Summary: So you bought a new car and you want it to work right and last. A good first step is to check out the Scheduled Maintenance Guide. Yep, change the oil every 5,000 miles, but a lot more is recommended. Doesn’t your estate plan deserve the same care? Page references are to the 2010 Ford Motor Company Scheduled Maintenance Guide. For some reason most folks understand that their car needs TLC, but they don’t apply the same logic to their estate and financial plans.

◙ Warning: The Ford Scheduled Maintenance Guide cautions readers [p.2]: “Today’s vehicles are more sophisticated than ever and need to be properly maintained to help ensure that they operate at the highest level.” Well, Henry, your grandmother may not have drive a Model T, but her estate plan surely didn’t have split-dollar loans, trust protectors, directed trusts, unitrusts, GRATs, discounts, guarantee fees, and all the other bells and whistles your plan has. So if your estate plan is a tad too complicated to crank out on legalzoom, then the maxim for car maintenance assuredly applies to your estate and financial plan as well.

◙ General Maintenance: The Ford Scheduled Maintenance Guide provides recommendations for different mileage markers. The basic service at a 7,500 mile marker includes expected stuff like changing oil, filters, tire rotation and performing a “multi-point inspection.” [Ford Manual p. 14]. For your estate plan, each year you should do some of the basics like: ■ Update key data including balance sheet and family/personal data. Your advisers need current data to advise you about the adequacy of your current planning and documents, and especially in the event of an emergency. ■ Review the ownership (title) of your assets and beneficiary designations to assure that they are consistent with your plan. Values change, liability exposure can shift, tax rules change, and annual monitoring is pretty important to assure that your plan is working. Regular monitoring, just like oil changes, is pretty inexpensive and can avoid much more costly problems. ■ A quick conference call between your various advisers keeps your “team” coordinated. Often this might require modest time. Assure that your investment adviser and CPA are on the same page as to capital gains and losses, marginal tax rates, etc. With the uncertainty about estate tax repeal and carry over basis rules your estate planner needs to be in on that call too. Business succession planning requires coordination of your estate and corporate attorneys, CPA and insurance consultant. ■ Don’t forget your “multi-point inspection.” [Ford Manual p. 14]. For your estate plan, just like your car, that means running through details that your advisers deem important to assess the functioning of your planning. Consider: How is your asset allocation disbursed to different trusts and entities (asset location) and does the approach remain optimal? Is your insurance coverage adequate in light of current circumstances and are policies performing as expected. And so on.

◙ Special Operating Conditions: Before relying on just the regular maintenance schedule, you need to first determine whether you operate your car in a more demanding special condition. If you tow an Airstream trailer, that’s a “special operating condition” and you need to have some items “maintained more frequently”. Works for your car, works for you estate plan! If you’re towing a heavy load then you need more frequent maintenance. Most plans should be reviewed every couple of years. These are plans that are for an intact non-blended family, face no estate tax issues or the tax costs are simply solved, no sophisticated trusts, etc. If you have “special operating conditions” you need to “inspect frequently, service as required.” Special conditions might include: closely held business with buy out provisions; complex blended family (unless your last name is Brady, it’s probably complex); family partnerships or LLCs (achieving estate tax minimization and asset protection goal is never normal maintenance); all but the most basic of trusts; etc. The manual recommends much of the basic service every 5,000 miles instead of every 7,5000 miles. [Ford Manual p. 41]. Ditto you your estate and financial plan.

◙ Idle Hours: If your car is used for police, delivery or other purposes it may experience significant idle time. Idle time is like stealth miles – it doesn’t appear on your odometer, but idle time is insidious and potentially damaging to your car. Even though your odometer is not registering wear and tear, each hour of idle time can be the equivalent of 33 miles of driving. [Ford Manual p. 43]. Your estate plan can similarly be undermined by issues that are hardly registering on your radar screen. Spending rates can inch up ever so slightly such that continuing an annual gift program to the kiddies could begin to erode your financial security. Court cases could reinterpret nuances of provisions in your documents that only a professional reviewing your entire plan could identify.

◙ Deferred Maintenance: Would you ever think of like showing up at your dealer for your first oil change with 50,000 miles on your SUV? No, but why do so many clients not talk to their insurance consultant or estate planner for a decade or longer after their trust was signed? Would you blame your mechanic if you’re SUV we’re a bit cranky after 50,000 miles with no care? Why are your professional advisers somehow responsible for similar owner neglect? When your insurance plan was formulated and implemented the estate tax exclusion was $600,000, last year it was $3.5 million (this year we’re still wondering what it is!). When you show up to the dealer 10,000 miles late for your last service call and get tagged with some extras to you accuse your dealer of bilking you or do you thank the mechanic for catching a problem before it became an even bigger and more costly issue? When you’ve skipped the recommended scheduled maintenance you expect the bills to more costly and the repairs more difficult. The moral of the story for both your car and estate plan, is service both regularly and properly.

◙ Emergency Repairs: You hit a pot hole and blow out your tire. Your car may be new, but the bottom line is you have to fix the tire. If you’re lucky you can plug the hole. If you not so lucky you have to replace the tire. If you’re more unlucky you may have thrown the alignment out of whack and have to have the tires aligned. So you just signed your will, but the unimaginable happened and Congress actually let the estate tax lapse in 2010. You really need to update it, regardless of how new your car is! Pot holes don’t differentiate the damage they’ll cause by how recent the vintage of the car driving over them is. Neither does Congress! A named trustee turns out not to be so trustworthy, a responsible heir turns out to be anything but. Your insurance company’s performance is less than stellar jeopardizing your plan. Your wealth manager changes his name to Willie Sutton. Estate and financial plans hit unexpected potholes: marriage, divorce, re-marriage, new children, significant changes in wealth, diagnosis of a major health issue, change in residency/domicile, and more. Just because you spent a lot of time, money and effort implementing a comprehensive and flexible plan doesn’t mean you can ignore emergencies any more than you can ignore the thud of a flat tire.

◙ Replacement: “In general, tires should be replaced after 6 years, regardless of tread wear.” [Ford Manual p. 9]. But how old did you say your will is? Whoever drafts your documents updates and refines their forms and drafting all the time. States adopt new laws. Courts interpret tax laws. The Treasury department issues new regulations. Practitioners write and lecture about new techniques. Forms and techniques evolve and older approaches simply become less beneficial, some could become dangerous. After some number of years your documents should be replaced even if your situation hasn’t changed. Updating existing documents is analogous to balancing and rotating tires. You can maintain your tires to increase their longevity, but at some point you just really need new tires to be safe. Ditto on your will and other planning and documents.

◙ Conclusion: You take care of your car knowing that regular maintenance avoids worse problems. Your estate plan involves exponentially more money, and can similarly impact the security of your loved ones. Don’t settle for less for your estate plan than you do with your oil changes!
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: GRAT Decisions

Summary: To make great decisions for your GRAT you need to think creatively. The following checklist will help. But for those who missed the lecture on GRATs in acronym school, it stands for Grantor Retained Annuity Trust. It is a trust to which you can transfer assets, receive back an annuity for a specified number of years and thereafter the appreciation of the assets in the GRAT in excess of a federally mandated hurdle rate, inure to the benefit of your children. It’s a great estate tax plan for many well do to folks. As with all planning techniques, a broad perspective considering a range of issues, will server you best.

√ Financial: Which assets should go into which GRAT? How should your overall asset allocation be placed in your GRATs and other trusts (asset location). Should you use single asset class GRATs? Be sure that your wealth manager leads the way with whatever investment strategies are optimal.
√ Term: How long should your GRAT last? A common planning approach has been to use two year GRATs and to re-GRAT the large annuity payments each year. But the Obama administration has proposed 10-year minimum GRATs. So the 2 year re-GRAT’ing game may be in the ninth inning. Should you use a long term GRAT to lock in the current low interest rate hurdles?
√ Legal: State law considerations – should you be in Delaware? How should grantor trust status be structured? How should power to substitute be used?
√ Remainder Beneficiary: If your GRATs succeed, who should get the benefits? If you name children, should their distributions be outright or in trust? Trusts are preferable from a tax, control, safety and flexibility perspectives, but what terms? If the remainder beneficiary is a trust should that trust be a grantor trust after the GRAT term? That would permit you to continue to pay the income tax on trust earnings even though your children are the beneficiaries. That’s a powerful wealth transfer technique! What about naming your insurance trust (ILIT) as remainder beneficiary? That can provide a very tax efficient method to shift dollars into the ILIT without being limited by annual gift tax exclusion amounts. If your ILIT is party to a split-dollar arrangement the GRAT proceeds can be used to tax efficiently rollout (unwind) that arrangement.
√ Accounting: If funded with business or real estate interests rather than stock, proper operation of entities held by the GRAT is essential. Have your CPA review of expenses and deductions on entity to avoid indirect additional contribution to GRAT, maintain records for the trust and monitor payments. If you’ve been earning a $1M salary and cut it to $250,000 and a GRAT owns 50% of the stock in the business that could be viewed by the IRS as an additional gift of $375,000 to the GRAT thereby disqualifying it.
√ Annuity: Some advisers prefer the annuity be paid based on a December 31 year end so that it is due when you’re your April 15 tax return is due. Easier to remember. Some recommend that the annuity be paid based on the anniversary date of the GRAT. But that can be a funky date more easily overlooked. With a two year GRAT basing it on the anniversary date means two annuity payments instead of one. However, if the Obama 10 year GRAT rule is enacted, it would mean 11 instead of 10, not such a big deal. While you can defer the annuity payment until say April 14. Doing so might give you more opportunity to grow assets outside your estate. However, if interest rates are insignificant, or you don’t anticipate market appreciation of other GRAT assets that will be paid out, waiting may actually be detrimental.
√ Insurance: Have your property and casualty insurance consultant review business and real estate transferred to GRATs to assure that they are properly insured. Using life insurance to back stop mortality risk of GRAT is important to evaluate if you use longer term GRATs. While it can be done for a two year GRAT few view the risk as worth addressing. But if the Obama administration 10 year minimum GRAT term is enacted, buying a term policy to backstop your GRAT (if you die before the GRAT ends all the assets are back in your estate) will become commonplace.
√ Trustee: Some wealth managers prefer a domestic trust (formed in your state of residence) with you the grantor as the sole trustee since this simplifies it all, and gets plan in place cheaper. However, your estate planner may prefer an institutional trustee and basing the trust in Delaware, South Dakota, Alaska or another state with favorable laws and taxation.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Roth Tax Tip: A common conversion approach is to divide your IRA into separate IRAs converting each with investments in different asset classes. The ones that don’t appreciate you re-convert to regular IRAs so you don’t have to pay income tax on a unfavorable investment result. Everyone in your foursome converted their IRA to a Roth so you jump on the bandwagon. Check out your State estimated tax payments. If you don’t pay in enough your extension may not be valid. This can be tricky. If you made estimates assuming some IRAs would be reconverted from Roth to regular IRAs, you could void your state extension. Pay estimated state tax as if reconversion isn’t an option

■ Roth Drafting Tip: If you have a large Roth conversion consider amending your durable power of attorney and will to authorize your fiduciaries (agent, executor) to reconvert a Roth back to a regular IRA, or to convert a regular IRA to a Roth. Caution – if the beneficiaries of the IRA (regular or Roth conversion) are different then those receiving gifts under your power, or bequests under your will, clarify how this should be addressed.

■ FICA Taxes: Severance payments made by a bankrupt retailer to employees were not subject to Social Security taxes. Quality Stores (D.C. Mich). The IRS is likely to appeal this pro-taxpayer court ruling so the “jury is still out.” However, it may be advisable for companies to file protective refund claims on Form 843. The statute of limitations (the time period during which a claim can be filed) for 2006 years is almost over (3 years after the due date of tax return). Severance payments refunds may also be available for 2007 and 2008, and you will need to take this new case into consideration for 2009. Thanks Julie Welch, CPA, CFP, of Meara Welch Browne, P.C., Kansas City, MO.

Potpourri ½ Page:
■ Deteriorating Competency: Standard planning is set up and fully fund a revocable trust to manage assets. Consider also setting up a small balance checking account, with an attached credit/debit card, in your own name and outside the trust. If checks are inappropriately written, or the card is lost or stolen, trust assets can’t be reached. This can preserve independence while protecting almost all assets.
■ Annual Meetings versus Consents: Closely held businesses commonly sign unanimous consents in lieu of formal meetings. Consider instead an in-person annual meeting and signed minutes as taxing authorities can be hyper-sensitive about formalities for businesses owned by related parties. A meeting may be viewed as more formal even though annual written consents clearly indicate action by the various entities and are signed by their shareholders/directors.
■ Disability Income Replacement Insurance versus Disability Buyout Insurance: Many lay people are aware of the latter and some–as well as some lawyers– may confuse it with the former. Disability income insurance replaces your earnings if lost due to disability. Disability buyout insurance can be used to fund the repurchase of your equity in a closely held business if you’re disabled. Many closely held businesses purchase life insurance to fund death buyouts, but far fewer address disability insurance to fund a buyout if an equity owner is disabled. Proper planning requires addressing both needs. Thanks Stuart L. Pachman, Esq. of Brach Eichler, Roseland, NJ.
■ Gift tax returns don’t get enough respect. Evaluate whether you should file to elect out of 2009 GST automatic allocation rules. Also, consider filing every year and reporting and disclosing Crummey (annual demand notices). Few CPAs encourage this but it is a great way to run the statute of limitations on Crummey powers. Although nearly ubiquitous in trust planning (most insurance trusts have them) their common usage should not mask the complexity and audit risk they create. To meet the adequate disclosure rules the trust will have to be disclosed to the IRS, crummy powers attached, and perhaps more. Check with your CPA.
■ Lost Wallet. A prior Potpourri snippet suggested that if your wallet is lost or stolen you should report it to the IRS. The reader called the appropriate IRS office and they required a form to be filled out for someone who is a victim of identity theft. For the next 3 years your returns are flagged and your 1040 will be delayed as a human has to look at your taxes rather than a computer. The reader felt this was a bit much to endure. As with all planning, you have to weigh the pros and cons.

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Benjamin Franklin Was Wrong!Summary: Benjamin Franklin penned the famous phrase: “In this world nothing can be said to be certain, except death and taxes.” But Ben, smart as he was, couldn’t conceive of our current Congress! Nothing is certain about taxes any longer. (1) Everyone expects tax rates to rise to cover growing deficits, but what form that takes and when it will happen all remain to be seen; (2) President Obama’s proposed budgets has nasty stuff for wealthy folk endeavoring to plan their estates; and (3) The “Now you see it, now you don’t” estate tax remains in flux. Since you’ve no doubt heard about repeal, possible reinstatement, and carryover basis, we’ll provide a broader discussion of the current estate tax environment and pro-active steps you can take. A recent survey of CPAs said 83% of their clients are taking a “wait and see” approach to the estate tax. Hmmm. Sounds a bit like Nero and the fiddle.

For a detailed 60 page analysis of the impact of estate tax repeal, including sample documentation and more see www.laweasy.com. Subscribers to the electronic version of Practical Planner received this white paper during the first week of January. Sign up and receive future electronic updates and seminar announcements. Just go to www.laweasy.com and input your email address into the green box on the right side “Free Monthly Newsletter.”

Estate Repeal, Well Maybe: Everyone expected, and still expects, Congress to “patch” the estate tax so that in 2010 we’d have the same $3.5 million exclusion and 45% tax rate as in 2009 until Congress decides what to do for the long term. Senate Finance Committee Chairman Baucus and Treasury Secretary Geithner stated that they both support extending the 2009 estate tax rates for 2010 and making the changes retroactive to January 1, 2010. You might know the result by the time you read this, but then again maybe not. Whatever happens, issues and opportunities should be evaluated. Importantly, there are important lessons that everyone should learn from these events. Planning, it seems, should forever more be more flexible.

Obama Budget – Estate Restrictions: In addition to repeal uncertainty, changes proposed in President Obama’s budget create additional concerns. ◙ These include a restriction on Grantor retained annuity trusts (GRATs) commonly used to shift growth in asset values outside your estate. GRATs will have to last a minimum 10 years. This is significant because if you don’t survive the 10 year term the assets will be included in your estate. The addition of this mortality risks will make GRATs, which hare commonly two years under current law, impractical for many seniors. Hug your insurance agent. If you use a 10 year GRAT odds are good that you’ll want to at least consider a 10 year term insurance policy to cover the risk of your dying prematurely. The investment strategies of GRATs will have to change. You can’t immunize a single asset class GRAT with cash and sit on it for a 10 year term, With a 2 year GRAT that was tax-groovy. ◙ Discounts, long the bane of the IRS, and fodder for more cocktail conversations than any other tax topic in history, will be subject to new limitations. The Treasury will issue new regulations specifying restrictions (e.g., in a partnership agreement or state law) that will be ignored in valuing interests in family controlled entities if the ownership interests involved are transferred by bequest or gift to family. These will include interests that can be removed by family members. So if you’re planning a discount move, swing before the window closes. Discount restrictions will take some of the juice out of many tax planning techniques. But don’t despair, grantor trusts are quickly becoming the “new tax normal.” See Practical Planner May 2009. Archives are available on www.shenkmanlaw.com.

Carryover basis Rules: For those dying in 2010 there will be a limited basis step up. Congress effectively created an income tax cost to replace the estate tax. If you die owning a stock you paid $1 for and it is worth $1M under 2009 law, you would pay an estate tax (if your estate exceeded $3.5M) but then the “investment” or “tax basis” in that stock would be increased to $1M value at your death. IRC Sec. 1014. If your kids sold it for $1M they would not pay capital gains tax. Under the 2010 law, unless and until Congress changes it, the basis step up is limited under an arcane set of new rules that ever tax geek hopes they don’t have to learn. These rules are called “carry over basis”. Every estate will get to increase the tax basis in assets owned at death by $1.3M (only $60,000 for non-resident aliens, sorry Sigourney). $3M more can be allocated to increase basis of property received from a deceased spouse. These rules will require substantial recordkeeping by everyone, regardless of the size of your estate, because everyone is potentially subject to income and capital gains taxes. The rules are arcane, even for tax laws! Unlike the fiddling Nero — do something! ◙ Re-title accounts to tenants in common with your spouse. The planning paradigm with the estate tax had been to divide assets 50/50 so whoever checked out first could fund a bypass trust. The new carry over basis paradigm is to divide assets by appreciation. But just like Doublemint gum you can get two, two tax plans in one! Tenants in common gets you the right division under either scenario. ◙ Revise your documents! Yes, you need to. Build in more flexibility, specific powers and instructions on how an executor should divvy up the basis adjustments if they apply, and other goodies discussed below.

Your Will is Probably Wrong: If your will leaves an amount to a trust or children based on the amount that doesn’t create a federal estate tax (a common way to write will language because of the many changes the law has taken over the years) what happens if there is no estate tax? Your dispositive scheme may just go haywire! You need to revise your will to contemplate a world without an estate tax. No tax advisers ever had this scenario in mind on their radar screen. . ◙ Consider appointing an independent fiduciary to address tax decisions while uncertainty reigns. Putting this off won’t help. And even if Congress reinstated the estate tax retroactively yesterday, issues may remain for some time to come. ◙ Include statements clarifying your personal objectives independent of tax considerations. That will help interpret and apply your will regardless of how the tax system is jiggered.

He’s Back – The Return of Freddy Krueger: Everyone is confident Congress will bring back the estate and GST tax. If Congress reinstates the estate and GST taxes but does not make them retroactive what happens during that interim window when there is no estate or GST tax? You may not be able to set up a dynasty trust and make it GST exempt because you may not be able to allocate GST exemption to protect a trust if there is no GST tax. Does that put the freeze on that type of planning until Congress acts? What if you set up a GST exempt trust and Congress retroactively reinstates the GST tax? Will that result in a retroactive allocation of GST exemption to that trust? ◙ Instead of fiddling fund a trust now with a defined value clause to allocate assets among GST exempt and non-exempt trust based on how the law shakes out. ? ◙ If you have a trust that is not exempt from the GST tax but for which grandchildren (“skip people in tax jargon) are beneficiaries, consider distributions now while there is no GST tax. You might be able to make distributions subject to an agreement of the beneficiary to refund the distribution if a GST is retroactively reinstated.

Gift Planning: Make taxable gifts! Yes, you read right! If you’re loaded and on in years or not well, if you make large taxable gifts at the 2010 35% maximum gift tax rate, that could be a whopping savings from incurring the 55% marginal estate tax rate that comes into play in 2011 and later years if Congress does nothing. Also, if you survive 3 years after making the taxable gift, the gift tax you paid is removed from your estate as well as the asset (in tax jargon that’s a net gift). That’s a winner. Just make conforming updates to your living will since you’ll need to survive 3 years after making the taxable gifts to get the gift tax out of your estate. ◙ If you wait for the tax issues to resolve, interest rates might be higher, asset values may be higher and tax planning strategies more limited.

Conclusion: The uncertainty is wild, but so are the roller coasters at Cedar Point. Jump on and have a ride. Waiting will provide certainty, but may also waste valuable planning opportunities.
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Upper-Class Planning

Summary: So the super wealthy can still try to do cool stuff but what about folks that Robin Leach wouldn’t bother with? They can and should still plan, even with uncertainty the rule. Here’s some ideas:
√ Non-tax planning should lead the way. Don’t let the tax tail wag your dog. Estate and financial planning should consider taxes, but truth be told taxes are the ultimate cop out. Minimizing taxes is a safe goal. You don’t have to address the kids that you don’t speak to, the shortfall in your retirement funds, and all that other unpleasant stuff. Whatever happens with the federal estate tax the reality is that only a tiny percentage of estates will ever be taxed. Some estimate only 6,000 estates in 2009 would file estate tax returns when the exclusion was $3.5 million. Not many. So, in the words of Dr. Phil, “Get real” and focus on what’s really important to you.
√ Integrate estate, financial and income tax planning – holistically. ◙ Income tax rates are likely going up – so plan accordingly. Municipal bonds (but consider interest rate risks), more carefully planning to harvest capital gains and losses to minimize tax, charitable gift annuities, tax deferred exchanges of real estate, and other techniques, will all become more popular as rates rise.
Estate tax will get tougher not easier and is pretty unlikely to disappear. ◙ Budgets need to be created, and monitored, as tax and economic conditions continue to evolve. The super-rich folks can make gifts without a thought, but plenty of wealthy people who think they don’t have a care in the world could be spending/gifting themselves into financial worries. Everyone likes a quickie. Multiply your investment assets (leaving off your house, art and bottle cap collection) by 4%. Can you live on that? If you’re laughing, hustle over to your financial planner and get on the wagon. You can’t do an estate plan, make gifts, figure out how much insurance to buy, if you don’t have a handle on your financial picture. ◙ What’s this boring stuff have to do with economic turmoil and tax uncertainty? Everything. Solid broad based planning, monitored regularly, is the key during uncertainty.
√ Life insurance becomes more attractive. Insurance has performed better then some asset classes and should be part of many, perhaps most, plans. If income tax rates rise the tax benefit of insurance provides is more valuable since assets will grow inside the tax advantaged insurance envelope will. Insurance, if it is properly owned by a trust, is outside your estate whatever happens with the estate tax.
√ Asset protection – litigation is always a concern trusts help. Family Limited Partnerships (FLPs) and LLCs. Even if discounts are restricted or repealed FLPs and LLCs are great for control and asset protection. Lawsuits won’t disappear. FLPs will be increasingly used to shift income to lower tax bracket family members if tax rates rise and the spread between the highest to the lowest tax brackets increases. The Code Section 704(e) family partnership rules were enacted long ago to control overly aggressive planning in that regards. Planning around its constraints will come back into focus.
√ 529 plans remain great. Assets are outside your estate, tax favored, etc. You can inexpensively and simply plan for children or grandchildren. If you remain the account owner you can reclaim the assets if economic or tax developments change your situation.
√ Domestic Asset Protection Trusts (DAPT) have become more practical for wealthy, but not super-wealthy folks. Competition has increased among trust companies willing to serve for relatively modest fees to facilitate this planning. You can set up a trust in a slew of states: Delaware, South Dakota, Alaska or Nevada (Dick, we wouldn’t leave out Nevada!). The assets may be removed from your estate to save estate tax, and from the reach of your creditors. PLR 200944002. This is a great technique to consider with so much uncertainty affecting the tax laws and the economy. It was a completed gift even though trustee in the trustee’s discretion could make a distribution to the grantor or grantor’s spouse This is a great maneuver for those with enough wealth to worry about taxes and creditors, but not so much wealth that they can give away tons of it. iv. The open issue is whether this completed gift would be outside grantor’s estate. Some believe that if the gift is complete is should be outside the estate. Other’s are not certain. Does this apply to a non-Alaskan resident? The ruling specifically states that person that created the trust lived in Alaska. See also, PLR 93320065.

Recent Developments Article 1/3 Page [about 18 lines]:
■ CPAs Face Tough Confidentiality Rules. Tough rules restrict CPAs use of tax return information. Treas. Reg. Sec. 301.7216 effective on January 1, 2009. The general rule is that a tax return preparer cannot disclose or use tax return information without first receiving the client’s written consent. So you want to protect yourself from a potential claim of an estate plan gone awry by informing all clients for whom you have addresses of the impact of estate tax repeal. Sure makes sense to do. But hold your horses. Before you trot off consider that the IRS recently issued Revenue Ruling 2010-4 and 2010-5. Love letters they’re not. For you not to be subject to criminal penalties for improper disclosure of client tax return information you have to take precautionary steps. But be careful not to tell the guys around the poker table what old man Jones earned last year is not enough. Yes, the IRS might actually view the names and addresses you extract for mailing your newsletter as constituting tax return data! Consider requesting your printer (and fulfillment house if you use a separate firm) to confirm that they have procedures in place that are consistent with good business practices and designed to maintain the confidentiality of the disclosed tax return information. You should then make a determination that if those procedures are in fact followed the printer will be able to assure the confidentiality of the data. Have your printer acknowledge that it is prohibited from the further use or disclosure of the tax return information (names and addresses) provided to it by you for purposes other than those related to the provision of the printing and mailing of your newsletter.

■ Dukes, the former paramour, claimed that for over a decade she and Fritz resided together and held themselves out as a married couple, with Fritz assuring plaintiff that eventually they would be legally married. They parented two children and share ownership of a residence. They separated in 2006 and Dukes filed a complaint for palimony which was dismissed for failure to prove an underlying promise of “lifetime support”, an indispensable requirement of a palimony claim. Dukes v. Fritz, New Jersey App. Div., Docket No. A-6139-07T36139-07T3, November 17, 2009.
Potpourri ½ Page:
■ S corporation Charades: So your CPA recommended an S corp. instead of an LLC to save payroll taxes. Slick move dude. Like the IRS wouldn’t suspect that. Right? Take a peek at “Report to the Committee on Finance, U.S. Senate TAX GAP Actions Needed to Address Noncompliance with S Corporation Tax Rules.” http://www.gao.gov/new.items/d10195.pdf. Check out this pearl of an excerpt: “Even though a majority of S corporations used paid preparers, 71 percent of those that did were noncompliant.” Got your attention? Now try this one out for size: “Some S corporations also failed to pay adequate wages to shareholders for their labor for the corporation, which led to underpaying employment taxes.”

So what’s the real deal? Determining how much can be distributed from a business without being subject to payroll taxes should be based on an intelligent analysis of the facts. One approach might be to independently determine a reasonable return on the capital in the business and separately to determine a reasonable compensation for the services rendered to the business (considering industry data, comparable prices for others providing similar services, and adjusting for the differences of your particular business). Subtract these from profits. If there’s a difference evaluate a reasonable method to allocate that difference against your estimates for compensation and/or return on capital. You could just take the easy, smart but more costly approach, and hire an appraiser to document the figures. There is a wealth of tax law that can provide guidance as to the factors to consider in any analysis. Reasonable compensation is a permitted deduction under Code Section 162(a)(1). The determination should be based on the facts and circumstances of each case. Treas. Reg. 1.162-7(b)(3). Factors might include: ◙ The employee’s role and contribution. ◙ How the employee’s compensation compares with similar employees of other businesses. ◙ The nature and financial condition of the corporation. ◙ Dividend payment history of the corporation. ◙ Compensation to other employees relative to their work load and responsibility and the internal consistency of the compensation for the employee in question. Mayson Mfg. Co. v. Commr., 38 AFTR 1028 (178 F.2d 115), 11/17/1949.

The one thing that you really shouldn’t do is simply set up your business as an S corporation and assume, as your CPA may have told you, that you can just treat some modest amount as wages, and take the bulk out as an S corporation distribution not subject to payroll taxes. Superficial assumptions might lead to not so superficial penalties!

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Lead Article Title: Maximize Legal Fees and Family StrifeSummary: At a panel discussion for the NYS Foundation for Accounting Education conference all five panelists, led by the famed Sid Kess. and including Daniel Daniels, Esq. of Wiggin and Dana, LLP, James F. Kelly, Esq., of Davidson, Dawson & Clark, LLP, and Steven Siegel, Esq. of the Siegel Group, all complained that few clients heed their advice on planning. But hey, why should clients listen! Ignoring the advice of your advisers is the best way to maximize professional fees, and assure the most family strife. So if that’s what you want to do …. Fine! “We talk to clients until we’re blue and they rarely listen,” lamented Steven Siegel, Esq. So, here’s a checklist of tips to maximize the problems your family and loved ones will face gleaned from the panel discussion:

Outdated Bypass Trust: Don’t update your will merely because its 10 years old. The old formula could trigger state estate tax on the death of the first spouse. More than a score of states use an estate tax exclusion lower then the federal amount (now $3.5M) so that distributing the federal exemption amount will trigger state tax. An old will that distributes the federal exclusion amount to kids could now distribute far more than intended, perhaps your entire estate, to kids from a prior marriage instead of providing for your spouse. When your old will was done the federal exclusion might have been $1M, the increase to the current $3.5M could disrupt your entire plan.

Ignore Spousal Right of Election: State laws provide a right to a surviving spouse to demand a specified portion of a deceased spouse’s estate, regardless of the will providing for less. Ignore your lawyer’s advice to obtain a formal waiver from your spouse of his/her spousal right of election. Leave the door open for your spouse to undermine your entire dispositive scheme. The family business you wanted to go to your daughter whose been running it? Your fourth husband might instead walk off with a piece.

Qualified Personal Residence Trust (QPRT): QPRT is a special trust used to leverage a gift of your house to your children. You can live in the house during the QPRT term. When the trust ends don’t bother leasing the house, signing a lease or paying rent. That requires legal fees. Be penny wise and pound foolish. It’s better to make the IRS’ job easier to prove you had a life estate in the house so that they can tax it in your estate and nix the QPRT plan.

Skip Annual Gifts: You can make annual gifts of $13,000/per donee/per year and in addition pay tuition or medical expenses directly yearly. That is too simple. Instead, wait until health issues make tax planning urgent. Then it will be more difficult, risky and costly to reduce your estate.

Don’t Consider Tax Allocation: Don’t worry which beneficiary pays estate tax. With a marginal state and federal tax cost of possibly more than 50% taxes may be the biggest factor in determining who nets what. Rely instead on whatever boilerplate happens to be in your will. Even better, print a cheap will off the internet that could not possibly address this issue. Be like Alfred E. Neuman … “What, me worry?” Just don’t get mad at your estate planner when the tax dollars hit the fan!

Leave Charity A Percentage Bequest: Leave a percentage of your estate to a charity, not a fixed dollar amount. The state attorney general (AG) will have to get involved. You’ll pit the charity against your heirs. The charity’s board has a fiduciary obligation to protect the charity. The more your assets are valued at the more the charity gets. Your heirs will want to value estate assets as low as permissible to minimize estate tax. The ensuing disputes will assure more costs and angst.

Don’t Review Regularly: Don’t meet with your planners annually. Why keep your plan current and catch loose ends. Better to wait until your health or competency deteriorates to the point where planning is impossible. Keep meetings years enough apart to assure your attorney can hardly remember you. That will make planning really efficient, no continuity. But hey, you’ve saved the cost of all those annual updates.

Divorced – Don’t Change Plan Beneficiaries: The divorce agreement covers it all. Right? Wrong, so leave your miserable ex as the beneficiary under your profit sharing plan. Focus on your new paramour not protecting your desired heirs.

Ignore Citizenship: Gifts to a non-citizen spouse are limited, and there is no estate tax marital deduction without a special trust called a Qualified Domestic Trust (QDOT), but hey, save money and have the attorney who did your house closing draft a form will because it’s cheaper.

Simple Will: Why complicate matters, get a 3 page will. Don’t worry that it won’t address most issues and will result in a complex and costly probate process. You want it simple now, not simple later when it really counts. But hey, you can believe you’re right because the costs and problems will occur when you’re no longer here to know.

No will: The only thing better than an overly simple will to maximize costs and problems is no will. Kids from prior marriage not your current spouse may walk with money you wanted your. The state will distribute your assets as law provides, which is unlikely what you want. A court might appoint Attila the Hun as guardian of your beautiful kid. But think of the legal fees you’ll save!

Disclaimer Plan: Don’t worry whether your plan is practical, just make sure it’s simple and cheap. Given all the uncertainty concerning the estate tax, and the complexity, just give your surviving spouse the right to determine how much of his/her inheritance will go into a tax advantaged bypass trust. Practitioners only see 5-20% of surviving spouses ever address this. So while it sounds good, it’s generally not effective. That will assure less control, more tax and more problems.

Rely on a Safe Deposit Box: Stuff everything important in a safe deposit box so that you increase the chance of needing court proceeding to access the will and other key documents. That will maximize stress and probate costs. Better yet put the only living will in your box so that all decisions concerning end of life and funeral will have to be made in the dark.

Advisers Shouldn’t Meet: Too expensive to have all those folks billing hourly at the same table. You’re right. It’s better that your plan not be coordinated. Why should your accountant review harvesting gains and losses before year end with your wealth manager, or your attorney assure that the corporate kit for the family S corporation be consistent with what your CPA reflects on the 1120-S K-1s and what your will says. Save money. Don’t coordinate.

Bank Teller Does your Planning: You’ve changed wealth managers and banks in light of lousy performance (supposedly 70% of investors have done this in the past year) but in the move all the accounts that were carefully titled by your estate planner to conform with your plan morph into joint ownership circumventing your will and undermining all your planning. That’s OK, rely on the clerk at the new bank or brokerage firm to make these determinations.

Neglect Complex Blended Family: Even if your family tree is as complex as a Banyan tree don’t worry about the implications to your estate plan. Don’t have a will detailing all persons to be included and excluded and clarifying family relationships. And certainly don’t use a revocable trust to minimize probate complexities your complex family structure will cause. Be sure to use standard beneficiary designations that cannot encompass the range of people involved.

Name Uncle Harry as Executor: Don’t name an institution or someone with the real qualifications to be fiduciary. Pick your poker buddy or someone who doesn’t get along with your heirs. That will assure more fireworks. Name your son-in-law without addressing what happens in the event of divorce.

KISS The Guardian and Trustee: Keep it Simple Stupid. Why name multiple fiduciaries so that you have check and balances. Name the same person to wear multiple hats. This is great to increase the likelihood of mismanagement, theft or worse. If the guardian is the trustee who can sue who if there is a problem?

Beneficiary Designations Don’t Send them to Your Planner: Change them each time you change accounts and don’t show your planner. These documents govern distribution of retirement assets, insurance, etc. not your will. So you can easily undermine your entire plan by handling them wrong and your planner’s recommendations are likely to be incorrect if he/she has incorrect information.

Remarriage: Don’t bother with trusts, they’re costly and complicated to operate. It’s better to have your 4th spouse run off with the assets you intended your children to eventually inherit.

Joint Accounts: Don’t do a revocable trust as you age, just title all accounts as joint with the kids. This will almost assure that monies won’t be divided as you wish on death since you cannot predict which accounts what will be spent from. That’s always good for a family fight. If the child is sued, divorced or dies first, your simple joint account approach will assure a battle with the claimant, ex-spouse or IRS as to who really owned the account.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Disability Ins. 2

Summary: Last month’s checklist began addressing claims under disability income insurance, business overhead insurance and perhaps disability buyout insurance. This month will provide a few more tips and discuss steps those struggling with their disability companies, and their advisers, can take. Reporters interested in exploring what appears to be a rather significant problem are provided great sources at the end of this checklist.

√ Authorizations. Don’t provide the carrier with an open ended authorization to obtain whatever information they wants. Some authorizations are unreasonably broad. Instead endeavor to reasonably limit authorizations to what is appropriate and necessary. The business overhead carrier will need different information than the disability income carrier. Revoke existing authorizations if they are too broad or are being abused. Ask for copies of all documents obtained on your matter from the insurance company. If they won’t confirm what documents they requested inquire in writing why. Remind them that financial and other confidential information about you should not re-disclosed to the extent feasible (certain data may have to be).
√ Physician Calls. Your physician will get a “peer to peer” call. They might be really busy and not focused if the call comes during the middle of their office hours. This is the same issue as with emails above. Quick answers may just be wrong. If your physician states something incorrectly it could be used to undermine your entire case. Then the insurance company can deny your claim. Consider restricting your physician to only releasing selected data and not speaking on the phone. This should be noted prominently on your patient file.
√ Symptom Worksheet. Prepare a symptoms work sheet and fill it out and provide it to your physician at each visit. Your physician may not have adequate time during a routine office exam to record this level of detail and the insurance carriers may need detail to make determinations. A quick comment in your chart like “stable” might be so general and vague that it is simply inaccurate. But it could be a basis to deny your claim.
√ Remember Home Mortgage Securitization? So you bought a policy from an insurance company with a household name. You pay premiums for years relying on the reputation of the company in case you need ‘em. Years later when you file a claim you learn that the well known company sold your policy (they’ll call it “reinsured”) to a Chinese company who hired a private US company to administer it. When the name brand insurer has no interest in your policy, will it really be administered in the manner you anticipated when you purchased it? Even your agent may have no clue what has transpired. Hasn’t the fundamental nature of the agreement made when you purchased the policy been violated? Some type of disclosure standard, at minimum, should be considered to address this.
√ Monitoring or Pressuring. If you have a progressive chronic illness what purpose is served by a disability company continually requesting reports from your neurologist? Chronic progressive illnesses don’t improve. While one can understand the desire for periodic updates at a reasonable interval, does a substantial increase in requests for data occurring at the same time you have a dispute with the insurer, or are negotiating a buyout, suggest something inappropriate? Reasonable regulation of this process should do nothing to harm insurers protecting their legitimate interests, but it might well give the struggling disabled some protection. How about a recent add directed to the disability insurance industry: “Do you know what your claimants are doing around the upcoming holidays? Find out now at a discounted price. Capture that active claimant on video! An all-inclusive day of surveillance for a low flat rate of: $499.”
√ How to Buy Disability Coverage. If you’re in the market for buying disability coverage, do it right. Most folks focus on premium costs. You’re not buying hamburger! The real shopping you should do is to pick the right agent. Get an agent that really knows the product, and who will stick with you and help you if you have issues later. That’s the smart way to shop.
√ Few Options. What does it mean when a nationally known insurance consultant doesn’t want to bother filing a claim for obviously incorrect actions by a disability insurance carrier with the state insurance commission because he knows nothing will be done? When industry leaders are so jaded another approach is called for.
√ Join the Task Force. The Insurance and Financial Planning Committee of the RPTE Section of the American Bar Association is organizing a task force to explore disability insurance issues, with an emphasis on developing goals and framework for possible state legislation and regulations. One perceived problem is the lack of transparency in the operations of this industry, and the need for consumer oriented regulation. An end product might be a white paper that will be presented to NCCUSL to initiate the process of drafting a uniform law. For info contact David S. Neufeld, Esq. 609-919-0919, David@DavidNeufeldLaw.com
√ Reporters. Reporters seeking more information on these issues should contact: ■ Jennifer Jaff, Esq., Advocacy for Patients with Chronic Illness, Inc., (860) 674-1370, patient_advocate@sbcglobal.net ■ Bonny G. Rafel, Esq. Livingston, New Jersey (973) 716-0888 brafel@disabilitycounsel.com .
Recent Developments Article 1/3 Page [about 18 lines]:
■ Tax Losses. Businesses May Take Advantage Of Expanded Loss Carryback Option Under New IRS Procedure IR-2009-105 and Rev. Proc. 2009-52. You can elect under IRC Sec. 172(b)(1)(H) to carry back a net operating loss (NOL) for 3, 4 or 5 years, or a loss from operations for 4 or 5 years, against income in those years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year.
■ Estate Tax. H.R. 4154 would make permanent the current estate tax rate of 45% and the non-inflation indexed exemption of $3.5 million. This means $7 million for couples with proper planning (so you still need to hug your estate planner!). If nothing is done the rate would fall to zero in 2010 and resume 55% in 2011. Compared to the $1M 55% system that existed not so many years ago, this will cost the federal fisc $234 billion! Bottom line, stop ignoring the estate tax and go plan. See the lead article for more reasons why!
■ 2010 Standard Mileage Rates: In 1/1/2010 the standard auto mileage rate will be 50 cents per mile for business purposes, 16.5 cents per mile driven for medical or moving purposes, and 14 cents per mile for charitable purposes. News Release IR-2009-111 and Rev. Proc. 2009-54, 2009-51 IRB.
■ S Corporation: Tough rules govern who can be an S corporation shareholder. Regular IRAs can’t. Rev. Rul 92-73. Don’t get cute, Roth IRAs can’t either! Taproot Administrative Services, Inc. v. Commr., 133 T.C. No. 9 (2009).
■ Grantor Trusts With a Twist: You might be able to structure a trust where the beneficiary, not the settlor setting up the trust, is treated as the grantor for income tax purposes. PLR 200949012. Cool stuff. Dad may be able to set up such a trust for Doctor Daughter so she can sell exposed assets to the trust and achieve asset protection.

Potpourri ½ Page:
■ Roth Conversion Errata. Nov 09 Practical Planner typo. The text incorrectly reads: “be reported 1/2 in 2000 and 1/2 in 2012” should have been “½ in 2011 and ½ in 2012”.
■ Password Encryption. Organizing and protecting passwords, and assuring they are identifiable in the event of disability or death is becoming a more important disability and estate planning step. Consider “KeePass,” homepage http://keepass.info. Thanks to Lynn H Lander.
■ Name a Guardian. If you’re disabled your power of attorney and health proxy will protect you. But what if a court has t appoint a guardian? Who should it select? Make your wishes known now in a guardian designation. For example CT law, § 45a-645, permits you to name your own conservator for future incapacity. You have to be age 18 and of sound mind. You can designate the persons whom you desire to be appointed as conservator of your person, your estate, or both, if you are later found to be incapable of managing your affairs or incapable of caring for yourself. The designation shall be executed, witnessed and revoked in the same formality as required for a will.
■ Tenants in Common (TIC) Accounts. Instead of setting up separate husband/wife brokerage accounts to divide asset to fund a bypass trust you can simplify by having one account titled as TIC. While this can meet the estate tax objectives one Social Security number is on the account. So if that spouse’s Social Security number is caught up in an identity theft mess you may not have access to the entire account while the issue is resolved. TICs might be simpler, but not necessarily better.
■ Estate Tax. ◙ Since it ain’t going away, take action. ◙ Structure irrevocable trusts as grantor trusts. With estate tax likely to be permanent and income tax rates also like to rise this is a great play since the grantor, say mom, can pay tax on trust income growing outside her estate. ◙ Reconsider permanent insurance. Whole life policies have out performed some portfolios over the last decade, the income tax benefits will be more valuable as income tax rates rise, and if owned by an insurance trust its a great estate planning play since repeal of the estate tax is almost assuredly off the table. ◙ Use split dollar arrangements to fund the payment of insurance premiums if you need to use annual gifts to help out heirs hurt by the recession. ◙ Family Limited Partnerships (FLPs) can still be great. Even if discounts are repealed they provide for control and asset protection. Lawsuits won’t disappear. FLPs will be increasingly used to shift income to lower tax bracket family members if income tax rates rise.
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Roth IRA ConversionsRoth IRA ConversionsSummary: To convert or not to convert, that is the question. Many websites, and even some advisers use simplistic calculators, that don’t do the decision justice. Others use modeling so sophisticated they could be mistaken for space shuttle algorithms. While some advisers bring nearly religious zeal to their views, the realities are that for some taxpayers the answer is obvious, for some a coin toss (not as cool as the slick models, but perhaps as effective of an analysis for many). We’ll try to demystify the issue with some background. Then we’ll try to help you identify whether you seem to be pretty obviously in the convert or not convert camp. For those in the gray zone in between we’ll try to give you some pointers to discuss with your advisers. In the end the Solomon-like approach of splitting the baby might just be the most prudent approach for the gray zone.

What’s the Deal?

Roth IRA’s are cool: ◙ All growth is tax-exempt. ◙ There are no minimum distributions required at age 70½ as exist for regular IRAs. That’s big since the assets can continue to compound tax free which enhances the Roth asset growth prospects (hopefully enough to cover the tax paid and then some) and possibly creditor protected. ◙ If your modified adjusted gross income (MAGI) exceeds $100,000 you cannot convert your regular IRA to a Roth but in 2010 that limit disappears. ◙ If you convert in 2010 the income tax due can be spread out over two years. You can elect out of this deferral and pay all the income tax in 2010 if that proves advantageous (e.g., large rise in future tax rates). Election has to be made by 10/15/11, on an extended return. Hedge your bets and extend.

Favoring Conversion

For conversion to make sense some of the following should be present: ◙ Future tax rates are higher than the rate you pay now when you convert. This creates a positive tax arbitrage. Rising rates seem like a Wilt the Stilt slam dunk…how could they not? ◙ You have significant tax attributes are available to offset the current income tax triggered (e.g, charitable contribution carryovers, investment credit carry-forwards, “Madoff-type” carryovers). ◙ Post-conversion Roth IRA funds will almost assuredly not be needed to support living costs for a long time if ever, so that the assets can remain invested to compound tax free to be bequeathed to your heirs. This is a key question which requires an analysis of your cash flow, assets and “burn-rate” (spending). If you’ll bequeath your Roth to a properly designed generation skipping tax (GST) exempt trust you grandchildren may be able to withdraw Roth IRA money over their life expectancies. That’s lots of years of income tax free growing. ◙ Adequate cash resources outside of IRA plans are available to pay the income tax due on conversion.

Asset Protection

Asset protection worries might make conversion a great deal if your post-conversion Roth will be protected under state creditor protection laws from claimants. Conversion could present an opportunity to convert a regular IRA to a Roth IRA, and using outside funds to pay the tax, you have effectively taken 60-cent dollars that are protected inside a regular IRA, and turned them into 100-cent dollars that are protected inside the resulting Roth IRA, and eliminated a non-protected asset by using it to pay the income tax on conversion. You can also continue making contributions to your Roth IRA after age 70½ and never have to withdraw from it. That leaves Roth dollars snug and safe. In contrast you cannot contribute to a regular IRA after 70 ½ and you have to take out minimum required distributions (MRDs) each year.

Other Factors

To get it right many variables need to be factored into your analysis. ◙ What will your post-conversion investment rate of return be? ◙ Is there a tax bracket arbitrage available? For example, if you’re terminally ill it might pay to convert while married filing joint at a lower tax rate than your surviving spouse will have if she takes distributions out of a taxable IRA at a single person’s tax bracket after your death. Arbitrage can be negative if converting pushes you from a current low bracket into a higher tax bracket. ◙ Will the government directly or indirectly taxing Roth dollars (e.g., via phase outs of other tax benefits based on Roth balances or withdrawals, etc.)? If the federal fisc remains hungry in decades to come most anything might be possible. ◙ What financial needs for health or other emergencies might cause Roth funds to be tapped before anticipated? ◙ Can you really model these factors? How can you guesstimate how the government may change the tax rules applicable to well to do taxpayers, yet alone guesstimate the percentage likelihood of such changes?. ◙ If you convert the tax you pay will be removed from your estate possibly lowering your estate tax. ◙ If you split the baby and only convert say ½ your IRA, perhaps you should first split the IRA into parts, say a bond part and equity part. Then convert the equity part only which has more likelihood of appreciation then the bond part.

Estate Tax and 691(c)

What’s the estate tax consequence of Roth versus not? Some background first. ◙ Your IRA is included in your taxable estate and could be subject it to a 45% estate tax. ◙ Since a regular IRA represents income that has not been subjected to income tax (ignoring non-deductible contributions), this is called “income in respect of a decedent” (IRD). IRD is subject to income tax as your heirs receive it. So the 55% left after the estate tax bite gets bitten again with a 35% income tax rate (which will likely increase in the future). Ouch! ◙ The double tax whammy is mitigated by an income tax deduction for the federal estate tax paid. Code Sec. 691(c). This is not a perfect offset. ◙ If you’re in a state that has an estate tax there is no offset for state estate taxes paid. ◙ The beneficiary paying the tax might not be the one inheriting the IRA and getting the benefit. ◙ The IRD deduction may be subject to phase out of deductions under Code Section 68 reducing the benefit. So, it might be a better deal to die Roth’d.

How to Convert

◙ If conversion still seems plausible after the initial evaluation review timing of tax payments with your CPA. You can pay all at once or spread the payments. ◙ Consider whether you can divide your IRA into separate IRAs by asset class and convert each asset class IRA separately. That way, if a particular asset class IRA declines in value before the extended due date for the return, you can un-convert (recharacterize) it and avoid the tax. So if you convert 1/1/10 right after the ball drops in Times Square, you can hold your tax breath until 10/15/11 to decide. That’s a 21 ½ month looky looky. Why pay income tax to convert a looser? Be wary that the IRS and/or Congress may get hip to this jig and try to kibosh it. They’re trying to do just that with zeroed out short term GRATs that similarly present a “head you wins, tails try again” paradigm. If you un-convert you have to wait 30 days before trying again. ◙ Review estimated tax payment requirements with your CPA.

Qualified Plans

If your child is your qualified retirement plan beneficiary she can direct your plan directly from the qualified retirement plan to either a: (1) Roth IRA; or (2) Non-spousal beneficiary regular IRA rollover IRA. However, once the qualified plan has been rolled into a regular IRA it cannot thereafter be converted to a Roth IRA. Caution – if you rolled an ERISA plan into a regular IRA and now Roth it some experts worry this might taint the protection you had under the Bankruptcy Protection Act.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Disability Issues

Summary: Professionals and business owners are often admonished to purchase disability income insurance to replace the income lost if they become sick or disabled, business overhead insurance to keep their practice afloat, and perhaps disability buyout insurance to fund the buyout of a disabled partner. So you’ve paid all 3 premiums dutifully for years and unfortunately suffer a debilitating illness which derails your career, dreams, and worse. The process of collecting on these can prove daunting.

√ Just diagnosed? Get someone not emotionally vested to shepherd you through the process. If you’re dealing with the emotional trauma of a new diagnosis or injury you need someone methodical and objective to deal with what might be several independent insurance companies. The paperwork can be voluminous. The technical issues (medical, tax, legal) may be complex. If your hands are full dealing with treatment plans, rehab, etc. get help. Paying for your accountant and a disability attorney to handle the submissions will cost a bit up front but can avoid tremendous difficulties. As a layperson, your imprecise use of terminology could delay or derail your case. You need to make sure the facts are appropriately and clearly presented.
√ Your planning should have involved more than just a disability income policy. You should have had an exit strategy from your business or professional practice. Don’t defer selling or transitioning your practice or business for too long if you’ll have to do so. If you run it into the ground there will be little to sell. If you have buy sell and other business agreements in place get your accountant and corporate attorney on the case as quickly as possible as there may be critical deadlines.
√ If you have a business overhead policy it should protect you if you cannot work full time. These policies are sold to help cover your fixed costs, like rent. You may have to prove partial or total disability to collect on them. You also have to corroborate the expenses you are incurring. Often these are geared to expenses that are deductible for tax purposes. It can be good as gap insurance while slowing down. The definitions and calculations may differ from those under your disability income policy. Again, the concepts are likely to be technical and the paperwork substantial. Consider involving your accountant. If you are totally disabled and close down your practice or business the coverage may prove ephemeral.
√ Try to be consistent with what you report to your business overhead insurer, disability company, the IRS, credit and mortgage applications, etc. The insurance companies will get access to all these documents. Consistency, unfortunately, is probably impossible given the different definitions and purposes of the financial and tax reporting you might be involved in. The confusion can be substantial and differences may have to be reconciled.
√ Your disability income company wants to know quality and nature of your work. They need to determine how you derive your income (e.g., surgery, office hours, lecturing). The quality and quantity of work you do defines the “duties of your occupation.” This might require some fancy cost accounting analysis that no one had ever focused on before.
√ Working while you are disabled, especially at earlier stages of a progressive illness, is common. You want to maintain normalcy as long as possible. Your business overhead coverage may be a huge help if you’re only partially cutting back. But be wary, disability income insurance companies may view your working initially as an indication that you can continue to work even though you’re sick. This could shift the dynamic to you if you cut back further in the future, or cease working, to demonstrate that even though you previously worked with the disability you can no longer do so. You may have to demonstrate a new development that has created the new change (e.g., no available job with the necessary accommodations, a worsening of your condition).
√ Be carefully about sending Emails. It’s too easy to hit that [send]. Instead write a Word document and attach it so you can review it make certain that the facts are listed correctly. If there are tax or accounting issues, have your CPA review it. If there are policy definition issues, consult with your agent. Have a disability attorney review everything before it is sent.

Recent Developments Article 1/3 Page [about 18 lines]:
■ RMD: You won’t have to take a distribution from your IRA for 2009 because the Required Minimum Distributions (RMDs) have been suspended for this year only. In Notice 2009-82, 2009-41 I.R.B. 491 the IRS addressed a number of issues created by the waiver of 2009 RMDs. Because these rule changes were enacted so late in the year, the IRS has provided some leniency to taxpayers. The IRS won’t consider a plan to have failed to be operated according to its terms merely because, between 1/1/2009 and 11/30/2009, 2009 RMDs were or were not made, beneficiaries weren’t given option of not receiving distributions that included 2009 RMDs, or direct rollover option was or wasn’t offered for 2009 RMDs. For taxpayers who have already received 2009 RMDs, the IRS extended the normal 60-day rollover period so that it doesn’t end before 11/30/2009. Thanks to Charles C. Shulman, Esq. Teaneck, NJ.
■ Innocent Spouse Relief: When spouses file a joint income tax return they are both jointly and severally on the hook for any tax. If certain requirements are met one spouse might qualify for relief from the tax attributable to the other spouse under IRC Sec. 6015: ◙ H&W filed a joint return; ◙ There was an understatement of tax due to an erroneous item of H; ◙ W didn’t know, and had no reason to know, of H’s understatement; ◙ It’s inequitable to hold W liable for the tax based on all the facts and circumstances; and ◙ W elects innocent spouse relief within two years of the IRS beginning collection. Linda Bruen , TC Memo 2009-249 (Tax Ct.)

■ Expatriates: Benjamin Franklin uttered the famous phrase in 1817: “In this world nothing can be said to be certain, except death and taxes.” Well expatriating to avoid the taxes probably won’t work either. In Notice 2009-85 the IRS explained the new Code Sec. 877A mark-to-market exit tax enacted as part of the “Heroes Earnings Assistance and Relief Tax Act” (HEART) in 2008. The tax can be on the unrealized appreciation of those assets over $600,000 (inflation indexed). If you receive a gift or bequest from an expatriate on or after June 17, 2008 you may face a tax under Code Sec. 2801 at the highest marginal gift or estate tax rate on the fair value of the property. But since the Notice was only 65 pages long it only addressed the 877A provisions, you’ll have to wait guidance on the 2801 rules.
Potpourri ½ Page:
■ What to do with Some Spare Cash: Tax refund, property finally sold, big birthday gift, what should you do with the dough?: ◙ Buy term life insurance. Everyone’s savings and retirement plans and house values have been hammered. If you get hit by a bus tomorrow will your family make it? Buy at least a 10 year term policy to supplement your family’s savings until your asset values regain former ground to support them. And since the estate tax looks long lived, you might just opt for a more comprehensive revision of your insurance plan. ◙ Consult with a fee only financial planner. They are objective. Everyone’s finances and planning has been put through the mill. Spend a few buck to get an objective non-sales compensated expert to look at your estate plan, investments, retirement planning, and get you back on track. ◙ Pay down costly debt. Some folks still have credit card and other debt that is accruing interest at high rates. Line up all your bills and pay off the most costly first. If you are at risk of not being able to pay off your debts, call up your creditors and tell them how much debt you have and what cash you have and offer to strike a deal. Some may be very willing to cut what you owe to get paid. If you can selectively do this you might get yourself “out from under” a lot of pressure for a lot less money than you thought you needed, and back on track to rebuilding. ◙ Put it away for that rainy day fund mom always warned you to have but which many people forgot about. Sorry mom! Many investors were really hurt by the market declines because they did not have a cash reserve to fall back on. As a result they had to liquidate stocks and missed out on the 50% recent run up in the market.
■ ID Theft. If your wallet was lost or stolen, report to it immediately to the IRS ID Theft Unit 800-908-4490. Your account will be flagged immediately. So if the “bad guy” makes any filing or refund request under your name or Social Security number it will be flagged and the IRS will contact you before taking any action.
■ Money Service Business. You thought an MSB meant a bank! A hotel, corner grocery store selling money orders and other businesses can be ensnared by the tough anti-money laundering compliance program. Your business needs a policy and procedures appropriate to the size and sophistication of the business. MSBs must register with FINCEN as money service business and renew by the end of second year from the initial registration. Maintain check cashing activity logs. Transactions over $10,000 must be reported. The penalties for non-compliance are huge! For info see www.fincen.gov go to MSB link, or www.irs.gov and click to MSB info. Center.
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Lead Article Title: Stop Heir Loss with Estate Planning Propecia – Part 2Summary: Markets down, house value down…counting on that inheritance to make the gap? Then the heir loss prevention tips for last month and below will help you avoid getting scalped. Don’t count on throwing Momma from the train in 2010, it’s pretty unlikely the estate tax will disappear. So if you want to maintain that trust fund baby lifestyle, consider the following.

Mom’s Investment Horizon
So mom has CDs at 50 different banks (and lots of toasters). For her, investment risk means a lower CD rate. “While staying conservative might make sense for mom’s core portfolio that supports her daily living expenses, its really not necessary or appropriate for assets she won’t spend down,” suggests Ted Sarenski, CPA, PFS, DB&AB Financial Services, LLC. If mom’s planner can determine the principal to assure mom’s living expenses to say 95% of life expectancy, the remaining principal can be invested with a more appropriate asset allocation without jeopardizing her safety, peace of mind, or your Tuesday night meatloaf dinner. “You can get a pretty good handle on what her life expectancy really is by getting a life expectancy analysis (LE) from a number of independent companies,” recommends Susan J. Bruno, CPA, PFS of Beacon Wealth Consulting, LLC.

Ownership (Title) to Assets
How do your parents own their assets? This may control the ultimate distribution of assets regardless of what their will says. ◙ Adding “joint tenants” on the name of a bank statement or stock certificate can dramatically change who will receive an account following a parent’s death. ◙ If personal assets (e.g. jewelry) are held in a safe-deposit box, the legal presumption is that the owner of the box owns the assets. ◙ Distinguish “joint tenancy” from “tenants in common”, where each person owns an undivided interest in the property. On the death of a joint tenant, the survivor obtains ownership of the entire property. On the death of a tenant in common, the deceased person’s will governs where ownership of his interest in the property will be distributed.

◙ Community property can be an issue. Generally all property that a husband and wife acquire during their marriage while they are domiciled in one of the community property states belongs to each of them. If one of your parents remarries and lives with the new spouse in a community property state, these rules could have a huge effect on what you may ultimately inherit. The rule in community property states is “share and share alike.” They share not only in the physical property acquired but also in the income from the property and their salaries, wages, and other compensation for services. At the same time, each may have separate property. Spouses may also hold property between them in joint tenancy and generally may adjust their community and separate property between themselves (i.e., use a transmutation agreement).

Unique Problems Raised by Personal Property
Jewelry, art, and other personal property can raise a host of issues. Often these assets have tremendous sentimental value so that improper distribution can lead to fueds. If your parents will let you address the topic with them, there are a host of issues you should help them focus on ways you can help them on to assure that their wishes are carried out. What is Aunt Nellie’s wedding band worth? Valuing personal assets is often a very difficult task. When the value is largely sentimental, the task becomes impossible. This should be carefully considered by your Your parents should consider this carefully in determining how to handle personal property. Often, the best solution is for your parents them to specifically identify which asset should be given to which heir. A personal letter or note may be helpful in this regard. If your parents or other benefactor lists each item of personal property in their wills, the distribution of those items, as they have specified, will be assured. Well maybe.

Sample Clause: I give devise and bequeath my wedding band to my favorite nephew, Joseph Fordham. And exactly which Aunt Nellie’s wedding band exactly which one was she Aunt Nellie referring to? The one from her first or her sixth marriage? Which one was actually bequeathed? The case of the disappearing broach. Personal property is often tough to track.

Case Study: The case of the disappearing broach. Aunt Gertrude bequeathed her diamond broach to a particular niece Joanne. Her other assets were generally divided up by specific bequests as well. —$50,000 to one nephew, $75,000 to another, and so on. However, went when Aunt Gertrude died, no one, not even the executor, could find a diamond broach among her belongings. There were no letters indicating that she gave it away before she died. It wasn’t was not listed in any insurance policy. There were No claims had been filed for its loss or theft. Joanne really wanted the broach. The more she wanted it, the more the value of the broach seemed to soar. Aunt Gertrude’s executor couldn’t could not prove it was missing. How do you prove a negative? The ensuing legal battle, which ultimately was settled for $10,000 paid from the estate to Joanne, probably cost the family $25,000 in combined legal fees, and fractured the family relationships beyond repair.

Will Challenges
What happens when cousin Sue sues? ◙ Planning for a will challenge should begin with your parents’ first estate estate-planning meeting, not after a lawsuit has been filed following their deaths. ◙ Expect your parent’s will be to be challenged if they leave a disproportionate amount to one beneficiary. ◙ Dissuade angry relatives from challenging your parent’s will in court by having your parent’s sign another will a few months later. Each new will revokes the prior will. But if a later will is invalidated (e.g, proven to be signed under duress), the prior will is reinstated and governs. So if relatives feel they were treated unfairly challenge the last will and they succeed in overturning it, then the prior will, which is identical as to the major distributions is reinstated. They’d have to successfully overturn that prior will as well! Each successive will should add some change, e.g. $1,000 to a new charity, to demonstrate that they reviewed and reconsidered the will, but did not change the primary distribution provisions. ◙ Several similar wills over a long time period will show a court that they did not write up a new will or change your their intentions on a whim.

Insure Against Mom’s New Spouse

So when mom marries the pool boy, insure that your inheritance will be protected. When mom’s new spouse is younger than you, suggest (very politely!) that Mom purchase a life insurance policy to fund your inheritance if she wants to leave most of her assets to her new hubby. While advisers often recommend a QTIP trust for the new spouse, if the new spouse is younger than you, you’ll be using the inheritance when the QTIP ends for dentures and Centrum Silver. “Consider a guaranteed universal life insurance policy on mom to insure that you’ll get an inheritance on mom’s death, not when the young pool boy eventually dies. This also gives mom the ability to plan with no constraints. A simpler solution for all,” suggests Susan J. Bruno, CPA, PFS of Beacon Wealth Consulting, LLC.

Mom’s Nuptial Agreement

If mom is going to remarry, encourage her to sign a prenuptial as the first line of defense in protecting her assets from later marital claims. Points mom should consider: ◙ Mom and her prospective spouse should each be represented by independent attorneys. ◙ The agreement should be signed in advance of the marriage (not on Mom’s way down the aisle, —the longer before the marriage the better). ◙ The agreement should be signed, witnessed, and notarized with the same formality used for a deed for real estate. ◙ Mom must make full and clear disclosures of what she owns. Attach detailed balance sheets, several prior years’ income tax returns (the more the merrier), and other pertinent info to the agreement as exhibits. ◙ The agreement should be fair and reasonable. These terms are impossible to define, so Mom should take any steps feasible to demonstrate this. If her new spouse will have adequate to support himself if divorce occurs will be helpful. ◙ Steps should be taken to corroborate that Mom’s future spouse was not signing under duress, because of fraud, and that Mom was not over-reaching. ◙ The prenup should address all legal, tax, and financial issues that might be relevant: Which state law will govern? What alimony or support rights will Mom’s spouse have in the event of divorce? Will Mom be obligated to leave anything to her new spouse in her will? Is her new spouse waiving any rights of a spouse to elect against her estate (spousal right of election)? ◙ What if Mom was too starry eyed to sign a pre-nup but wakes up and smell’s the coffee after the honeymoon? While unlikely to provide the same measure of protection as a prenup, a post-nup might be the only choice, assuming new-hubby agrees.

Your Pre/Post-Nup

So you’re getting married and an gangbuster inheritance might come your way. Sign a prenup that expressly addresses gift and inherited assets to shore up the protection. If you’ve been married for years before realizing the likelihood of gifts or an inheritance, then even if everything seems peachy, consider having a lawyer draw up a post-nup between you and your spouse confirming that any gifts or inheritance will remain yours alone and will not become a marital asset.

Inherit the Best Way Possible

Maximizing your inheritance is not only about getting the most dollars. It’s about getting them the best way. ◙ The best way is in a lifetime or perpetual trust structured so as much of the inheritance as possible will never be subject to a gift, estate, or generation skipping transfer (GST) tax again. ◙ If the trust is set up in a state with favorable tax laws you might be able to avoid your state’s income tax on trust earnings. ◙ The trust can provide considerable protection from your claimants, divorce, and other things that go bump in the night. ◙ Instead of your parents bequeathing assets directly to you they should bequeath assets to a trust for your benefit that is structured to achieve the above goals. ◙ Your parents can set up this type of trust while they are alive or under their will. You could even arrange for the set up of the trust and your parents will can bequeath assets to that trust. ◙ Consider using an independent institutional trustee in a state with laws that are particularly favorable to the goals you’re trying to achieve (e.g., Delaware, Alaska and others) and giving that trustee discretion over distributions instead of mandating distributions (e.g., a unitrust or HEMS standard).
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Checklist Article Title: Ruin Ur Kids R Us

Summary: Some folk just want to destroy their kids. While Mimic Jon and Kate Gosselin of “John and Kate Plus 8” fame have raised destroying children to new heights (lows?), too many parents use their estate plans to accomplish similar heartache. Some folks plan their estates in ways that will almost assure a will challenge, estrangement, or that there child will spend the rest of his days bemoaning the evil done unto him. Here’s some good ways to plan your estate to accomplish just that.

√ Do a Leona! Leona Helmsley’s dog, trouble, was to continue to live an opulent life, and then be buried alongside Leona in a mausoleum and was bequeathed $12 million to keep him in Puppy Chow. Two of Leona’s grandchildren supposedly received nothing from her estate. The sordid details are pretty long.
√ Use your will and other estate planning documents to formally “dis” a child. The words of your last will, letter of instruction and related documents are viewed by many heirs as your partner words. Including hurtful statements in these documents is almost always harmful and inappropriate. “I leave nothing to my son Joe because he was disrespectful, ungrateful, and married a witch.” While you might feel that way, the use of a less harmful phrase like “I leave nothing to my son Joe for reasons best known to me,” can accomplish the same legal objective of assuring that it wasn’t a scrivener’s error that Joe was overlooked, without carving nastiness into eternity.
√ Not leaving the door open. Disinheriting a child completely is often harsher than it needs to be. Leaving a 5% tip to a waitress that wasn’t great can get your point across, and might even encourage better service for the next customer. In contrast, a -0- tip might just evoke anger and accomplish little. No one has the right to tell you not to disinherit a child, but consider the consequences and options. Might it be better if you have a $2 million estate and 4 children to leave the wayward son $50,000 or $100,000 and state: “I have left $100,000 to Joe hoping that in time he will make peace with himself and the memories we had,” or “I have left $100,000 to Joe to acknowledge my love and affection for him and to express my sadness that our relationship had not been closer.” Many lawyers will balk at this approach as it might provide a opening for a challenge that may not have existed. However, if it can mend an heirs heart, or prevent an heir from seething in anger for his remaining lifetime, might it not be worthwhile?
√ Leave disproportionate bequests. Leave your daughter 75% of your estate and your son 25% because you liked your daughter more. OK, no one can tell you how to divide your estate, but what if the will left everything equally and you made gifts to your daughter while you were alive, or used life insurance in a trust, or some other mechanisms that were not “in your son’s face” to favor your daughter. You don’t have to skin the estate distribution cat in the most obvious and offensive way possible. Subtlety can do much to preserve family peace.
√ Disinherit someone based on who they marry. Nothing like hating that son-in-law to stir the family pot. Consider instead a bequest to a trust with a close friend or family member who understands your concerns as trustee. Give the trustee absolute discretion over distributions to the child and other beneficiaries, perhaps a charity. Your wishes might be carried out without the blatant disinheritance or comments about a spouse. If the marriage fails apart from your disappointment, then the trust can be their to help your child move forward.
√ Ignore the emotional value of tangible property. Your wife, the mother of your children, died. You hold her jewelry and other memorabilia, but on your death your will has a generic clause bequeathing all personal property to your new wife. Your daughters will now never get the memories of their mother, and worse, they have to watch your new wife wear them.
√ Ignore the religious preferences of your heirs. One or more of your children have adopted a new faith, or perhaps are more observant in the faith your family shares. Instead of insisting on actions which will morally torment them, try to find more of a middle ground that is not offensive to anyone. Sure, it is your life and your body and you can do as you wish, but if you can achieve the goals that are really important to you without upsetting surviving heirs, isn’t that preferable?

Recent Developments Article 1/3 Page [about 18 lines]:
■ H died during the pendency of the divorce action (we’ve been assured it wasn’t a result of receiving his lawyer’s bill). H’s executor sought a constructive trust to prevent the unjust enrichment that would allegedly occur if W retained marital property beneficially belonging to H. The court held that the equities involved require relief from the strict legal effects of defendant’s death during the divorce. ■ When spouses divorce marital property is distributed equitably between them in accordance with state law. But, when one spouse dies during the pendency of the divorce the action is abated and statutory equitable distribution is unavailable. Marital property does not lose its essential and distinctive nature as property arising from the joint contributions of both spouses during the marriage because of the death of one spouse during the pendency of divorce proceedings. ■ Upon a sufficient evidentiary showing the courts should invoke the equitable remedy of constructive trust, and principles of quasi-contract, to avoid the unjust enrichment that would occur if the marital property held by the surviving spouse included a share beneficially belonging to the deceased spouse’s estate. ■ When property has been acquired in such circumstances that the holder of legal title should not in good conscience retain the beneficial interest, equity converts the owner into a trustee. ■ Public policy would be disserved if courts were to automatically foreclose equitable claims concerning marital property presented by the estate of a deceased spouse. The prospect of an estate continuing a battle over marital property that cannot be completed by a spouse who died while the divorce was pending is unpleasant, but precluding an estate from obtaining an equitable remedy is not appropriate. Kay v. Kay, No.A-93-08, New Jersey Supreme Court, October 13, 2009.

Potpourri ½ Page:
■ Free online goodies www.360financialliteracy.org is the American Institute of CPA’s financial info site Chock Full O’ resources (not Nuts, that’s the coffee) to help you plan thru every stage of your life, which is especially helpful during this economic turmoil. It’s time to educate yourself and take control of your financial life instead of obsessing about the Dow going up and down which unfortunately you can’t control at all!
■ Where’s Inflation? 2010 Inflation-adjusted tax figures are the same or only modestly different: ◙ Dependency exemption$3,650 (unchanged). ◙ Standard deduction $11,400 MFJ and $5,700 for singles and MFS (unchanged). ◙ Annual gift exclusion $13,000 (unchanged). News Release IR-2009-93 and 94.
■ Final 2053 regs (T.D. 9468) provide guidance in determining the deductible amount of a claim against an estate. Sec. 20.2053-1(d)(1) provides the general rule that a deduction for a claim or expense described in section 2053 is generally limited to the amount actually paid for the claim or expense. Exceptions are provided. If a claim or expense that would have been deductible if it had been paid is not fully deductible within the limitation period, the estate may file a protective refund claim to preserve its right to claim a refund in the event that it becomes deductible later. Sec. 20.2053-1(d)(5). A protective claim for refund may be filed at any time before the expiration of the period of limitation prescribed in Sec. 6511(a) for the filing of a claim for credit or refund. Even if the IRS can’t assess additional tax it may still reject the claim for refund to the extent the Service determines there is no overpayment of tax.
■ Post Tax Season Follow Up: So you signed your income tax returns and filed them. You’re not done (not if you want to play it smart!). Call you CPA and set up a review meeting to sit with him/her for an hour (yes, you’ll have to pay him). Ask your CPA to review your tax return with you not to address tax issues per se, but to identify any type of planning ideas that your return might suggest, and any issues you may have missed. CPAs all have a wealth of general tax, investment, business, insurance and other knowledge, but you won’t know it if you don’t give them a shot to show you. It could be the most valuable hour of CPA advice ever.

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Lead Article Title: Stop Heir Loss with Estate Planning Propecia – Part 1Summary: “I’m not only the Heir Club president, I’m also a client.” “Finding the right heir loss solution is an important decision that can accentuate your lifestyle in unimaginable ways. But one size does not fit all heir loss cases.” Estate taxes, medical expenses, jealous siblings, legal fees, or other avoidable problems might infringe on, or even eliminate, your anticipated inheritance. The solution should be as individual as you are. We’ll use the title “parent” and “kid” to simplify the discussion, but the concepts applies to many relationships of benefactors and beneficiaries.Get Involved
Your active participation not only can maximize your inheritance, but can provide tremendous assistance to your parents or other family member or benefactor. Too often, poor planning dissipates money. Although the proposition may offend some people’s sensibilities, you should not feel guilty about planning to maximize your inheritance. Invariably, inadequate planning results in spending significant sums of money on unwarranted legal fees, professional fees, medical costs, and so on. Done properly, maximizing your inheritance will not harm your parents or other benefactors. Rather, it will safeguard their own interests and ensure that asset distribution after their death will reflect their true intent.

Open a Dialogue.
To inherit more, your first step should be to open a dialogue with your parents (aunt, uncle, or other prospective benefactor). Since much of the planning depends on cooperation from your benefactor, without a dialogue there is often little you can do to maximize your inheritance. ◙ You could discuss strategies that might give your parents comfort in later years, ways to assure their financial security, your own estate planning, charitable giving, or religious issues. Pick the most feasible approach, move slowly, and be sensitive. ◙ Focus on how you can help protect your parents. Has an overly aggressive stockbroker undermined your parents’ financial security? Once you are actively talking about your planning, it may become a simple matter to segue from a discussion of your living will to a discussion of theirs. You need only to ask if they agree with your decisions and if they are in any way similar to the decisions your parents made when drawing up their living wills.

2ND Spouse/Partner
◙ The classic 2nd marriage estate-planning approach uses trusts to provide for the new spouse while protecting assets to ultimately be distributed to children from a prior marriage. Typical estate tax bypass and marital (qualified terminable interest property, or QTIP) trusts can accomplish these goals. There are a myriad other variations and options. ◙ A life estate is common. Mom let’s her new husband live in the house for life, but then the house reverts to you and your siblings. Sounds great and seems simple, but it’s not. Although it’s common and inexpensive, it’s not always the best option when you want to maximize your inheritance. Too many ambiguities and issues are left unsettled when implementing a standard life estate. What if the house needs a new roof? What if the new husband moves into a nursing home? ◙ Prenuptial (spouse) or living together (partner) agreements are vital to protecting assets from the new spouse/partner. If dad uses trusts in his will to protect your inheritance, that might be nice, but it may prove academic if his new partner/spouse spends or takes all the assets before his death. Get dad to consider entering into a prenuptial (or postnuptial) or living together contract with his new spouse/partner to minimize the likelihood of legal and financial entanglements if the relationship terminates. ◙ A spousal right of election can be important in determining the ultimate distribution of any decedent’s assets. This is a right under state law for a surviving spouse to take a specified minimum percentage of the deceased spouse’s estate no matter what the will said. Unless your parent has planned to address this, or had the new spouse waive it, you might loose a large chunk of your inheritance.

Insurance Coverage
A conversation about QTIPs may prove irrelevant if key assets are lost to fire or theft. Insurance means more than life insurance. ◙ Life insurance could be essential to protect your parents’ assets by providing for a new spouse, paying estate taxes, or providing liquidity to ride out a downturn in the market before you have to sell. It can be the toupee of planning – covering up for assets bequeathed elsewhere. ◙ A house without fire and casualty insurance may be a total loss in the event of such a calamity. ◙ A theft can be devastating to the financial worth of a parent who has never insured valuable art, coins, or other collectibles, or has insurance that is based on an assessment made 30 years ago. ◙ Elderly parents who have no nursing home or long-term care insurance may deplete their assets to the point that their children must help support them.

Financial Planning/Investments
◙ Consolidation of a parent’s financial assets is a simple, no-cost, step to help your parent achieve important financial goals: control over her finances, safety through better investment planning, simplicity so she can follow the accounts and transactions, etc. Consolidation minimizes probate expenses and delays. ◙ Fewer accounts makes it much easier to maintain an investment allocation consistent with your parent’s risk profile. ◙ Budget is not a 4 letter word. Proper investment decisions require an analysis of financial needs, time frames, and expenses. Who is helping your parents make these decisions? Proper investment and budget planning will assure that your parents’ wealth will, to the extent feasible, last them throughout her lifetime. ◙ Longer life spans mean investment and spending have to consider the real time frame. The average woman will live 22+ years in retirement. In 1950, the figure was only 14 years. That is 8 more years to risk running out of money and to exhaust your inheritance. The only way to assure your parent adequate resources for her retirement years is to put in place an optimal investment strategy. And the real issue is that the preceding figures are averages. An average means a lot of people will live a lot longer in retirement than 22 years. So unlike a popular book about dying broke, your advice to your parents should be to focus on saving and spending so that their money will last to say 95%+ of their life expectancy. ◙ Investment policy statements (IPS) are an essential tool. If your parent hired a professional to manage her money, she should have signed an IPS that clearly identifies heir investment goals and objectives.

Theft and Loss
Theft or loss of valuables is not uncommon. 50% of those over age 85 have some cognitive impairment. ◙ As parents age, the likelihood increases of home health aide walking off with a coin collection and a piece of jewelry inadvertently ending up in the trash. Take steps to account, insure and protect personal property. Move small valuables that are not needed to a safe deposit box. ◙ If a parent dies, secure their residence (change locks and alarm codes or install an alarm if none existed). ◙ If a parent loans family or friends money, encourage them to have a note signed documenting that the advance was a loan and not a gift. Many borrowers seem to have selected memory about the nature of the transaction when questioned at a later date.

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Checklist Article Title: 2010 Planning

Summary: The economy, the estate tax, investment markets are all making planning feel like the roller coasters at Cedar Point.
The ten year deficit has been estimated at over $9.0 trillion. Taxes aren’t going down Virginia. The share of the tax burden borne by the top 1% in 2007 exceeded the share paid by the bottom 95% of taxpayers combined. Worse for the rich folk is that it’s probably gonna get worse! What should you do in the current climate of uncertainty before 2010 brings more change? The most likely scenario for the estate tax in 2009 is to extend the $3.5M exclusion and 45% rate to 2010 to give Congress a chance to act after health care reform is addressed. In 2010, instead of the repeal that looked so likely only a few years ago, a permanent estate tax, perhaps with exclusion lower than $3.5M could pass to bridge some of the growing deficit.

√ Wide Net. “Wealthy” folk need to watch the developments and stay flexible. Wealthy is in quotes because the next episode of the estate tax may nail many who don’t feel particularly rich (think “AMT”). If the exclusion drops to $1M in 2011 (which is what the law provides), and if inflation kicks up in future years as a result of bailout/stimulus spending, the estate tax net will grow wide. Further, states are hurting for revenue and may step up enforcement of their estate taxes and may even enact tougher taxes. Connecticut’s recent liberalization of its estate tax may prove the rarity.
√ Example: Your estate is $5M. Under current law you and your spouse can, with proper planning, avoid federal estate tax on a $7M estate. But if the exclusion drops to $1M your heirs will have quite the haircut. Action Step: Remove asset from your estate now to flexible structures. Do this before inflation kicks in, while asset values are low, while interest rates are low (it makes many techniques more efficient at shoe-horning value out of your estate).
√ Toggle. Chubby Checkers started it with the Twist, now it’s the Toggle. Tom Bergeron next show will be “Dancing with the Tax Attorney.” Grantor trusts are trusts with the income taxed to you. Set up grantor trusts for kids and if estate tax is repealed, or the exclusion stays high, or if the relationship of marginal to lower income tax rates change (so it’s better for the trust to pay income to your kids to be taxed at a lower rate), your trust protector can turn off grantor trust status to save yourself income taxes. If the estate tax grows nastier, keep grantor trust status activated to continue reducing your estate. See CCA 200923024.
√ DAPT. Set up and make gifts and/or sales to a self settled domestic asset protection trust (DAPT) in a state like Delaware which permits you to remain a beneficiary. If you need money because of future economic issues, you are a beneficiary and the trustee can make a discretionary distribution to you. If the estate tax remains burdensome, the growth in those assets should be outside your estate, generating important estate tax savings. You might also be able to realize a significant current state income tax deduction. If Congress acts to restrict this type of planning, hopefully your completed plan will be exempted (grandfathered). While that might be a risk, isn’t doing nothing a bigger risk?
√ 529. Put money in 529 plans for heirs. If the estate tax is repealed, or the exclusion remains at a level that exempts you can take the money back.
√ Convert. Roth IRA conversions can provide important estate tax savings. In 2010 you can convert without the $100,000 adjusted gross income limitation that had prevented many wealthy taxpayers from changing their regular IRA to a Roth. This is a great opportunity for many in that the income tax you have to pay on the conversion will be outside your estate. For info on teleconferences discussing Roth conversions see www.ultimateiratraining.com.
√ Insurance Trusts. Too many people own insurance in their own name (or set up a trust but never reviewed its operations with their estate planner to be sure its done right). That means the insurance is in your taxable estate. You may have been unconcerned in light of the talk of repeal and the growing exclusion. A $1M exclusion will change all that. If you transfer your insurance to a trust you must survive 3 years for it to be out of your estate. Act now to get the 3 year period tolling. The cost relative to the potential benefit in this new estate tax environment is miniscule.
√ Insurance. Buy insurance! Consider a cheap term policy with some conversion options. This can provide flexibility and security. Example: Your estate is $3M. No tax. Next year Congress reduces it to $1M. You have a stroke and are no longer insurable. Bam! How is that tax going to be paid? A term policy now, while your health permits it, locks in the ability to convert to a permanent policy to use to cover the estate tax if needed.
√ Basics. Don’t forget the basics. Most of you haven’t forgotten, you’re just ignoring them…big mistake! Update your powers of attorney and include a generous gift provision with safeguards. If you become incompetent next year as a result of health problems or an injury, and the exclusion is reduced to $1M, your heirs won’t be able to make large gifts to reduce the estate tax. Don’t get lulled into thinking that your current power works. It’s a different world than just a year ago.

√ Income Tax. Income and estate tax planning is inextricably intertwined. Expect income tax rates to increase on upper middle class and upper class taxpayers at minimum. This changes how you plan. Most people plan to defer income to later years, and especially retirement years, on the theory that they will be in a lower income tax bracket. This may never happen. Try this on for some perspective: According to the US Census Bureau median family income fell in 2008 to $50,303 (lowest since 1997). The wealthiest 10% of Americans earned more than $138,000. So about $140k puts you in the vice! Who do you think the government will have to squeeze for tax revenue?

√ Planning Yoga. Get flexible. Consider planning steps that can be undone, or at least modified, if the eventual tax legislation, or future economic developments, impact you other than as anticipated. Will the recovery have “U”, “V”, “W” or other shape? Have some of the pundits watched too much Sesame Street?

Recent Developments Article 1/3 Page [about 18 lines]:
■ Connecticut Estate Tax Made Less Harsh: ◙ For deaths and gifts on or after January 1, 2010, the Connecticut exclusion is increased from $2 million to $3.5 million. This is consistent with current federal law. ◙ Under old law, an estate or gift valued at $2 million or less was not taxed. However, the full value of any estate or gift valued more than $2 million is taxable. This paradigm resulted in a “cliff” in which a $1 increase in the value of a gift or estate from $2,000,000 to $2,000,001 increases tax liability from zero to over $100,000. ◙ Not all changes were favorable. The new law increased the flat income tax rate for trusts and estates from 5% to 6.5% from 2009 on. ◙ Filing deadlines were also accelerated. An executor (personal representative) will have to file an estate tax return six (rather than 9 under old law) months after the date of death, starting with deaths on or after July 1, 2009.
■ Connecticut Business Tax: Changes will ensnare more businesses in the Connecticut tax system. Under prior law a business needed a “physical presence” in Connecticut to pay tax. The new law is much broader and will subject a business (and/or the equity owners) to Connecticut tax if the business had a “substantial economic presence” in Connecticut, or if it derived income from sources within Connecticut. If your business purposefully directs business into Connecticut it will have a tax nexus. A business’ purpose would be evaluated by the frequency, quantity, and systematic nature of its economic contact within Connecticut.
■ Personal Injury Settlement: Generally not included in gross income, other than punitive damages. IRC Sec. 104(a)(2). This result will be available whether or not the amounts are received by suit or settlement agreement, and whether or not received in a lump sum or as periodic payments by individuals on account of personal physical injuries (including death) or physical sickness. This exclusion had required that excluded damages must derive from a tort claim. This requirement was relaxed in Prop. Reg. 127270-06 9/14/09). The proposed regulations expressly delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon “tort or tort type rights.”
Potpourri ½ Page:
Divorce: Estate Planning Steps
■ Destroy Old Documents: If you have not already destroyed old powers of attorney, health proxies or other documents naming your ex do so. Even if the divorce automatically makes those documents void, why tempt anyone. Do you want your ex to be holding an original signed health proxy authorizing him to pull the plug if you are hospitalized? This is a tricky step since there are often documents that are not obvious, such as a bank power of attorney form for one of your accounts your ex signed years ago that is on file at the bank and for which no one had a copy.
■ Sign new Documents: Usually about the last thing anyone wants to do after a divorce is hire a lawyer or spend more money on legal fees. But you really need to update all of your documents. Frequently powers of attorney, wills and other documents name an ex-spouse, an ex-spouse’s family or friends that have sided with your ex. Revise you’re your documents and name people as fiduciaries you can trust to take care of you and respect your wishes.
■ Revise Beneficiary Designations: If your ex is named as beneficiary of your pension plan he/she might vary well inherit the plan if you die. Don’t count on state law or the fact you’re divorced to change this. Sign new beneficiary designation forms.
■ Address College Savings: If your ex is the account owner listed on your child’s 529 college savings plan he/she can pull the money out at any time. Be sure to get a neutral party listed as account owner. Better yet, you might be able to name a trust with co-trustees as the account owner.
■ Monitor Life Insurance: Most divorces include a requirement that one spouse provide the other with life insurance coverage, but too few divorce agreements address how that coverage should be monitored. Obtain copies of proof of payment and if possible the right to periodically insist on and receive an in force illustration of the policy so you can verify that it is viable. Address the type of insurance coverage required and the amount. Your ex could buy the cheapest which is one year term. But if he develops a health issue in later years the coverage will become unavailable.
■ Property and Casualty Insurance: It is common in many divorces for some co-owned property to continue. For example, one of you might retain the marital residence until the youngest child attains age 18. If you’re a co-owner be sure your name is listed on the insurance policy for the house.
■ Investments: Revise your investment allocations. Most post-divorce portfolios are a mess. Don’t delay, get asset reallocated in a manner that works for you.
Thanks to Deana Balahtsis, Esq. a New York City attorney specializing in Family, Matrimonial and Adoption Law.

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Lead Article Title: Golf Talk – Back 9Summary: So last month we gave you exiting tidbits for each of the front nine. To assure you have talking points for the rest of the course, here’s some for the back nine.Hole #10 Start the back 9 with a cool acronym “BDIT” a Beneficiary Defective Inheritor’s Trust. The BDIT is creation of Las Vegas estate planning maven Richard Oshins, Esq. of Oshins & Associates. Your golf buddies have all set up self-settled grantor dynasty trusts and you wanna one up them. The BDIT is the answer. Have mom (anyone other than you or your spouse) set up a dynasty trust to benefit you. If you never make a gift to the trust, many of the estate tax rules that can operate to pull a trust’s assets back into your estate arguably won’t apply. For example, if your golf buds give assets to their dynasty trusts but retain the right to enjoy those assets (e.g., the income from a rental property, or the right to live in a beach house), those assets will be included in their estates. But with your BDIT, since you don’t transfer assets to the BDIT you don’t face the sasme risks. But if mom sets up the trust, how can it be a grantor trust to you? Characterization as a grantor trust assures all income is taxed to you and that you can sell assets to the trust without triggering capital gains. The mechanism to accomplish this feat is having your BDIT include an annual demand or Crummey power for you to withdraw gifts mom makes to the trust. If you can vest all of the principal of the trust in yourself, you’ll be treated as the owner of the trust for income tax purposes so long as the trust is not a grantor trust as to mom. So if mom gives $13,000 annual gifts to the trust each year and you don’t exercise the Crummey power to withdraw those gifts, the trust will be a grantor trust as to you. Because you didn’t set up the BDIT, you can be given more control over the trust then your golf buds can over their plain vanilla dynasty trusts with less tax and asset protection risk.

Hole #11 UTMA, Uniform Transfer to Minors Act, accounts use to be standard operating procedure for kids savings. But they ain’t fun since at the age of majority Junior can spend the money on a beer instead of tuition. What can you do? One approach is to have the UTMA invest in a family partnership or LLC so that when Junior attains the age of majority he’ll have to convince the local beer depot to take FLP interests as payment. Many financial institutions object to encumbering Junior’s money more than the UTMA account would. Solution – Give Junior the right to cash in his FLP interest within 30 days of attaining the age of majority! For you Code Section geeks this is similar to the 2503(c) trust right to withdraw at age 21.

Sample Provision: Whereas, it is the express desire of the parties, notwithstanding anything in this Agreement or applicable partnership law to the contrary, that if any partner is a minor for whom custodial funds were transferred or invested in this Partnership. Then in such event as the minor attaining the age of majority (determined by the laws of the State) such Partner may upon notice given at any time within Sixty (60) days of the date of attaining the age of majority that all of his or her partnership interests attributable to said custodial funds must be liquidated and the fair value therefore be distributed to said partner. If this right is not exercised within said period this right shall lapse.

Hole #12 Lots of trusts are structured as directed trusts where a person or board of investment advisers direct the trustees how to invest and the trustee is absolved of most or all liability for investment decisions (depending on state law and the trust terms). Many such trusts could benefit from the Doublemint gum approach to trust investment advisers. Many investment advisers are selected to hold family business or real estate assets that an institutional trustee might not be adept at. However, at some time even a trust largely comprised of a closely held business interest may become liquid (e.g. a sale of the business). Does the same investment adviser have the expertise to invest in marketable securities that knew say real estate or widgets? Unlikely. The dual approach can provide a better investment result. Finally, what if funds from one property or business are to be reinvested? Have an independent fiduciary, e.g., the investment adviser, authorized to allocate liquid assets from the marketable to the business/real estate component of the trust.

Sample Provision: At the direction of the Investment Adviser, if any, or if none, the Trust Protector, or if none, the Individual Trustee, assets which are readily marketable shall be made available for investments in assets which are not readily marketable or which are closely held or family businesses or Personal Use Assets. The express intent of this provision is to ensure that the Institutional Trustee, or the investment adviser who has the investment authority over marketable securities, not hinder or delay making those securities available to the Investment Adviser for investment or use in family business interests or other non-marketable investments under the direction of the Investment Adviser or a delegate of the Investment Adviser.

Hole #13 When a partnership, or an LLC taxed as an partnership, must close its taxable year (e.g., on the termination of a partner/member during the year), the economic results of the partnership must be allocated for that partner to the time period prior to the closing of the FLP/LLC books, and to the period after the closing. There are two methods which can be used to make this allocation: (1) the interim closing of the FLP/LLC books; or (2) the pro-ration method. Treas. Reg. Sec. 1.706-1(c)(2)(ii); See, Richardson v. Comr., 693 F.2d 1189 (5th Cir. 1982). If the executor has discretion to choose the assets to fund a bequest under the will, which is common, these rules and that discretion, will impact the estate’s tax results. If a pecuniary bypass trust (i.e., funded with a dollar figure not a portion of the estate) is funded with the interests in an partnership/LLC, the tax year of the partnership/LLC close and the bypass trust would be allocated the pro rata portion of the gain for the portion of the year in which it holds the interests in the partnership/LLC. If the executor uses the discretion granted under the will to distribute the deceased partner’s interests in the partnership/LLC under the residuary clause of the will to a residuary trust, instead of to the pecuniary bypass trust (assuming that the will was so constructed), the tax year of the partnership/LLC may not close as a result of the estate funding the residuary trust. As a result, all income from the date of death forward would inure to the residuary trust (since there would be no closing or allocation). If this discretion is combined with an interim closing of the books method, in contrast to the proration method, the executor has flexibility to determine which amount of gain to trap in the estate versus what gain (or other tax consequence) will be reported on the income tax return of one of the distributee testamentary trusts.

These general rules need to be applied to common estate and probate-related situations. The results are not certain as to how every estate/probate event impacts the requirement to close the tax year of an FLP/LLC owned in part by a decedent, estate or trust. For example, Code Sec. 761(e) provides that the distribution of an interest in a partnership will generally be treated as an exchange for purposes of determining whether Code Sec. 743(b) basis adjustment rules will apply. The IRS has held that the distribution of a lower tier partnership by an upper tier partnership constituted such an exchange, thereby permitting a Code Sec. 743(b) adjustment, even though no gain was recognized on the distribution. The Regulations indicate that a distribution by an estate is not an exchange (Reg. §1.706-1(c)(3)(vi), Example (3)). The IRS has indicated that a distribution by a trust may be an exchange under Code Sec. 706, thus permitting a basis adjustment under Code Sec. 743(b) (Rev. Rul. 72-352, 1972-2 CB 395). Congressional committee reports appear to indicate intent to exclude distributions by an estate or trust triggered by the death of a member from the exchange provisions of Code Sec. 761(e) (S. Rep. No. 99-313, at 924 (1986)).

Hole #14 If you buttoned up your FLP so tight to justify discounts you may undermined the annual gift exclusion for FLP interests. This is because a gift has to be of a “present interest” to qualify for the $13,000 annual exclusion and if the donee/partner cannot realize any current economic benefit because of all the restrictions, it may not qualify. See, Hackl V. Commr. 118 TC 14 (2002), aff’d, 335 F.3d 664 (7th Cir. 2003). Consider adding a right of first refusal, or provision analogous to a “Crummey” demand power, to the transfer restrictions or distribution clauses of the partnership agreement. If there is no present contemplation of annual gift transfers, this issue may be better not to be addressed in the Operating Agreement as such a provision may detract from the general discounts.

Hole #15 Recession brought lower asset values so many estates are choosing to value assets not at the date of death, but 6 months later on the alternate valuation date (AVD). But this election is not simple and can trigger family disputes if it benefits one heir at the expense of others. Most if not all wills and other documents are silent as to how to address this potentially volcanic dilemma. Example: An estate is comprised of a family business valued as of the date of death at $7M, securities valued at $10M and a house valued at $4M. The business on the date of death constitutes $7M/($7M + $10M + $4M) 33% of the estate, insufficient to qualify for estate tax deferral under Code Section 6166. At the AVD 6 months later the business value has declined to $6M, the securities to $4M and the house increased to $5M. The value of the business is now $6M/($6M + $4M +$5M) 40% of the estate, sufficient to qualify for estate tax deferral under IRC Sec. 6166. Thus, use of the AVD can have the added benefit of enabling the estate to qualify for additional estate tax benefits. The use of the AVD benefited the children receiving the business and securities, but penalized the child receiving the house. How can an executor make the election in such a situation? How can the executor avoid making the election? What’s good for the goose may not be good for the gander! The election must apply to all estate assets, no partial application is permitted. Treas. Reg. Sec. 20.2032-1(b)(2). The result is the classic Shakespearean decision: “To ADV, or not to ADV: that is the question: Whether ’tis nobler in the estate administration to suffer the slings and arrows of outraged beneficiaries…”.

Hole #16 It remains common for investments to be structured in the form of a limited partnership (FLP): control, income shifting, gift and estate discounts (but that window may be closing), etc. If you’re transferring securities to a FLP watch the Code Section 721 investment rules. Many folk forgot about these because capital gains kinda disappeared. But with the run up in the equity markets and other investments these rules could easily ensnare you. If you form an FLP consisting primarily of securities there generally is no income tax consequence, but if the FLP is characterized as an “investment company” and you diversify your previously undiversified securities portfolios by forming that FLP, then all the gain on all assets contributed to the FLP will be triggered for income tax purposes. Ouch! To make this even more painful, losses are not triggered, just gains!

A portfolio is considered diversified if less than 25% of its assets are invested in any single issuer and less than 50% are invested in any five or fewer issuers.

Hole #17 If you have or are divorcing, watch the home sale exclusion rules — the housing market will eventually recover and you’ll get nailed if you don’t. Most folks cannot imagine appreciating home values, but if you’re negotiating a divorce agreement don’t ignore it. If your ex-spouse is granted exclusive use of the residence that use will be credited to you for purposes of meeting the use and ownership requirements for the $250,000 home sale exclusion if mandated by a qualifying agreement (divorce agreement, decree of separate maintenance, and a decree of legal separation). IRC Sec. 71(b)(2). If not, it will not be credited to you if you’re not residing in the house. Bottom line: you could loose a big tax bennie.The timing of each spouse’s use and ownership should be considered to assure the maximum qualification for the exclusion.

It may be advantageous to delay the divorce, or the common filing of separate tax returns, to assure that the full $500,000 exclusion is available. In the context of a divorce settlement, if the house is transferred to one spouse, that transferee spouse may treat the house as if he or she had owned it during the period it was owned by the transferor spouse. I.R.C. §121(d)(3).

Hole #18 Financial stress is a top factor triggering divorce. This recession has been plenty stressful financially. It has also wreaked havoc with investment portfolios like none other since the depression. If you are in the process of or were recently divorced, review and revise your investment strategy. Pre-divorce portfolios are structured on a family basis. Post divorce each spouse may end up with non-coordinated pieces of the former family portfolio. Diversification which may have been adequate before, may be undermined by a divorce settlement that focused on tax basis, accounts within the control of each spouse, and other non-investment factors. The financial realities of divorce often necessitate a portfolio geared more toward generating cash to cover post-divorce living expenses, then growth for the future. An issue to address in the reallocation process is that the portfolio likely has a carry over cost basis under Code Sec. 1041 from your ex-spouse, or low basis equities purchased and held by you.

Example: In some instances selling covered calls against some of the holdings, with the intention of having the calls exercised, can produce incremental income to offset some of the tax liability.
Example: ABC stock is selling at $48/share. Cost basis is $25/share. If a client sells 1,000 shares the capital gain is $23,000 which at 15% (ignoring state tax) implies a tax liability of $3,450. If a $50 call (an option or right to purchase the stock at the $50 strike price) is sold for 1 point, this would generate $1,000. The client would sell the call, and hope the stock exceeds $50/share prior to the expiration of the call. If so, the call would be exercised and the client would realize $51/share, an additional $3,000 above the current value of the shares. That incremental revenue will offset most of the tax liability. If the stock price does not exceed $50, the call won’t be exercised, but the client has received $1,000 towards the tax cost to be incurred on restructuring the portfolio.

Your risk tolerance may change to reflect post-divorce economic reality, which is often much harsher than before. Intact families can often accept more risk in their portfolio when comfortable with their employment situation, and can rely on that cash flow for expenses. Post-divorce this certainty is often undermined by lower earnings, higher support or alimony payments, and the increased costs of maintaining separate homes and lives. Too often clients ignore the changed risk, or take the opposite approach and become so fearful of this new risk profile that they assume anything other than a money market account or CD is too risky. Clients seeking low risk portfolios often build a portfolio based on bonds, etc. They assume price risk is eliminated when they hold the securities to maturity. Reality is that the price risk remains because interest rates fluctuate. They are unknowingly assuming a great deal of risk, but risks of a different type, namely inflation risk. Even a modest rate of inflation can devastate a fixed income portfolio over time.

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Checklist Article Title: Death Panels

Summary: Instead of addressing real tough issues, let’s throw a fake. Death panels are a low blow fake, even for a moose hunter. But get real. Granny isn’t getting unplugged, but she should be responsible to address these issues while she can, but most don’t. Here’s a reality check – checklist on the non-existent death panels.

√ Rumors that bureaucrats will pull the plug on sick and elderly. It’s just static to avoid dealing with real issues. But are you dealing with the real issues?

√ Only 29% of people have signed living wills!! Folks are kicking up a ruckus about non-existent death panels when they haven’t taken the most basic step to address what they can control about their end of life decisions and treatment. Be responsible. Sign appropriate documents: a living will to make your wishes known; a health proxy authorizing someone as your agent to make those decisions.

√ Few people take the time to understand what end of life decisions are really about. Jane Brody in her recent book Guide to the Great Beyond (a must read) notes that there no significant survival benefit for pursuing aggressive medical options over hospice! Hospice can provide a more dignified and peaceful death, chance to address religious and spiritual issues and save a fortune in cost. One of the studies she cites found that those receiving aggressive end of life intervention survived 33 days while those receiving hospice instead survived 31 days. While any such studies are subject to wide interpretation and variation, and so much depends on the facts of the specific patient, there are some really important lessons and questions. Many religions view it as inappropriate to “pull the plug” on someone, even if in a vegetative state. If your wishes whether for religious or philosophical reasons are not to be removed from a ventilator or to have mechanical feeding cease, even if you are in a persistent vegetative state, make these wishes clearly known. They should be respected, health care reform or not. However, broad generalizations are dangerously inappropriate. If you face days of invasive medical procedures and what might be at most statistically insignificant longer life, or you can spend statistically about the same time in hospice, with the warmth of family, the guidance of your spiritual adviser, etc., even for someone with a strict fundamental faith what is preferable? Too often the decision is reduced to black and white inaccuracies, just like the death panel hyperbole. Consultations with appropriate advisers (medical, religious or other) is the only way to make informed decisions. Everyone should endeavor to address known issues and likely scenarios in advance. If the unforeseen occurs, that is why you should have a signed health proxy or medical directive appointing someone to undertake this analysis on your behalf.

√ Of the meager 29% who have living wills too often the family disregards a parent’s end of life wishes and don’t disclose the documents. Instead, out of guilt they often opt for aggressive end of life treatments the parent didn’t want, or they pursue what they believe to be religiously correct regardless of your religious beliefs. Think what you want, but the incidences of family members intentionally not disclosing living wills seems tragically significant.

√ Almost no families hold the recommended meeting with their advisers to discuss what often are widely divergent religious issues of their children (or other loved ones) and the impact on end of life decision making. While unpleasant and difficult, it will always prove easier to deal with then the explosions that too often occur when a parent or other family member is near death.

√ Bottom line: People are creating a frenzy over a non-existent threat, when they have the power to address the real underlying issue, few bother too, and of those that do, even fewer understand the implications or act to honor the decisions ultimately made. There is an issue here, but not what the media is focused on. Personal responsibility is at the heart of this issue and health care reform generally. Every adult should prepare the appropriate documents, make their wishes known, and make the effort to understand the personal, life, religious and other implications.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Proper Prenup Protects Estate: W and H signed a prenup agreement. Both were represented by counsel, engaged in discovery, and schedules of assets, liabilities and income tax return were attached to the agreement. H and W married July 8, 2003. H died March 9, 2008. On March 31, 2008 W filed a caveat to H’s will. A caveat is a challenge that the will should not be admitted. Issue – should the caveat be rejected and the will accepted, or should the prenuptial agreement be rejected and W be permitted to take a surviving spouse’s elective share under N.J.S.A. 3B:8-1 to -19. An elective share is a minimum inheritance a surviving spouse is entitled to by law, regardless of a will, if this right was not properly waived. W claimed, among other things that the agreed payments were made to her under a trust instead of under the will as required. The court found no practical difference. The court noted that the law, N.J.S.A. 37:2-38, places the burden of proof to set aside a prenup on the party alleging the agreement to be unenforceable and that burden must be met by clear and convincing evidence. A challenge can succeed on equitable considerations, such as unconscionability, failure to disclose, etc. In the matter of the estate of Donald Towbin, Deceased, Sup Ct NJ, App Div, Docket No. A-0161-08T30161-08T3, March 16, 2009.
■ Real Estate Tax Audits: The IRS Estate and Gift Tax Program recently started working with state and county authorities in several states to determine if real estate transfers reported to them are unreported gifts. Although a tax may not be due, a gift tax return may be required for real estate transfers above the annual exclusion amount. Penalties will be considered on all delinquent taxable gift returns filed.
Potpourri ½ Page:
Trust Protects Against Later Suit: Florida resident Grantor established a Trust. On Grantor’s death Trust divided amongst Grantor’s children. Defendant is the lifetime beneficiary of Trust which provides: ◙ The Trustee may, in the Trustee’s sole and absolute discretion, distribute to or for the direct or indirect benefit of B so much of the net income and/or principal from B’s Trust, up to the whole, during his lifetime, as Trustee deems advisable. ◙ Neither the beneficiary nor any other person or entity shall have any right to require or compel Trustee to make any distribution for any purpose whatsoever. ◙ No share or interest of any beneficiary shall vest in the beneficiary until actually paid or delivered to him or her by Trustee. ◙ Nor shall any share or interest of any beneficiary be liable for his or her debts, or be subject to the process or seizure of any court, or be an asset in bankruptcy of any beneficiary. ◙ No beneficiary shall have the power to anticipate, pledge, assign, sell, transfer, alienate or otherwise encumber his or her interest in any trust created hereunder in any way, or in the income. ◙ Nor shall any interest in any manner be liable for, of subject to, the debts, liabilities or obligations of any such beneficiary or claims of any sort against such beneficiary.

The court entered a judgment against defendant for failure to pay child support. The lower court held that the payment of child support is the paramount debt that any person could have. It is the most important obligation that a person has, is to support their children. However, on appeal the Court noted that the Trust was a non-self-settled trust established by a Florida resident, and comprised solely of the settlor’s property. Neither trustee was a resident of New Jersey. Other than the trustees subjecting the Trust to the special voluntary appearance to contest jurisdiction, the Trust has had no other contact with New Jersey. Pursuant to its own terms, the Trust is governed by Florida law which recognizes spendthrift trusts. The right of a third party to garnish assets of a beneficiary of a spendthrift trust is limited to disbursements from the trust and if disbursements are wholly within the trustee’s discretion, the court may not order the trustee to make such disbursements. The validity of spendthrift trusts is also recognized by New Jersey. In re Estate of Bonardi, 376 N.J. Super. 508, 516 (App. Div. 2005); Constanza v. Verona, 48 N.J. Super. 355, 359 (Ch. Div. 1958). Accordingly, even if the trial court had jurisdiction over the Trust, the court could not have ordered the trustees to disperse funds from the trust to pay an obligation of defendant. Lerman, v. Lerman, Sup Ct NJ, App Div Dock. No. A-1953-07T31953-07T3.
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Lead Article Title: Golf Conversation – Font 9

Summary: So you’re spending a lot of time on the golf course? What you really want are some great fairway conversation tips. You want something that will impress your foursome as you walk each of the 18 holes. Try the following to excite your buddies.
Hole #1 As soon as you finish singing “Auld Lang Syne” convert your IRA to a Roth. The income limits that prevent you from having the conversion disappear in 2010. The IRA pundits will tell you conversion will prove a winner for most folks that can pay the tax due on conversion with non-IRA funds. Considering that income tax rates will rise in the future, it’s a slam dunk. But just like with the ShamWow! commercial, there may be a “Special Double Offer!” If your state protects Roth IRAs from creditors conversion could give you an asset protection benefit — Wow! Send the IRS cash that is exposed to creditors to pay the tax due (e.g., the cash outside your IRA you’ll use to pay the IRS for taxes due on the conversion). Even the most tenacious plaintiff’s attorney isn’t likely to chase the IRS if they can avoid it. Meanwhile you’ll enhance the real value of what is in your IRA by transmuting pre-tax dollars into whole after tax dollars.

New Jersey, as an example, provides in NJSA 25:2-1 25:2-1 the following as to IRAs:

Conveyances of personal property in trust for use of persons making them void as to creditors; exemptions, definition 25:2-1. Conveyances of personal property in trust for use of persons making them void as to creditors. a. Except as provided in subsection b. of this section, every deed of gift and every conveyance, transfer and assignment of goods, chattels or things in action, made in trust for the use of the person making the same, shall be void as against creditors.

b. Notwithstanding the provisions of any other law to the contrary, any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust, shall be exempt from all claims of creditors and shall be excluded from an estate in bankruptcy, except that:

(1) no exemption shall be allowed for any preferences or fraudulent conveyances made in violation of the “Uniform Fraudulent Transfer Act,” R.S.25:2-20 et seq., or any other State or federal law;

(2) no qualifying trust shall be exempt from the claims under any order for child support or spousal support or of an alternate payee under a qualified domestic relations order. However, the interest of any alternate payee under a qualified domestic relations order is exempt from all claims of any creditor of the alternate payee. As used in this paragraph, the terms “alternate payee” and “qualified domestic relations order” have the meanings ascribed to them in section 414(p) of the federal Internal Revenue Code of 1986 (26 U.S.C. s.414(p)); and

(3) no qualifying trust shall be exempt from any punitive damages awarded in a civil action arising from manslaughter or murder.

For purposes of this section, a “qualifying trust” means a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986 (26 U.S.C. s.401, 403, 408, 408A, 409, 529 or 530).

Amended 1993, c.177; 2001, c.153.

Hole #2 Think lease options. In recent years, when every property owner assumed values were increasing at 20% a year (more if the property was in hot spots like Florida or Las Vegas) so why give a lease option to a tenant. Now, if you’re negotiating a lease, try to get a credit for rent towards a future purchase. In a soft market more landlords might consent to crediting say 20% of rent to a future purchase just to get a property leased. You might even be able to negotiate a lock-in value for the purchase price, perhaps at current value if you buy in a year, or say 105% of current value if you buy after 1 year but by the second anniversary, etc. For a financially strapped tenant a lease option is a great idea. This is a buyer/renter’s market so use these approaches to get a great deal for down the road when you will be more financially able to consummate a purchase.
Hole #3 Anyone who recently lost a spouse/partner should not make any significant decisions for say 3-6 months unless there is a real time deadline. You need time to adapt and gain perspective. The vultures circle pretty quickly looking to sell everything from high commissioned annuities to your IRA to the Brooklyn Bridge. But it can be tough to tell people, especially your brother-in-law “no”. So don’t say no, tell them: “Call my lawyer he/she is handling those matters.” If the pitchman actually calls your lawyer they’re probably for real. Few if any will. In 15 years of offering to field such calls for free we’re still waiting for the first call!
Hole #4 The State of New York requires LLC’s, upon formation or authorization to do business in NY, to be published in local newspapers. Then a Certificate of Publication has to be filed with the State of NY. Section 206(a) of New York LLC Law. Many folks still ignore these requirements. If within 120 days after formation, proof of such publication has not been filed with the department of state, “the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended, effective as of the expiration of such 120 day period.” Whoa, that’s serious.
Hole #5 Do your estate planning documents include incentive trusts? Lots of folks thought these were the cat’s meow to motivate Junior to be productive and not become a trust fund baby. Some incentive trusts, for example, grant a beneficiary a distribution dollar for dollar to that beneficiary’s earned income. Earn a dollar, get rewarded with a dollar. Smarter folks were aware that Forrest Gump trust planning, “Simple Is As Simple Does,” never was the right approach. A common problem with incentive trusts is that if Junior became a porno king he’d get a big incentive trust distribution, but if he joined the Peace Corp. to save the world, he’d get a pittance. Well, in case you hadn’t noticed we’re in a recession. Junior may have been industrious but lost his job due to no fault of his own. So incentive trust fund kids are being hung out to try. Instead of their trusts helping them through the lean years, they’re being told to beg elsewhere. Not a great result. Does it make any sense to limit distributions if the beneficiary lost her job because her employer declared bankruptcy? (What if she quit her job, not because she was retreating from the job, but because she was advancing her career in another direction?) The impact of the recession on a poorly drafted incentive trust could be disastrous to the intended beneficiary. If you set up an incentive trust, review it now with your advisers to see what can be done to infuse a bit of compassion and rationality into the distribution provisions. Smarter folks, instead of memorializing incentive provisions in legal documents, explained in nonbinding personal letters how such wishes should be considered. These personal explanations should be reconsidered in light of current circumstances.
Hole #6 If you’ve used private financing (i.e., not bank financing, etc.) to fund premiums on a life insurance policies, there is one requirement that must be met that some practitioners have overlooked. Both parties to the insurance financing transaction (e.g., an insurance trust and perhaps yourself, your spouse or another family trust that is loaning funds) must add a signed statement with both of their income tax returns each time a loan is made. That often means every year since each payment towards a premium is treated as an additional loan. Section 1.7872-15(d) spells out the requirements and the form of the statement to be filed. Whether or not you thought the loan is covered by the split-dollar regulations the regulation is so broad that it probably is. In fact, if you did a sale to a grantor trust (often called an IDIT or IDIGIT) for a note and that trust also purchased life insurance, it may fall under the spell of the split-dollar regulations. The positive to that is that you can guarantee loan treatment by following the procedure noted above. This little gem was recently overhead as small-talk by Richard Harris, BPN Montaigne LLC, entertaining other golfers on the green.
Hole #7 Compensation should be structured in a manner that motivates what is good for the business or professional practice. Too often compensation, as the result of interpersonal dynamics and firm politics, moves away from what is really in everyone’s best interest. Example: A physician group compensates physician/partners based on tenure. The result likely encourages the partners to compete for time off, less call, and other perquisites. Often it is better for the practice and the partners to have a productivity based compensation structure that motivates everyone to contribute to practice profitability. Thanks to Gene Balliett, Balliett Financial Services, Inc., Winter Park, Florida.
Hole #8 Consider empowering beneficiaries. Everyone’s heard stories of wayward trustees. But few people affirmatively empower beneficiaries to protect themselves. While the beneficiary’s role has traditionally been viewed as passive, this is not required or necessarily advisable. The extent to which beneficiaries have a right to be informed of the financial transactions and other aspects of a trust will depend on both the trusts instrument and local law. While many grantors prefer to keep beneficiaries uninformed, that has two negative consequences. The beneficiaries lose out on the opportunity to enhance their financial acumen under the guidance of the trustee, and they have less or even no ability to monitor the trustee’s performance and conduct. Beneficiaries, if reasonably empowered, can serve as a check and balance on the trustees. Rather than relying on state law, and the governing law of a trust which can be changed in many instances, consider embodying in the trust agreement specific powers for the beneficiaries. For example, the trust could expressly state that the beneficiaries should be given a copy of the trust agreement, perhaps the investment policy statement, and possibly even periodic financial information. When setting up a trust, “She says, hey beneficiary, take a walk on the wild side….doo doo….” Trusts can get more wild and grant beneficiaries the power to even remove or replace a Trustee.
Hole #9 Horace Greeley famously advised “Go West, young man.” But today he would have advised “Go South, retired person.” So you “moved” south to Florida to escape Northern taxes perhaps more than Northern climes. You need to revise your will and other estate planning documents to reflect Florida law. Some of the changes to make include: ◙ An executor must be a Florida resident or have a certain degree of relationship to the testator. ◙ Tangible personal property (e.g., jewelry) can be disposed of pursuant to a separate writing signed by the testator and dated. ◙ A spendthrift clause is only valid if it restrains both voluntary and involuntary transfers. ◙ The executor can only sell real estate without a court order if the will expressly specifically grants such power. ◙ In terrorem clauses (you sue you lose your bequest) are not valid under Florida law. ◙ A Florida will executed in a different state is valid if executed in accordance with the laws of the state where executed. Thanks to Benjamin Shenkman, Esq. of Gonzalez & Shenkman, P.L., Wellington, Florida.

OK Paul, you’ll have to wait until next month for nine more tidbits to get you through the back 9.
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Infirm Financial Abuse

Summary: Elder financial abuse is widespread and is probably getting worse as a result of the recession. Don’t assume it doesn’t apply to your parent or grandparent because of the level of their wealth or their perceived social status. Yes Virginia, it even happens in your circles, and even in nice neighborhoods. 50% of the people over 85 have cognitive impairment. So the number of elderly at risk is substantial. But more than the elderly are affected. Anyone with a cognitive or other disability that infringes on their ability to protect themselves is at risk. 90 million Americans have chronic health issues, and so many of them face the same risks and need the same protections. So while most call it “elder abuse” it is really “Financial Abuse of the Infirm.” Just no one in the media seems to write about it! How do you prevent financial abuse of the infirm?

√ Acknowledge the risk and that it may affect you or a loved one. Even if your kids (niece, cousin, neighbor….) is too good to do that, temptation especially if compounded by dire financial circumstances can push even “good” people to do bad stuff. Do you really know that your home health aide is more concerned about your financial well being than that of his or her family back home (wherever that might be)? Your wealth relative to that of a home health aide or distant relative or even neighbor, may be perceived as being so great that their helping themselves or their loved ones who are in greater need may not be viewed as infringing on your financial security.

√ One of the most significant steps is to encourage the person at risk to establish a funded revocable living trust with an institutional co-trustee. With a bank or trust company as co-trustees along with the individual involved, they will remain in control as long as feasible, and financially safe from abuse. Fund the trust. The more assets (other than IRAs, a professional practice, or certain other assets) for which they transfer ownership into the trust the more secure they will be since the institutional co-trustee can help keep tabs on them. The person at risk requires contractual competency to establish and fund a trust. This is a greater level of competency than required to execute a will. Additional protection can be obtained for the at-risk person by their naming a succession of individual trustees to protect their interests. Also, someone should have the right to replace the bank/trust company. The at-risk person can hold this if they are capable, but a better approach might be to provide this power to an independent trust protector who cannot also serve as trustee.
√ A durable power of attorney is an essential step to protect the at risk person. But it is not enough to sign a standard form without carefully evaluating its provisions. If the at-risk person really does not have a taxable estate, or any persons he or she is responsible to support financially, the power might expressly state that the agent has no authority to make gifts. Gift language of various sorts is routinely included in many standard powers (even costly lawyer prepared documents) when in fact the temptation for the agent is not worth the possibility of the agent abusing the gift power. Consider appointing co-agents and an independent “monitor” charged with providing some degree of oversight of agent actions. These checks and balances are an important step to making a power of attorney protective rather than a tool for abuse of an infirm grantor.
√ Yep it sounds simple and costs nothing but consolidating assets into one institution (or as few as feasible in light of reasonable concerns about financial institution viability and insurance limits) is one of the most powerful steps to avoid financial abuse. A secure public institution with adequate insurance is ideal. For those CD lovers pick an institution that participates in the Certificate of Deposit Account Registry Service (“CDARS”), program. It allows investors to keep up to $50 million invested in CDs managed through one bank with full FDIC insurance, and under one agreement. We’re not advocating CDs as an investment choice, but we are advocating consolidation and organization to protect the at-risk person.
√ Have a duplicate copy of the at-risk persons monthly statements sent to a trusted person. A long time independent CPA is a great choice. If a cost effective arrangement can be made for the CPA to balance all the monthly statements and send out a periodic report, even better. This assures that at least a bookkeeper at the CPAs office is reviewing everything. The at-risk person might also name an adult child who is not their agent under their power of attorney (nor the current co-trustee under a revocable trust) to receive monthly statements. The consolidation, simplification and independent review can minimize the temptation that agents and others in confidential and private relationships with the at-risk person might feel. That creates real checks and balances.
√ Set up accounts for automatic bill payment, payment to credit cards, payment plans with utilities and others that equalize payments every month, etc. Anything that can simplify and create regularity can make aberrations due to theft, fraud or other abuse more obvious to spot.
√ Include in powers, revocable trusts and other documents a periodic mandatory inspection, interview or meeting by a social worker or similar independent organization with the person at risk, and a requirement that they report in writing to at least two fiduciaries. This can create another important check on personal as well as financial security.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Parents of disabled children should be able to exclude reimbursements for non-public school services from their income according to a recent IRS announcement. Information Letter 2009–0124. The general tax rule, which should come as no surprise, is that reimbursement of any personal expense is taxable as income unless a special rules provides to the contrary. A board of education may be required to pay for non-public education services obtained by a parent for a child if: (1) the services offered by the board are inadequate; (2) the services the parent secures are appropriate; and (3) equitable considerations support the parent’s claim. If these conditions are met, the school board must pay for the cost of the non-public education in order to satisfy its legal obligation to provide a free appropriate education.
■ Single member LLCs are disregarded for tax purposes, but that doesn’t mean they don’t have a tax consequence as taxpayers recently learned in New Jersey. Kaplan v. Director Division of Taxation, Docket No. A-3758-07T3, 2/11/09. The taxpayers held commercial real estate in single member disregarded LLCs. These generated losses to be reported (since the LLCs were disregarded) on their personal 1040 which would not be deductible. So the taxpayers tried to report income realized on other rental real estate partnerships (RELPs) as rent income to offset the LLC losses. NJ headed that one off at the pass. So the taxpayer tried to argue that the single member LLCs were actually tenant in common interests and hence the losses were reportable as partnership results that would offset the RELP income. The court held that the attempts to transmute income into whatever category seemed to provide a tax benefit wasn’t cricket.
■ Income from artistic performances isn’t subject to sales tax. Strippers doing a pole dance were found to be part of the dramatic arts so that the sales tax exemption under Sec. 1105(f)(1) applied. The judge found that: “The pole maneuvers in particular are no small feat to accomplish…” Neither was such legal reasoning! Matter of 677 New Loudon Corp d/b/a Nite Moves 821458. NYLJ 3/26/09.
Potpourri ½ Page:
■ Insurance: Before lapsing an insurance policy carefully evaluate your potential future needs for the policy (you may no longer face an estate tax but may face liquidity or other needs), consider the impact of possible income taxes and surrender charges (if any) in your analysis, will health issues impact your ability to obtain insurance if you need it in the future?
■ Reminders: For those suffering from cognitive issues try the creative use of the website www.rminder.com. Set reminders and your cell phone will get a call to remind you of what you need to do at the appointed time. If you have vision impairment and use special computer equipment the rminder converts your text to voice. Sync with recurring entries in your Outlook calendar to make it even easier and more automatic.
■ Roth IRA Contributions versus Mortgage Repayment: Hey Roth contributions can be a tax (and maybe asset protection – see lead article) home run (Rich even I know what that is). But before you convert, do the math. If you have a home mortgage which is a better financial option? Paying down your home mortgage or contributing to a Roth IRA? From an asset protection perspective if your state doesn’t protect tenants by the entirety home ownership between spouses from creditors, but does protect Roth IRAs, the asset protection answer may be simple. For some investors pencil pushing is necessary. Variables include marginal tax rates, how much interest expense would be deductible above the standard deduction, when and how tax rates may change, after tax returns estimated for each option and the risk associated with each.

■ Michael Jackson’s Estate May Own the Taxman but Not Owe the Tax Man! The untimely death of famed pop singer Michael Jackson raises some interesting estate tax issues. For estate tax purposes, assets generally must be valued at their fair market value at the time of the decedent’s death. Treas. Reg. Sec. 20.2031-1(b). Assets are valued at their “fair market value”. This is defined as the price at which the property would change hands between a hypothetical willing buyer and hypothetical willing seller, assuming neither is forced into the transaction and that both parties are reasonably informed about the facts relevant to the sale. The price is normally determined based on the market in which the item is most commonly sold to the public. Treas. Reg. Sec. 20.2031-1(b) and 25.2512-1. For anyone that owns a television or has been on the internet, the fascination with all things Michael Jackson has exploded. It seems pretty incontrovertible that the value of licensing anything with his image or log, or songs, has exploded in value. Yet the value for tax purposes is determined at the date of death when the discussion was of a possible comeback final tour. Might just be that the entire post-death increase in value escapes the tax man. There will likely be some pretty technical valuation analysis done to prove the difference in value of his assets pre- and post-death. Could the estate show that the value of his licensing rights, songs, etc. was quite a bit lower at death. Perhaps the difficulty or limited guarantees for his planned European tour might be used to support low values. If the publicity surrounding his death can be demonstrated to have increased these values, might the estate successfully argued that these were due to post-death events and not appropriately reflected in his date of death asset values? If this were to succeed, especially in light of some of the supposedly high debts Michael Jackson supposedly had, his estate may escape the Taxman, while leaving a tremendous financial legacy to his heirs.
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Mistakes Physicians MakeSummary: “What’s up Doc?” What are some of the common planning mistakes many physicians make? Here’ Bugs’ dozen top votes:

“I won’t get sued for more than the limits on my malpractice policy”. Wishful thinking, but it won’t keep Lord Voldemort, Esq. at bay. Not only was there never merit to this, there are cases on point confirming that Plaintiff’s recoveries are not limited by your coverage.

“I put all my assets in my spouse’s name, I’m safe.” Good plan but you missed the Sesame Street episode on the letter “D”! Divorce.

“I’m not worried about malpractice.” Yeah, but that’s not the only risk. ◙ If your son has a beer bash while you’re away that gets out of control how much might the suits cost? ◙ A physician that knew best was on vacation with his wife. She imbibed a bit too much when out with her friends and drove over a line of children waiting for a school bus. At least it solved their estate tax problem! ◙ The median family net worth is about $60,000. $2.5 million puts in you in the wealthiest 1%. When Willie Sutton, the famous bank robber, was asked why he robs banks he retorted “Because that’s where the money is at.” Your wealth alone may be a magnet for claims. It’s not only about malpractice Doc.

“I need to have an offshore asset protection trust.” Great plan if it’s right for you:
◙ $5-10 million investment assets really offshore. ◙ It should only be used for a portion of your assets (a nest egg). ◙ $25,000 – $50,000 in costs. ◙ Should only be done if all other techniques appropriate to your situation have already been implemented. ◙ Lots of snake oil salesman pushing FAPTs (the same guys who sell living trusts to avoid the evils of probate). ◙ Try it on the cheap and you could be getting free government room and board until you repatriate the assets you transferred. ◙ “You can paint it any color, so long as it’s black.”Asset protection isn’t like Model-T’s, you need more options than black or just a FAPT.

“I paid an attorney to protect my assets; I don’t need to do anything else”. You’re still looking for the magic bullet – they don’t exist, not even at Hogwarts. ◙ Any technique that might help you requires your continued effort and involvement. ◙ If your accountant isn’t involved it won’t work. Every trust and entity requires a tax filing. Every trust and entity must have proper recordkeeping to be respected. That means more cost, time and complexity. ◙ Your insurance consultants must be involved. Life insurance is a powerful asset protection tool. Property and casualty insurance are important too. Assuring that each asset and business is properly insured (and that the insurance reflects the proper trust, LLC, PC and other entity that owns the assets) is a critical first line of defense to all sorts of claims. You cannot plan without your insurance advisers involved. ◙ Follow through is important. If you set up a trust and don’t transfer assets to it, it’s useless.

“Investment planning – I can do better than those fee only folks.” The stats say you’re way wrong. But a good wealth manager is an integral part of your asset protection team, not just an ETF picker. Which entities should own which assets and how can overall family asset allocation goals be achieved. Another spin. How much did you loose in the 2000 or 2009 meltdowns? Investment risk is as real as malpractice risk. ◙ Bottom line – you need a team of advisers and your plan must be coordinated and monitored at least annually.

“I don’t have enough assets to worry about planning.” Yes, you do: ◙ Planning, to be successful, has to be implemented well in advance of any claim. The time to start planning is yesterday. If you wait until you have “enough” assets (when is that?) it’s too late. ◙ You don’t have to spend $50,000 for an asset protection plan. The plan should be tailored to your specific circumstances. If your asset base is limited, you shouldn’t ignore planning, you should engage in planning appropriate for your circumstances. ◙ It’s not only about your assets. If your parents (or another benefactor) intend to leave you assets, you should plan for those assets too (an inheritor’s trust).

“It’s too expensive to do.” The costs, relative to your malpractice premiums are probably modest. ◙ You can and should undertake planning in distinct phases or steps. Not only does that make it more cost effective, but it makes it simpler to understand and implement. ◙ Addressing planning in phases will improve your chances of success. Doing the kitchen sink might be too costly. Take steps along the path cannot be.

“Asset protection is about protecting my home and investments, it doesn’t have anything to do with my practice?” Well, Muggle, you seem to be missing things that are clear as day to a wizard. The safer you run your practice, the less your asset protection plan will have to be tested! If you have a professional corporation for your practice, be certain it adheres to all corporate formalities. Examples: Adequate capitalization (watch accounts receivable factoring and other techniques if applied in excess), annual meetings, signed minutes, signed and implemented shareholders’ agreement (an agreement with provisions that are ignored demonstrates a lack of adherence to corporate formality), signing documents properly (in the name of the entity by an authorized officer), and so forth. Remember, the proper use of a professional entity will help insulate you from claims against other physician shareholders or members.

“I want the Whipple Procedure of asset protection planning!” Medicine and law are practiced quite differently. Docs like giving procedures and equipment special names. In estate and asset protection planning cutesy names usually mean a marketing gimmick, not a good planning tool or the sign of a renowned practitioner. It’s just different. Even Elvis says you’re barking up the wrong tree! If a planning technique has a fancy name, and especially if it has a trademarked name, don’t do it without clearing it with a reputable team of practitioners. Example: When establishing a charitable remainder trust (CRT) many advisers recommend a “wealth replacement trust”. It’s really just an insurance trust with a fancy name. While it’s a great technique in the right circumstances it’s not appropriate for everyone, and the fancy name should make you suspicious. Hire competent professionals in each appropriate specialty. Hire a good CPA, attorney, insurance consultant, and financial planner, that understand and work with asset protection planning, not someone who specializes in planning for physicians. You want skilled practitioners, not a person skilled in marketing to physicians.

“A FLP will protect my assets.” You need to understand some core concepts. “Inside liability” is the liability associated with a particular asset. Example: You own a rental property. If a tenant sues, that is inside liability associated with the investment. You could have the rental property owned by a family limited partnership (“FLP”) limited liability company (“LLC”) to prevent “inside” liability from reaching your other assets, such as your home. “Outside Liability” is liability created by an asset or activity other than the asset/activity in question, and from which you need to protect that asset. Example: You want to protect your rental property from malpractice risk. If your rental property is owned by an LLC a malpractice claimant that obtains a judgment should only be able to obtain an interest as an assignee of your membership interest. Reality: A one member LLC may not afford this protection. Better Plan: Fractionalize ownership of the LLC so you own less than 50%.

“I need sophisticated planning.” Maybe, but your Defence Against the Dark Arts starts with the basics. They are cheaper, simpler and can be quite effective. ◙ Non-deductible IRA. The financial media tells you not to invest in a non-deductible IRA. They’re wrong. It’s a great asset protection tool. Contribute $5,000 ($6,000 if over 50) as soon as possible after January 1 each year. It’s an independent pot that is protected up to $1 million under the bankruptcy act. It has no costs, no legal fees and no complexity. The more separate protected pots, the more difficult to attack your assets. Further, an IRA has an ideal non asset protection motive, you’re saving for retirement. ◙ Pre-fund retirement assets. If you have a pension plan fund it as soon as possible each year. ◙ Consider permanent insurance inside your insurance trust instead of only term, and instead of insurance owned outright. Example: Set up an insurance trust (“ILIT”) to own permanent insurance funded up to the maximum you can without affecting the tax structure of the policy (MEC limit). Your spouse can be a co-trustee and beneficiary and can access the cash value of the policy in future years if needed. Insurance protects your spouse and children and has a strong non-asset protection motive. ◙ Re-title your house. Tenants by the entirety has a measure of protection from claimants. A qualified personal residence trust (QPRT) is another approach that in appropriate circumstances may provide greater protection. When using a QPRT you transfer your house to a special trust, QPRT, for a term of years (say 20) after which your heirs (or a trust for their benefit) owns the house. Downside – the value of the house will not be available to you in retirement. ◙ Have a large umbrella (personal excess liability) insurance policy. Be certain it is properly coordinated with your automobile and homeowners’ policies. This is vital to protect against other liability risks (asset protection planning is NOT only about malpractice risks, it’s about all identifiable risks you can address). ◙ Use your prenuptial agreement to create asset protection benefits. ◙ Have your spouse create trusts in his will for your benefit that restrict, to the extent permitted by the tax laws, distributions to you. Example: A bypass trust for your benefit should include children as beneficiaries, a sprinkle power in the trustee (the right to distribute assets to any one of several beneficiaries in the trustee’s discretion) and totally discretionary distribution standards.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Late Decisions

Summary: “OK mom, I’ll get to it!” Procrastination is common for more than just the teenager requested to clean up his room. What really vital planning decisions are you putting off?

Decisions People Leave Until It’s Too Late

√ Signing a living will. Clarify what your end of life wishes are and telling your loved ones how you feel. How many people sign them in the ER on a quick form? Everyone remembers the Terri Schiavo tragedy. Don’t have your end of life wishes violated because you didn’t communicate them. Example: You have ALS and want every measure taken to prolong your life, including a respirator, so long as you are of sound mind. Knowing many standard forms might restrict this you opt for a special living will that you tailor to address your special health situation.
√ Rebalance your portfolio regularly. “I’ll wait until the market recovers.” Yeah, that’s exactly why the average individual investor earned about 4% in mutual funds over the past 20 years when the return of those funds over the same time period was closer to 12%. Rebalance regularly.
√Tell your loved ones that you love them. Write an “ethical will” or heartfelt letter expressing how you feel and your concerns and wishes for family, friends and loved ones. Too often people literally wait until they are on their death bed and then they don’t have the strength or mental presence to do so. Example: Your daughter has early onset Alzheimer’s disease. You opt to leave more in your will to a trust for her and if she dies to her husband, then to your other children. You write a letter explaining why you are leaving her more and assuring your other children it is not because you care or love them less. The fuzzy stuff is important too!
√Protect your assets. It’s too late when you’re sued. Buy insurance and take other appropriate steps to protect your assets before you have any real or likely problem. Example: If you’re in business and subject to liability exposure, perhaps your savings should be in your spouse’s name.
√Update your will. Adjust for new laws, changes in asset values and personal matters. Example: Your son has multiple sclerosis and had to leave his job, and is struggling to make ends meet. Your daughter is still getting by. Do you leave him more? Example: Your child has substantial health issues – if he/she receives government aid you might need to leave any bequests in a special needs trust so you don’t disqualify him/her for essential government programs.
√Sign a power of attorney. If you become disabled and have not taken precautions, a family member may have to petition a court to be appointed guardian to handle legal, tax and financial matters for you. That is costly, time consuming and all public record. Plan ahead.
√ Buy life, disability or long term care insurance. “I’ll get to it, but I’m young [healthy]…” Ask anyone diagnosed with cancer if they received a phone call in advance of the diagnosis so they could buy insurance. Health problems are equal opportunity employers and you never know when they will come knocking. If coverage makes sense get it. There are ways to tweak coverage to keep the costs down, but to still have it in place. Example: Buy term insurance with a conversion feature. You can convert at a later date. Buy disability policy with a longer waiting period. Buy long term care while it is affordable, before you face health issues.
√ Maintain a calendar. “I’ve never been audited, I’ll get to it.” Not corroborating business, travel and entertainment and other expenses won’t bode well on an audit. A calendar documenting key data is easy to maintain and can be essential to address a range of tax audit issues. Are you resident in a high or low tax state? Calendar travel dates to prove the time periods in each. Need to allocate earnings between states? Calendar where you worked. Claiming travel, entertainment or meal expenses? Document when, where, who and what on a calendar. Often, adding simple notations to the appointments you keep on your regular calendar take little additional time but may go a long way to assuring ready access to information to support a tax position. Importantly, making those entries regularly and contemporaneously gives them more credibiltiy.
√ Issue Crummey Powers. Yes, they should be issued by the trustee of your trusts as soon as possible after you make a gift to the trust. These notices inform trust beneficiaries of a limited right to withdraw funds from a trust thus making your gifts to the trust qualify for the annual gift tax exclusion, presently $13,000/year.

Recent Developments Article 1/3 Page [about 18 lines]:

■ Partner’s Inheritance Rights: NY recently recognized a right in a same sex partner to inherit. In the recent case, the Court recognized the validity of a same-sex marriage between two New Yorkers conducted in Canada. Matter of the Estate of H. Kenneth Ranftle, File No. 4585-2008 (N.Y.L.J., Feb. 3, 2009). The Court acknowledged that a person may provide for his or her same sex spouse to inherit his or her estate just as any spouse. The deceased partner’s family members should not have legal standing to object to the will. This case continues extends the concepts of an earlier NY case in which the court held that a marriage that was valid under the laws of Canada, Massachusetts or any other state where it was legal, was entitled to recognition in New York. Martinez v. County of Monroe.
■ Split Dollar and S Corporations: “Make a new plan, stan…” Your family record company, an S corporation, and your life insurance trust (“ILIT”) create an agreement to own a large permanent life insurance policy on your life. Your ILIT pays for the economic benefit of the insurance and your S corporation pays for the bulk of the premium. If you get hit by the bus, Gus, the ILIT collects the death benefit and reimburses the S corporation for the premiums it advanced, or the cash value of the policy on death if greater (not the facts in this ruling). Split-dollar can be cool. But what about the tax requirement 1361(b)(1)(D) that an S corporation can only have one class of stock? All shares must have identical rights to distribution and liquidation proceeds. The key to avoiding problems, Lee, is that the ILIT must pay the appropriate fair share of the insurance cost. Then no special benefit is provided to a shareholder that could violate the one class of stock rules. PLR 200914019. Reality, if you have a health issue the actual cost of insurance could be much greater then the imputed cost and a split-dollar plan, Stan, could result in a real disproportionate benefit, but no tax problem.
Potpourri ½ Page:
■ Payroll Tax Audits: Detailed federal employment tax audits will begin in November and will focus on: (1) worker classification (employee vs. independent contractor); (2) fringe benefits; (3) officer’s compensation; and (4) reimbursed expenses. Don’t wait to get tagged, review your policies and procedures now. Review employee classification and correct any inappropriate treatment of employees as independent contractors. Corroborate the legitimate classification of appropriate workers as independent contractors (e.g. document relevant facts, collect business cards, advertisements, etc.). In closely held businesses have your CPA confirm the reasonableness of salary. If you’re underpaying salary to avoid payroll tax in an S corporation, that could be an issue. Be sure expenses are properly corroborated and that firm policy requires appropriate recordkeeping and reporting.
■ Deductions and Employee Status. A surgeon was held by the court to be an employee, not an independent contract. So what? His business expenses were therefore only deductible as unreimbursed employee business expenses on Schedule A, not as a business expense on Schedule C under IRC Sec. 62. These are subject to the 2% floor on miscellaneous itemized expenses – i.e., the have to exceed 2% of adjusted gross income (“AGI”) to be deductible. IRC Sec. 67. No surprise, they didn’t so the entire deduction was lost. Maimon, TC Summary 2009-53. Here’s some of the facts: ◙ Executed an employment agreement expressly identifying him as an “employee”. He should have signed a consulting agreement stating he was a contractor. ◙ He served as an officer and director of the employer/corporation. Bad move. ◙ He was reimbursed for CME, hospital staff dues, professional societies, professional publications, and other professional expenses in accordance with policies established by the employer. Contractors should have the risk of economic loss. If many costs are reimbursed, the risk of loss is mitigated. ◙ Received Form W-2 for “Wages, tips, other compensation”. He should have been given a 1099. ◙ He did not pay self-employment tax. You can’t have your cake and eat it too. ◙ He did not receive compensation from any other source, and he did not perform medical services for a fee outside of his relationship with the employer. A contractor holds himself out to others for similar work.
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Grantor Trusts: All that Glitters Isn’t SimpleSummary: If a trust is treated as owned by the person setting it up (the “grantor”) for income tax purposes, many beautiful things follow. The grantor can pay the income tax on the trust earnings thereby leveraging the growth of trust assets, typically outside the grantor’s estate. The trust can transfer appreciated assets to the grantor, or the grantor can sell appreciated assets to the trust, all without income tax consequences. This planning must be done with care to avoid the Scylla and Charybdis of the gift and estate tax. But how is such tax elixir achieved? A common mechanism to achieve grantor trust status is for someone to be permitted to substitute non-trust property for trust property of equivalent value. The popularity of grantor trusts and this technique belies the complexity. Several recent IRS pronouncements address grantor trust status. They are important for those heading down the yellow brook road in search of grantor trust Oz.

Code Section 675 – Income Tax Consequences of Power to Substitute

Code Section 675(4)(C) is paraphrased as follows. The grantor is treated as the owner of any portion of a trust in respect of which a power of administration is exercisable in a non-fiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term “power of administration” means any one or more of the following powers…(C) a power to reacquire the trust corpus by substituting other property of an equivalent value. Sounds simple. Just add the right lingo into a trust, like a grantor retained annuity (GRAT) trust or defective grantor trust (IDGT) giving someone the right to substitute property in a non-fiduciary capacity. But there have been and remain lots of issues: ◙ Is the property held in a non-fiduciary capacity? This could turn on the facts in each case making a conclusion tough. So clearly, the grantor cannot be the trustee and hold this power. It is less clear that if the person given the power is an investment adviser, trust protector, etc. whether they could still hold this power in a non-fiduciary capacity, so caution would dictate not doing so. ◙ Even if holding a power to substitute succeeds in characterizing the trust as a grantor trust for income tax purposes, does it taint the trust assets as includible in the grantor’s estate? The conclusions that it didn’t were often based on the case Estate of Jordahl v. Comr., but in that case the power was held in a fiduciary capacity. Apples and oranges. ◙ OK, so give your college buddy the power avoiding the issues of your holding as grantor creating estate inclusion. But can how can he “reacquire” what he never owned to achieve the income tax status? But the statute above does say any person. Not clear. ◙ #The trustee must have a fiduciary duty to the beneficiaries, be held to a high standard of conduct, be required to administer the trust solely in the interest of the beneficiaries, act fairly, justly, honestly, in the utmost good faith and with sound judgment and prudence. The trustee must be subject to a duty of impartiality that requires the trustee to take into account the interests of all beneficiaries.

Rev. Rul. 2008-22 – Estate Tax Issues of Power to Substitute

The IRS said that the power to substitute won’t cause estate inclusion under IRC 2036 or 2038 if certain requirements are met. That’s big. Follow the Ruling’s recipe and one of the big risks noted above is obviated. But not all that glitters is gold, there are still lots of landmines. In the ruling taxpayer set up an irrevocable trust for descendants.

◙ The grantor expressly cannot be trustee of the trust. ◙ The trust document provides that the grantor has the power, exercisable at any time, to acquire any property held in the trust by substituting other property of equivalent value. ◙ This power is exercisable in a non-fiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. ◙ The grantor has to certify in writing that the substituted properties are of equivalent value. ◙ Under state law the fiduciary has the obligation to ensure that the properties are of equivalent value. While the Ruling doesn’t address this issue, the trust document could specify this requirement as well. If state law did not require this, will inclusion in the trust document suffice? This is perhaps the keystone of the Ruling – it is the fiduciary duty of the trustee that keeps the grantor’s non-fiduciary power in check to thereby avoid an adverse tax result. ◙ If the trust has two or more beneficiaries the trustee must have a duty to act impartially in investing and managing the trust assets, taking into account the differing interests of the beneficiaries. What happens if the assets include family business interests from which perquisites and salaries are paid is not clear. ◙ The trustee must prevent any shifting of benefits between the beneficiaries that could result from the substitution of property by the grantor. A common step in a GRAT is to “immunize” the GRAT after a run-up in asset values by substituting cash equivalents for the securities. Does immunization meet this criteria? ◙ The trustee must have the discretionary power to acquire, invest, reinvest, exchange, sell convey, control, divide, partition and manage trust property in accordance with the standards provided by law. has an unrestricted discretionary power to acquire, invest, reinvest, exchange, sell, etc. trust property in accordance with standards provided by local law. Security GRATs are never really invested in accordance with local law, namely the Prudent Investor Act. To the contrary, security GRATs are intentionally invested in non-diversified portfolios whose risk levels are substantially higher than the overall risk level for the family’s overall investments. IDGTs often hold business and real estate interests. How will this Ruling be applied with a trust investment adviser serving, or if the trust has restrictions on selling a family business? Perhaps this should be considered in the investment clauses of the trust document. While the trustee (or investment adviser if one is used) may prefer that trust investment provisions permit the holding of a non-diversified, highly volatile asset base, to confirm acceptability of the strategy used (i.e., to protect the trustee from a claim of improper investments), might such a provision conflict with the Rulings require of investment in accordance with “standards provided by local law”? ◙ The grantor cannot exercise the power in a manner that reduces the value of the trust property or increases the grantor’s net worth. ◙ The nature of the trust’s investments or the level of income produced by any or all of the trust’s investments does not impact the respective interests of the beneficiaries, such as when the trust is administered as a unitrust. The entire intent of a GRAT is to increase the benefits to the remainder beneficiaries. Does that violate this concept? Arguably not since the interest of the grantor during the GRAT term is fixed.

Bottom line, if the grantor is not a fiduciary, and holds the above power to substitute, and the trust document and local law include the requirements of the Ruling, grantor trust status should be achievable for income tax purposes without causing estate tax inclusion, but risk and issues remain.

PLR 200846001 – Gift Tax Issues of Power to Substitute

A common planning approach is to set up a two year GRAT which has to be a grantor trust. After the two years are up, the assets remaining in the trust can be distributed outright to the heirs, typically children, or held in further trust for those heirs. That remainder trust, after the GRAT term, can also be structured to be a grantor trust. This will enable the grantor to continue to pay the income tax on the earnings of the post-GRAT kid’s trust, thereby further leveraging the value in that trust for the children. This PLR (and remember private letter rulings can only be relied upon by the taxpayer to whom issued) had a different approach then the above Revenue Ruling. Here’s the facts. Wife set up a GRAT and named Husband trustee. A different approach was used to achieve grantor trust status during the GRAT term and after. The power to substitute was used only for gift tax purposes, not to achieve grantor trust status for income tax purposes.

Grantor Trust During the GRAT Term: The trust document specified that the annuity amount could be paid to the Grantor from trust income or principal. This made the GRAT a grantor trust during the GRAT term. IRC Sec. 672(e)(1)(A) provides that the Wife/grantor will be deemed to hold any power held by her spouse. IRC Sec. 673(a) provides that the grantor shall be deemed the owner of a portion of the trust in which he holds a reversionary interest in income or corpus if the value of the interest exceeds 5% of the value of such portion. IRC Sec. 674(a) provides: “The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.” However, for this to succeed in creating grantor trust status the exceptions in IRC Sec. 674(b), (c), and (d) cannot apply. These powers of the husband as trustee were imputed to the wife as grantor, since husband was not an adverse party to the Wife/Grantor. IRC Sec. 672(e). This provision provides that the grantor is treated as holding any power or interest of any individual who was the spouse of the grantor at the time of the creation of such power or interest.

Grantor Trust After the GRAT Term: The husband, as trustee, was given a broad power to expend trust assets for the Wife’s/grantor’s children, in such proportions as he deemed appropriate. IRC Sec. 674(a), see above. Therefore, the Wife/Grantor was deemed to own the trust for income tax purposes.

Power To Substitute Doesn’t’ Create Gift Tax Issues: The power to substitute assets was held in a fiduciary capacity which could not create grantor trust status under IRC Sec. 675(4)(C) above which requires that the power be held in a non-fiduciary capacity. The IRS held that the power to substitute shares of publicly traded company 1 for shares of publicly traded company 2, or vice versa, would not create a gift tax on transfer so long as the share were properly valued and any value differential was made up in cash. The power to substitute also did not disqualify the GRAT.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Alternate Valuation Date

Summary: When you die the estate tax is assessed on the value of the assets you owned on the date of your death. In case you haven’t noticed, asset values have been declining lately. If your estate were taxed on the date of death values, nine months later when the tax is paid, the value of the estate might have declined to the point where the tax is as much as the value of your assets. To minimize this unfairness the tax laws permit your estate to value assets at the date six months after your death if the values and tax are lower. This is called the alternate valuation date and is contained in Code Section 2032.

√ Gee another tax rule. Do you care? Well, if you’re an executor and don’t make the election and should have, you could be held personally liable if the alternate valuation could lower taxes. Re Lohm Est., 269 A.2d 451 (Pa. 1970). Got your attention?
√ The election is made by the executor on the estate tax return and is irrevocable.
√ The election must apply to all estate assets, no partial application is permitted. Treas. Reg. Sec. 20.2032-1(b)(2).
√ Assets which are distributed, sold, exchanged, or otherwise disposed of, before the 6 month date after death are valued as of the date they were distributed, sold, exchanged, or otherwise disposed of. A transaction which is a mere change in form is not considered sold, exchanged, etc. and is valued at the 6 month date. Treas. Reg. Sec. 20.2032-1(c).
√ Patents, life estates, remainders and reversions that are affected by a mere lapse in time are valued as of the date of death and an adjustment to the 6 month alternate valuation date to reflect differences in value that is not due to the mere lapse of time. Treas. Reg. Sec. 20.2032-1(f).
√ If the alternate valuation approach is used, the value of an asset on the alternate valuation date becomes the beneficiary’s income tax basis for that asset. IRC Sec. 1014(a)(2). Thus, the estate tax savings from electing alternate valuation may be offset by an increased income tax liability when the inherited property is later disposed of. You’ll have even more fun and family harmony if the result of the election is to lower taxes for one heir while raising the overall tax costs for another. Rumor is that the Hatfield-McCoy feud began over a 2032 election.
√ Some estates have restructured assets after death to reduce their value, then elected to use the alternate valuation date to lower their estate tax. The IRS viewed that like taking your finger off a checker piece then trying to move it anyhow – not playing by the rules. So they wrote new rules in Proposed Regulations Section 20.2032-1(f)(1). These endeavor to prevent executors from taking actions that could lower the value of an estate asset and then electing alternate valuation. Specifically, the IRS tries to limit reductions in value to only those caused by market forces.
√ Choosing alternate valuation can affect the estate’s qualification for special estate tax benefits that are based on certain assets exceeding specified percentage tests. If the relative value of different assets changes post-death these benchmarks could be met or missed. These could include: Code Section 303 redemption of stock to pay death taxes if the value of the corporate stock exceeds 35% of the gross estate; Code Section 2032A requires that 25% or more of the adjusted value of the gross estate must constitute qualifying real property interests; or Code Section 6166 requires that business interests exceed 35 percent of the adjusted gross estate to pay the estate tax in installments.
√ The retitling of the decedent’s IRA (“John Doe”) to an inherited IRA (“John Doe, Deceased, fbo Jane Doe”) should not be considered a 2032 distribution so that the IRA will be valued at the six month date (assuming no sales of stock from the IRA).
√ If prior to the September 30 of the year after death (the beneficiary determination date) the year of death, the beneficiaries who inherit the IRA can split the IRA account into separate IRAs so that each of them can be a “designated beneficiary” of their own separate IRA and thus use their own life expectancy to calculate required minimum distributions (e.g. cousins with significant differences in age). The division of one IRA among named beneficiaries should not be a “disposition” so that the value should still be determined at the 6 month date.
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Recent Developments Article 1/3 Page [about 18 lines]:
■ Grantor Retained Interests: Proposed revisions to Reg. 20.2036-1 (found in REG-119532-08 ) provide a method to determine the portion of trust corpus includible in a deceased grantor’s estate if the grantor reserves a graduated retained interest, which is a retained interest that increases annually during the term of the trust. The proposed method measures the amount of principal needed to generate sufficient income to produce the payments that would have been due even after the decedent’s death. This is done as if the decedent had survived and continued to receive the retained interest. The proposed regulations make other changes as well, including clarification of the includable amount if the decedent retained the right to receive an annuity or other payment, rather than income, after the death of the current recipient of that interest.
■ New York will tax non-residents on gains on sales of real estate entities starting May 7, 2009. Example: You live in New Jersey and own 40% of an LLC that owns an apartment building in NY. If the LLC sells the building at a $1M profit, you’ll have to report $400,000 in gain to NY. Caution: Depending on how your home state taxes your LLC gain, and what it does by way of a credit for taxes paid to NY, you could pay taxes in both states! Sing the jingle: “Double your pleasure
Double your fun With Doubletax Doubletax…”Complexity: Ya need more rules to keep your CPA employed, so: ■ Interests in a partnership, LLC, S corporation, or a C corporation is treated as NY real estate if 50% or more of its assets are real estate located in NY and it has 100 or fewer owners. ■ So you get smart and transfer enough cash into the LLC the week before you sell the property so that the real estate constitutes only 49% of the assets and you avoid the tax. No so fast Slick. Only assets owned for 2 years before the sale count.
Potpourri ½ Page:
■ Alternate Valuation: An estate is allowed, in very general terms, to value estate assets 6 months after death. With asset values declining this can be important. Consider making a protective Code Section 2032 election as a hedge against IRS valuation attacks. The executor can check the box on Form 706 indicating “Yes” for the alternate valuation election, and then write the words “protective”, and file the 706 with regular values. Because of the economy some practitioners are making this procedure a regular practice. There does no seem to be any prohibition in the regulations against this. Caution: Using alternate valuation may change relative values of assets and help qualify the estate for other tax bennies, like the IRC Sec. 6166 estate tax deferral, or zap your ability to qualify. Thanks to Steven B. Gorin, Esq. of Thompson Coburn LLP, St. Louis, Missouri for this clever idea at the ABA RPTE Spring Meeting.
■ 529 Plans. Wealthy taxpayers have always set up trusts for children, and in particular grandchildren to pay for college. Now that those trust investments have been so hammered, and the wealthy families feeling the pinch of recession and market meltdown, many are looking to invest the trust funds into 529 plans to eliminate the costs of maintaining trusts and/or to better qualify the grandchildren for financial aid since trust assets may be counted more heavily then are 529 assets. The trust itself may be able to transfer assets to a 529 plan. Another approach is that the language of the trust may be broad enough to permit the funds to be distributed out of the trust to a 529 plan.
■ Love Life insurance: We don’t sell insurance so we can tell you with a straight face — when President Obama raises taxes on the wealthy the tax deferred growth inside that permanent insurance policy is going to look pretty appetizing (well, so long as the insurance company stays in business). Put that in the pot as you rethink insurance coverage in light of all the other changes.
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Brooke Astor: Questions and LessonsSummary: The estate of Brooke Astor is embroiled in a headline grabbing suit with her son, Anthony Marshall, and her former estate planner, Francis X. Morrissey, Jr. Was she competent when she signed the two questionable codicils amending her will? Did her Alzheimer’s disease render her unable to comprehend what she signed? Was son Anthony as bad as the tabloids make out? The tabloids have raised lots of points, many of them left unaddressed, or explained inaccurately. Many of these points might be important for you to understand the case. Even if the tabloid accounts are completely off target (no surprise there) there are lots of interesting issues for cocktail party conversation.

■ Were Anthony Marshall’s Perquisites Theft or Confirmation of Brooke’s Intent. Well the tabloids make it should that Anthony was a bad boy. Maybe he was, or maybe he wasn’t. Maybe his increasing his compensation for managing his mother’s affairs was inappropriate. But maybe it was a good tax plan! The income tax he would have to pay on the compensation might have been less than the combined federal and state estate tax had those funds been left in the estate. Hmmm, most folks do like to minimize taxes. That might have made excessive compensation a potential tax issue, but not an abuse of his position. Anthony paid salaries of some of his employees from his mother’s funds. Was it abuse of his position or perhaps overly aggressive tax planning? Lots of rich folks aggressively try to find ways to diminish their taxable estates; perhaps the payments were taxable gifts, but no more than that. Were these payments authorized? If Anthony was agent under a broad power of attorney for his mother some or all of the payments might have been permitted. If the power of attorney gave Anthony the right to make unlimited gifts to himself or for his benefit, then all of the payments could arguably be permitted. Why would Brooke have given such broad discretion? Many wealthy taxpayers give trusted agents unlimited gift authority. Making large taxable gifts, if the donor survives for three years, can remove the gift tax paid from the gross estate creating a beneficial tax result. Well what about that retreat in Maine? Brooke no longer owned or used it, but continued to pay the expenses. Gee, so do lots of taxpayers. Mom and dad gave the kiddies the vacation home, but continue to cover the costs, against the advice of tax counsel. Those payments might constitute gifts to the kids creating a gift tax liability, or perhaps could be argued by the IRS as being evidence of an incomplete gift of the vacation property thus pulling it back into the estate. So again, based on the sketchy tabloid accounts, Anthony may have done what many do. It is potentially a tax issue, but is he really the bad boy they paint? Tabloid accounts don’t address much of this, but do leave a distinct impression of wrong doing. The “No Bias. No Bull.” tabloids seem to have forgotten Sgt. Joe Friday’s quip “Just the facts ma’am.”

■ Document a Pattern. From what can be gleaned from the tabloid accounts, there were 3 codicils signed. The defense will argue that if Mrs. Astor’s first codicil, signed a mere three weeks before the second of the three, was not challenged, why should the second one be in question? If she was competent for the first, why but three weeks later, should she have been incompetent for the second? While the details of this argument are unclear from the tabloid accounts (aren’t most things?) there is an important lesson. If there are health questions that could affect your competency, establish and document a consistent pattern. While this can be done with wills (see below) there are other steps that can also be taken. For example, did Mrs. Astor name her son as agent under her durable power of attorney? What scope of powers was he given? If she granted her son a broad general power of attorney, that would certainly indicate a level of trust in him consistent with the modifications of her will. If, for example, she had initially named her attorney as her agent, but then named her son, that pattern could indicate a growing trust and confidence in her son.

■ Create a Succession of Wills. Worried about a possible will challenge? Create a succession of wills. Legally, if your February 2009 will is overturned based on a successful challenge of your competency, then the will you signed prior to that one, say your September 2008 will, becomes the governing document. For example, if you’ve been diagnosed with Alzheimer’s it might be years before there is a cognitive impact so significant that it impairs your ability to sign a will. So, if you sign a will now, revise it in six months and sign a new 2nd will. Then revisit it again a few months after that and sign a 3rd will. A challenge to your third will reinstates the second. A challenge to the second, reinstates the first, and so on. Further, if each will reflects a step along a constant continuum (e.g., each further increasing bequests to your only son, and a reducing charitable bequests that had been your primary beneficiary), the sequence lends credibility to your actions. If the 7% unitrust payment to Anthony (see below) would have exhausted the trust with a reasonable degree of certainty, perhaps that was a logical step on the continuum to an outright bequest? Have a disenfranchised child you have disinherited? After you sign the will disinheriting them, go back to the same firm a few months later, add a new charitable beneficiary and perhaps make other changes to demonstrate that you reconsidered the will, although you chose to exclude the same child. Have a different attorney and witnesses supervise the execution. Repeat the process. Using different witnesses each signing makes it less likely someone will convince a court that so many independent witnesses could have all been mistaken as to your competency.

■ Careful with Codicils. Codicils, or amendments to an existing will, are often not the preferred approach since the Codicil highlights the modification from the prior will and can potentially introduce inconsistencies or interpretive issues between the various codicils and the will they modify. In most cases signing a new will is a better option. One notable exception, which may have applied in the Astor case, is that if your competency is in question, the Codicil merely amends the prior will, it doesn’t revoke it. If you are proven to have been of questionable competency when you signed the codicil, than only the modifications effected by the codicil are in question, not the issue as to whether by signing the codicil you intended to revoke the prior will.

■ Basic Math: 7% Unitrust Belies Tabloid Statements. Brooke wanted to leave her estate to charity say the tabloids. So instead of giving her assets outright to Anthony, she put them into a trust. Anthony was to get 7% of the value of the trust every year (that’s called a unitrust). So the tabloids conclude that Anthony was a bad boy trying to defeat his mother’s intent to leave her estate to charity. Who’s doing the math at those tabloids? If you read the studies published by those smart folks at Alliance Bernstein you’d know that you really might want to payout only 3-4% a year if funds should stay intact. If Anthony was to get 7% of Brooke’s estate, the trust was clearly a wasting asset, meaning a lot of principal would be distributed to Anthony under what the tabloids say her trust provided. Brooke died in 2007 at age 105. Anthony was in his early 80s which could mean a 20+ year life expectancy. Factor into the analysis the huge drop in asset values in 2008-9, but continue the 7% payout. The tabloids don’t even mention whether Anthony had any principal invasion rights. If you have some Monte Carlo simulations done on these facts the odds are pretty high that not a large part of the estate would ever be distributed to charity under what the tabloids describe was Brooke’s plan. If you believe that Brooke intended her estate to eventually be distributed to charity with these assumptions, we’ve got a bridge to sell you.

■ Competency. Was Brooke competent? If Brooke was not competent, than any document she signed, or any transactions she completed, during the time period in question will be ineffectual. Did she make large charitable gifts or sign other significant legal documents other than a codicil during the time period in question? If so have they been challenged too? The degree of competency to sign a will (testamentary capacity) is less than that required to execute a contract. So if Brooke’s codicils are even subject to question, any contract documents signed would be more prone to being overturned. The tabloids are silent. Many people mistakenly believe competency is purely a medical concept. Competency is really a legal determination. The tabloids made hay out of the fact that a laundry list of famous socialites would be called to testify as to Brooke’s condition. In a competency determination, the weight of a gaggle of famous folks on one side of the scale, and a qualified lawyer supervising the signing on the other, should tip the scale towards the lawyer’s determination. The circumstances of the specific matter weigh on how competency in that situation should be assessed. Anthony was her only natural heir. He appears from tabloid accounts to have been managing her affairs. A 7% unitrust with a potential 20+ year time frame could conceivably have paid out a substantial portion, even a substantial majority, of Brooke’s estate to Anthony. These circumstances, if correct, might suggest a rather low threshold for assessing Brooke’s competency. Attorneys are to consider the degree of physical, financial or other harm to the client when assessing competency. Based on the above, how much harm was there?
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: New York Power of Attorney Changes

Summary: A power of attorney is one of the most important legal and financial documents you will ever sign. A power can be vital to protecting your financial interests when you are disabled. A power can be your primary dispositive document by authorizing an agent to make unlimited gifts, modify beneficiary designations and more. It can also be a source of elder financial abuse by someone (e.g., child, caretaker, etc.) using it as a weapon to steal your assets. New York, after 8 years of study has revised its laws governing powers. Chapter 644, 1/27/09. 8 years demonstrates the seriousness, importance and risks of what too many people view as a simple, “standard” document. The new rules are effective 9/1/09. For all you folks that continue to ignore the many articles (HIPAA, prudent investor act, etc.) imploring you to update your plan and documents, and to meet all your advisers annually, here’s another major change to ignore at your peril. For a background article on powers see Practical Planner July 2006 available in the newsletter archive on www.shenkmanlaw.com.

■ Expect More Cost, Time and Complexity. The modifications to NY’s power of attorney law are laudable. There is no question that too many people were misled by the ease or simplicity of signing perceived standard powers. The internet has exacerbated this problem exponentially. Unfortunately, protection comes at a price. Standard forms and lawyer prepared comprehensive forms will be longer, more complex, require more decisions, take more time to sign, create more potential for execution errors (e.g., not checking all the required boxes or failing to sign a critical rider).
■ Sign New Forms. New forms are being created. Anyone that has signed old NY power standard forms should consider signing new ones that comply with the new requirements. Old powers will remain valid but will be subject to some of the new rules, including those governing HIPAA, acceptance by third parties and the standard of care required of the agent. Even if old powers work, you should have the protections afforded by the new law. Further, using current documents will likely grease the wheels for having the documents accepted.
■ Your Agent Must Sign. The agent, to use the power must sign the document. It’s not valid without your signature as principal and the agents. Signatures must be notarized. Ch. 644, §2, 5-1501B(1).
■ Evaluate Gift Powers. The authority of an agent to make gifts can be vital if you face an estate tax. With the federal estate tax exclusion now $3.5M, for the vast majority of Americans this is not an issue and the weighing of the risks of a broad gift provision, versus loss of estate tax planning benefits has changed. For most Americans, unless there is an heir in need of help, the risk of gift powers now might outweigh the possible benefits if estate tax is not an issue. However, in states, like NY, that assert an estate tax on all assets over $1M, the gift power may be the key to reducing or eliminating that tax. If a power doesn’t expressly provide the authority to make gifts, the agent cannot do so. NY has made this much tougher and more complex. A “major gifts rider” must be attached to the statutory power of attorney, notarized and witnessed by two independent (i.e., cannot receive gifts) people. This can also be accomplished in a non-statutory power (i.e., lawyer created documents) meeting the same requirements. Ch. 644, §2, 5-1501B(2), § 19, 5-1514. Agents must act in accordance with the principal’s instructions, or if none, in the principal’s best interests. These changes raise a raft of issues that are complicated and problematic. For example, you might authorize your agent to made decisions pertaining to your IRA. You’ll have to sign a Gift Rider to permit a change in beneficiaries. How can you differentiate between non-gift and gift-like powers and decisions?
■ Authorize Medical Records. HIPAA – the Health Insurance Portability and Accountability Act (see Practical Planner July 2007) restricts access to your protected health information (“PHI”). Your financial agent needs access to some of that info to pay bills. The new law grants that. Good change, but will your records include more personal details than you want a financial agent to see? §5-1502K, Ch. 644, §12. Financial agents still are precluded from being empowered to make health care decisions under a financial power.
■ Agent Acknowledges Responsibilities. The new law clarifies that the agent is a fiduciary (position of trust). Ch. 644, §19, 5-1505. The agent is required to disclose to third parties that he is acting as your agent. The agent must sign the power for it to be valid, and in doing so acknowledges the responsibility and liability that he is accepting by signing on as agent.
■ Appoint A Monitor. You can appoint someone to monitor your agent’s actions. Ch. 644, §19, 5-1509. The monitor can request a copy of the power of attorney and documents that record transactions of the agent.
Recent Developments Article 1/3 Page [about 18 lines]:

■ Not Swiss Cheese. If you are keeping funds offshore and not fessing up, the time has come to face the piper. While you may have heard of the UBS Swiss account issues, the issue, and risk to you if you’re involved, if far greater. If you come clean with the IRS-type amnesty program before the IRS knocks on your door, you may get immunity from both: prosecution for tax evasion (not paying tax on the unreported income), and false filling (not checking the box on your Form 1040 disclosing that you have a foreign account). Also, June 30 every year you’re supposed to file Form TBD-90 with the Treasury Department reporting your offshore accounts. There are draconian penalties if you fail to do this — up to 50% of the account (wow!). These penalties might be waived if you disclose. Voluntary disclosure might get you immunity from prosecution and the right to repatriate the funds. IRM 9.5.11.9. Not playing like a Boy Scout could trigger more problems. If you repatriate a large dollar amount from overseas without having fessed up, when the bank files a suspicious activity report (e.g., an aberrational deposit) with the IRS as it may be required to do, this will be sent to the IRS criminal investigation unit. If you make a voluntary disclosure you avoid all this. But just like those car commercials, “professional driver, closed road,” hire a pro to guide you. Thanks to Lawrence S. Horn, Esq., Sills Cummis & Gross P.C., Newark, New Jersey.
■ Innocent Spouse Relief. Generally, a husband and wife that file a joint income tax return are jointly liable for all taxes, interest and penalties. An exception permits a spouse who did not know about the tax understatement to avoid liability if it would be inequitable to hold that spouse liable. The IRS had maintained that the claim for innocent spouse relief had to be brought within 2 years of the IRS beginning collection. Reg. 1.6015-5(b)(1). The court held the 2 year requirement was invalid. Cathy Lantz , 132 TC No. 8 (Tax Ct.). For those who failed to claim the benefits because of the 2 year period, the opportunity should be revisited.
Potpourri ½ Page:
■ Ruff Decision. Divorce can become a dog fight, literally! Doreen claimed she and Eric had an oral agreement that the pooch was hers. The trial judge, clearly not a pet lover, held that pets are personal property but “lack the unique value essential to an award of specific performance.” The Animal Legal Defense Fund submitted a brief amicus curiae urging the court to consider the best interests of the animal in making decisions. Fido was registered with the American Kennel Club as owned by both. On appeal the court considered the “special subjective value of personal property” and that specific performance is an appropriate remedy for personalty for which there is “strong sentimental attachment,” and awarded Fido to Doreen. Houseman v. Dare, Sup. Ct NJ App. Div. Docket No. A-2415-07T2 3/10/09.
■ Rainy Day Fund Oversights. Everyone needs a reserve; a rainy year+ fund is optimal. Mom told you to have one, but many folks seemed to have overlooked this basic. It is also interesting that many investors focused on asset allocation models and most of the discussions of asset allocation in the press never mentioned emergency cash funds. Having a separate pool of cash/near cash investments is really a critical component to appropriately determining an asset allocation model. Many investors are learning this concept the hard way. That cash reserve is proving essential for investors to be able to whether the storm of market decline and retain investments intact for that hoped for recovery. The rich need emergency liquid savings as much as anyone else, perhaps more so, because of the high cost of their lifestyles. Others relied on home equity lines and other borrowing capabilities in lieu of maintaining that emergency day fund. Those lines may no longer be available. When recovery occurs (Bill assured me it will) don’t forget planning basics.
■ The Issue with Issue. Jim (Father Knows Best) and Margaret Anderson are becoming the rare family model. CNN recently reported that: “Nearly 40 percent of babies born in the United States in 2007 were delivered by unwed mothers.” So when your will leaves assets to “issue”, who are issue? If your power of attorney permits gifts to “heirs,” who are heirs? While most folks don’t like to delve into these definitional issues of issue, failing to do so will lead to growing confusion, problems and litigation. How should a child born out of wedlock be treated under your documents? Do you have personal, religious, moral or other preferences?

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Lead Article Title: Goldilocks Trusts Save the Day
Summary: Economic volatility can be a boon and bust for your estate plan, and in particular for the trust funded on your death (whether under your will or a revocable trust). So if you’re not sure if your porridge, or the markets, will be hot, cold or just right, try the Goldilocks approach. Each bear gets its own trust (bulls too if you remember what they look like). Your estate planner might call this the “double pecuniary”, but Goldilocks and the bears seems more apropos.
Impact of Market Changes on Trusts Under Your Will.
◙ What happens in a down market (cold porridge) when values decline between the date of death and the date of funding the bequests under the will? ◙ Assume you have a will with a pre-residuary pecuniary marital bequest, and the residuary will be the bypass trust. A “pecuniary” bequest is a fixed dollar amount, whether stated as a dollar figure or by formula. ◙ If the value of the estate declines between the date of death and date of funding, the entire estate could inure to the marital trust, and there will be no value/assets passing to the residuary to fund the bypass. ◙ What will be the impact on bypass trust heirs (e.g., what if bypass includes as beneficiaries children of several prior marriages)? ◙ If the market recovered by the time the second spouse dies, all would be includible in the surviving spouse’s estate and none would have been sheltered in the bypass trust. ◙ How do you preserve some benefits of the bypass amount of the predeceasing spouse in light of the uncertainty as to whether the estate will increase or decrease in value post death and prior to funding the testamentary trusts? ◙ The double pecuniary approach can provide a possible solution. This approach requires your will to include 3 trusts, kinda like the 3 bears.
The Three Trusts.
Just like Goldilocks, you want your trusts not to hot, not to cold, but just right, no matter what the stock market does. The Three (3) trusts would be drafted as follows: (1) A pre-residuary pecuniary marital trust; (2) A pre-residuary pecuniary bypass trust for somewhat less than the applicable exclusion amount ($3.5M in 2009); and (3) The remainder to the residuary (what’s left) bypass trust. Here’s the key: As the pre-residuary bequests are both pecuniary bequests, post death changes in the asset values, will be shared pro-rata between the trusts. This would preserve at least some of the bypass amount in a down market (cold porridge). In an up market (remember that concept?), all of the increase will pass to the residuary bypass trust, thereby sheltering more assets from tax on the second death.
Sample language for your will could include the following for each of the 3 Goldilocks trusts:
◙ Pre-residuary pecuniary marital trust. “I give, devise and bequeath to Pecuniary QTIP Trust the smallest amount necessary to reduce my estate tax to zero.”
◙ Pre-residuary pecuniary bypass trust. “I give, devise and bequeath to Pecuniary Bypass Trust the amount that equals the applicable exclusion amount available to my estate, reduced by Two Hundred Fifty Thousand Dollars ($250,000) [or some other amount]”.
◙ Residuary Bypass Trust (i.e. everything else). “I give, devise and bequeath the residuary of my estate to the Residuary Bypass Trust.” You could combine this bypass with the above bypass but it would ruin our Goldilocks paradigm.
Using the sample language above here’s how your “new and improved” will plays out. ◙ Up. In an up market, all the upside goes to residuary share so if values of the estate assets increase above $250,000 after the date of death, this increase will benefit the Residuary Bypass Trust. ◙ Down. In a down market, if estate assets decline post-death, the estate will loose the residuary bypass trust. ◙ All Around. This is a funding formula that might warrant consideration in light of volatility. ◙ There is no rigid time as to when the executor must close the estate; so long as there is some basis your executor can keep your estate open. If the markets recover, your executor can capture the upside in the Residuary Bypass Trust. ◙ The double pecuniary formula attempts to maximize the benefit of the bypass amount in either type of market conditions.
Example 1 – Typical Estate Plan: Assume a $10M estate at death. No post death change in value. In a bypass/marital will: ◙ First part is a pecuniary marital. The absolute minimum without incurring an estate tax. What is the smallest you can give without estate tax? $6.5M. ◙ The residuary bypass would be funded with $3.5M since that is the maximum federal bypass amount. When actually drafting the document the dollar figure would not be used, rather a reference to the amount that can pass with federal (or perhaps state) estate tax.
Example 2 – Double Pecuniary Format: Assume a $10M estate at death, no post death change in value. ◙ First part is the pecuniary marital which would be the same as above: $6.5 million. ◙ Bequeath to a pecuniary pre-residuary bypass trust, something less then $3.5M. For example, bequeath $250,000 less than the maximum amount permissible to give to bypass trust. Therefore, $3.25 million will pass to the pecuniary pre-residuary bypass trust. ◙ The balance is your residuary estate, which is bequeathed to the residuary bypass trust ($250,000).
Example 3 – Double Pecuniary in an Up Market: Estate on death was $10M, and at time of funding was $12M. ◙ $6.5M pecuniary pre-residuary marital trust. ◙ $3.25M to pecuniary pre-residuary bypass trust. ◙ Residuary bypass trust is $12M-$6.5 M-$3.25M = $2.25M. In an up cycle your estate would fund the excess into a residuary bypass trust and all the growth will be outside the surviving spouse’s taxable estate.
Example 4 – Double Pecuniary in a Down Market: ◙ Estate at death $10M and at time of funding was $6.5M. ◙ In a traditional will. $6.5M would pass to the marital trust and there would be nothing for the bypass trust. ◙ In a double pecuniary will the following would occur: ◙ Residuary Bypass Trust is zero since there are insufficient assets. ◙ Since there is less than the $9.75M required by the two pecuniary formulas to fund both the Pecuniary QTIP Trust and the Pecuniary Bypass Trust it must be determined how the $3.5M decline in the estate’s value from $10M to $6.5M is shared (i.e., allocated between the two trusts). ◙ The two pecuniary trusts have to share ratably in the $6.5M estate assets since insufficient value remains to fund both. They share the decline in estate value proportionately. ◙ Pecuniary QTIP Trust: $6.5M/($6.5M+$3.25M) x $6.5M estate value at funding = $4,333,333, is allocated to the Pecuniary Marital Trust. ◙ Pecuniary Bypass Trust: $3.25M/($6.5M+$3.25M) x $6.5M estate value at funding, or $2,166,667, is allocated to the Pecuniary Bypass Trust. ◙ $4,333,333 + $2,166,667 = $6,500,000.
Impact of State Estate Tax.
If you have a pecuniary marital and the estate declines post-death so that there is no bypass trust funded, the state estate tax might have to be paid out of the marital portion, as there is no other portion. If the state estate tax has to be allocated against the marital portion will it reduce the marital? If the estate tax is allocated against the marital share, this might decrease the marital deduction. Estate of Stevenson v. Director, Div. of Taxation, 23 N.J. Tax 583. Consider using $675,000 in New Jersey, $1M in New York (and other amounts perhaps depending on the state where you live) instead of the exclusion amount reduced by $250,000 in the above example.
Income Tax Consideration.
There is a risk of greater income tax on funding the trusts used in the double pecuniary approach in an “up” economic environment since you will be using appreciated securities to fund the pecuniary amounts. The Residuary Bypass Trust would be the only portion of your estate that is not pecuniary so your executor may endeavor to allocate the appreciated assets to that share to avoid trigging income tax on funding.
Personal Considerations.
◙ Who are the intended beneficiaries of each of the trusts? ◙ If they are different, what are the priorities of protecting the economic benefits for each? ◙ What are the priorities? ◙ What are the distribution standards for each of the trusts? ◙ Who are the trustees (or distribution committees if used)? ◙ Based on your actual goals and objectives, the beneficiaries, priorities, persons making the distribution decisions, weighing the potential income tax problems, types of assets involved, and other considerations, does the double pecuniary really accomplish your objectives?
Conclusion.Yep, it could be a better mousetrap. Yep, you’d empress your golf buddies on the 7th green dropping you new plan…… But, does it really accomplish your goals?

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Monitoring Your Life Insurance

Summary: Insurance is a key safety net for many. If your portfolio is down by 40%, your insurance may be even more vital. The economic meltdown has had profound impact on insurance coverage itself and the companies issuing your policies. NYC based insurance guru Lee Slavutin, of Stern Slavutin 2, Inc., offered the following checklist of ideas to help guide you in reviewing your life insurance.

Risks.

You face at least two important risks relating to your life insurance portfolio in 2009 and beyond:

1. Policy lapses because of investment losses in the stock market. This will be an issue for some variable life policies invested in equity sub-accounts. Variable life is a type of life insurance in which you can select mutual-type funds from those offered by the insurer within your policy. You thus assume the benefits, or lately the risks, of the performance of those funds. If the funds were hammered in the market decline, you policy will have been as well.

2. Insurance company impairments or failures.

Reviewing and Monitoring.

Monitoring your insurance policies will require greater vigilance in 2009. Here are some of the steps you should take:

1. Evaluate more frequently (e.g., monthly or quarterly) your variable life insurance policy investment accounts and values.
2. Re-test your policies. This means obtaining a current “in-force illustration” for each of your policies. This is a projection of where your policy is today and how it will perform based on its current status, not the assumptions used when you first purchased it long ago. Those assumptions, especially in light of the recession, may not be panning out. Use this information to determine if the current premiums you are paying are adequate to maintain the policy.
3. If you need to goose up your premiums, can you afford to do so? If the policy is held in a trust, consider the need to have additional gifts made to the trust. Have your estate planner determine whether there are adequate demand (Crummey) powers to permit those gifts to qualify for the annual gift exclusion (now $13,000/year).
4. More frequent checks (e.g., monthly, or even weekly you have reason to be worried) on the ratings for the insurance company that issued your policy. Consider the ratings of all the rating services, not just one. You can obtain ratings by visiting the rating agencies’ web sites. This will requires you to register, but there is no fee to obtain current ratings. Some companies have already been downgraded, and others have been taken over by state regulators (e.g., Standard Life Insurance Company of Indiana and Penn Treaty Network America Insurance Company). The agencies and their websites are: ◙ AM Best – www.ambest.com ; ◙ Fitch – www.Fitchratings.com ; ◙ Moodys – www.Moodys.com. ◙ Standard & Poors – www.standardandpoors.com.
5. Understand the limitations of the ratings. The rating services are not perfect, but can be a valuable source of information on the financial strength of the insurers. If a company is downgraded and you are thinking of replacing your policy with a new policy from another carrier, review carefully the following “replacement” issues: ◙ Is replacement really in your best interest? Are there large surrender charges? Compare the surrender value with the account value to see if there is a penalty. ◙ Are you insurable at favorable rates? Never cancel an old policy until you have replacement coverage in place. You can pay a modest initial premium to put the new policy into effect and later get the money from the old policy transferred as a tax free exchange.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Loans on Your Life Insurance. Your back is up against the wall, and you borrowed on your life insurance. Caveat Emptor – the loan can have some nasty tax consequences if the policy contract is terminated. The insured borrowed on the policy and did not pay interest on the loan until the loan balance and accrued interest increased to the point where it exceeded the policy cash value. The policy provided that if the outstanding debt exceeds the cash value that the policy will be cancelled 31 days after a notice is sent to the insured. That cancellation requires recognition of gain. 72(e)(1)(A)(i), (5)(A), and (C). Reinert v. Commissioner; T.C. Summ. Op. 2008-163.
■ Liable For Partner’s Misdeeds. The recession has flushed out lots of bad boys. Unfortunately, you may only have to look down the hall. The fall of the NYC law firm Drier LLP highlights another landmine many people will have to contend with. If you were partners with someone who defrauded customers, stole money or committed other misdeeds as a partner, you may be on the hook regardless of your innocence. You might have to return money you thought you earned from work that was not completed. If you were held out to the public as a partner, even if you had no signature authority over bank accounts and did nothing wrong, you still may have had “apparent authority” to act. You have an obligation to monitor your partners. How far that obligation extends, and the scope of your liability, may turn on the partnership agreement and other terms of your relationship. You could be held liable for your partner’s wrong doing. Bottom line: if the economic turmoil has brought to light misdeeds of one of your partners, don’t assume you can duck the fallout. Get legal counsel and determine the scope of your liability.
Potpourri ½ Page:
■ Caution When Leaving. You don’t have to camp at Crystal Lake to get the ax. But if you do, read the fine print before using any of your old scripts. Review all the documents you signed with an employment attorney: employment agreement, firm manual, non-compete, etc. Have a lawyer review any termination agreement before you sign. Are you subject to a non-compete, non-disclosure, gag order, or other restrictions? What do they mean to your job search? Has your lawyer reviewed the reasonableness and enforceability of the restrictions? Watch out for misappropriation of confidential proprietary information which belongs to your former employer which may have to be returned and not used. This might apply even if you’re not subject to a non-compete. This could include: customer contact information, electronic rolodexes, files, lava lamps, documents, etc. Try to forward a few quick emails to yourself or downloading the boss man’s hard drive onto a memory stick, and Jason could be after you. Big Brother can detect these actions with pretty routine steps.

Knowing the parameters cannot only help you evade Jason, but might save the interview with a new employer by showing them you’ve been careful, responsible, and won’t be bringing them new issues. Given the competition in the employment market, you don’t want the other candidate to have done their homework better than you.

In spite of certain restrictions, you may be permitted to contact your customers directly and inform them that you have left your position because of a reduction in force (if appropriate) rather then letting them surmise that your departure was for more nefarious reasons. You may have to look up customer phone numbers on line rather than using contact information misappropriated you’re your former employer. Ask your lawyer what you can say given the restrictions that may apply. You might be limited to explaining your departure, and that you will be in touch and will let them know where you land. If you’re subject to non-solicitation restrictions, you might advise customers that you’re not allowed to solicit them as customers for X amount of time (the time of the covenant) and that you want to abide by your agreement, but that you want to stay in touch with them generally. Showing you’re ethical and live up to your agreements could be great PR.
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