Wills, Trusts & Estates Prof Blog

Pros of Intentionally Defective Grantor Trusts

Many planners will advise wealthy clients to set up an irrevocable life insurance trust (ILIT). But with this plan, the clients have to gift money in premiums to an ILIT and pay gift-taxes on that money or use their lifetime gift tax exemption.

A way to obtain life insurance without worrying about taxable gifts is to use an intentionally defective grantor trust (IDGT). Essentially, these IDGTs create a family bank for heirs that would be funded when the clients die. Many clients set these up to be a lending source for the whole family in the future.   

For an example that further explains IDGTs, please visit the following article: 

See Roccy DeFrancesco, Using IDGTs to Create the Family Bank Through the Tax Favorable purchase of Life Insurance, Family Bank, Nov. 2, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention. 

Survey Reveals Estate-Planners are Concerned But Optimistic

Wealth Counsel and Trusts & Estates recently conducted a survey to discover how estate-planning professionals view the nation’s economy and the partisan gridlock on Capitol Hill. Respondents included estate-planning attorneys, certified public accountants, certified financial planners, registered reps, and insurance professionals.  The survey revealed that estate-planners are not optimistic about the nation’s economy, but the majority of the estate-planners are still optimistic about the future of their practices and careers. Some of the data revealed in the survey is below:

• One in five respondents reported that many of their clients have gone out of business.
• Forty percent of respondents stated that business clients have postponed the hiring of new employees.
•  Fifteen percent of married clients have an average net worth of $5 million or more, and 23% had an average net worth of less than $500,000.
• Only 29% of baby boomers are adequately prepared for retirement.
• Ninety-one percent of respondents believe the budget deficit will necessitate future tax increases.
• Seventy-one percent of respondents believe outsourced jobs need to return to the U.S.
• Thirty-eight percent of respondents have clients who have expressed concern and panic due to the decrease in their real estate assets.
• Thirty-five percent of respondents had clients who had lost a home or business as a result of foreclosure.
• Seventy-three percent of respondents believe that financial illiteracy of American consumers played a role in the subprime mortgage crises.
• Forty-three percent of respondents have witnessed a revenue decline or no change in revenue, but 89% expect to see their practice grow over the next five years.

See Matthew T. McClintock and Jonathan A. Mintz, Estate-Planning Professionals: Concerned Yet Optimistic, Trusts & Estates, Nov. 23, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Fourth Annual Estate Planning & Community Property Law Journal Seminar

The Estate Planning & Community Property Law Journal at Texas Tech University School of Law will host the Fourth Annual Estate Planning & Community Property Law Journal Seminar on February 24, 2012. Attendees will receive 5.57 CLE or CPE hours and 1 ethics hour. A description of the seminar and a list of the speakers and their topics are below:

• Once-in-a-lifetime chance to learn from top estate planning professionals nationwide
• Speakers also include leading Texas practitioners, nationally recognized professors, and student editors from the Estate Planning & Community Property Law Journal
• This is an invaluable opportunity to network with professionals within the estate planning community Reservation includes a subscription to the Estate Planning & Community Property Law Journal

Speakers Include:

• Professor Ira Mark Bloom (Justice David Josiah Brewer Distinguished Professor of Law, Albany Law School): Powers of Appointment Under the Restatement (Third) of Property (Wills and Other Donative Transfers)
• Professor Jeffrey N. Pennell (Richard H. Clark Professor of Law, Emory University School of Law): A Prescient Look at the Future of Estate Planning
• William D. Pargaman: (Texas practitioner, Brown McCarroll, L.L.P. Texas Board of Legal Specialization, certified specialist in Estate Planning and Probate Law): What Has The Legislature Done To Us Now? (Don’t Worry – It’s Not Too Bad!)
• Professor Gerry W. Beyer: (Governor Preston E. Smith Regents Professor of Law, Texas Tech University School of Law): Morals from the Courthouse: A Study of Recent Texas Cases Impacting the Wills, Probate, and Trust Practice
• Mike V. Bourland (Texas practitioner, Bourland, Wall & Wenzel, P.C.) and Dustin G. Willey (Texas practitioner, Bourland, Wall & Wenzel, P.C.): Estate and Income Tax Planning with Mineral Interests

For a pdf. version of the Seminar's brochure and registration form, click here: Download 2012 Brochure and Form

 

Planning for Wealthy Immigrant Clients

When working with wealthy immigrants as a financial planner, planners should realize that they should be providing “family-style” attention. You have to meet your clients in person because they are more inclined to give money to people they know. One planner attends client family weddings and parties to know his clients more intimately.

Many immigrant clients do not want to declare everything that they own, so they do not get the maximum tax deductions that they could. When clients come in with this mindset, it is helpful to point out the section of the U.S. Code that makes lying to the government a punishable offense.

Another wrinkle with immigrant clients is that some of them will want their wealth to be managed according to their religion. Many mainstream investments may be in violation of Islamic precepts or other religious beliefs, so one planner considers this wealth management to be “challenging and interesting.”

Since many clients will still have strong connections with their home countries, planners should become skilled with cross-border estate planning and rules for charitable giving overseas.

Karen E. Klein, Financial Planning, American-Style, Financial Planning Magazine, Nov. 1. 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention. 

Note on LLC and Cannon v. Bertrand

Jonathan J. Rose (J.D. Candidate, LSU Paul M. Hebert Law Center) recently published his note entitled Time For a New Plan: The LLC is a Better Option For Estate Planning After Cannon v. Bertrand, 71 La. L. Rev. 1029 (2011). The introduction from the note is below:

As the old saying goes, the only two things certain in life are death and taxes. But individuals can never be certain about the tax consequences that accompany death. The desire to reduce tax liability upon death and subsequently increase the value of assets transferred to surviving family members leads many people to actively manage their estates. Active management reduces the uncertainty associated with the taxes levied on a decedent's estate.

There are several useful methods available to reduce estate tax liability, including the family limited partnership. Individuals transfer assets to the family limited partnership in exchange for interest in the partnership.¹ The value, and resulting tax liability, for the partnership interest is generally lower than the aggregate value of the assets valued separately because the IRS permits the application of discounts to business interests to reflect lack of control, illiquidity, and lack of marketability.² Maximizing the amount of discounts applied to assets in the estate is a major goal of estate plans.³ Although death and taxes are certainties, discounts can be used to decrease the tax consequences of death.</p>

The value of these partnership interests is largely dependant on the rights held by the owner under state law.⁴ Louisiana partnership law states that a partner ceases to be a member of the partnership at death, and at death, the partner's successors are entitled to the value of his former share.⁵ State courts have determined the appropriate method for assigning value to the shares. Prior to the recent Louisiana Supreme Court decision in Cannon v. Bertrand,⁶ the court determined that fair market value *1030 was the proper valuation method.⁷ Under this method, family estate plans were still able to utilize the partnership as a means of achieving value-reducing discounts. The Cannon court, however, deviated from the manner in which partnerships were valued in prior partnership valuation cases.⁸ The type of valuation used by the court in Cannon increases the potential judicial award for the interest of a withdrawing partner.⁹ This decision is also likely to increase the value of a deceased partner's former interest for estate tax purposes.¹⁰ The potential increase in value of partnership interests makes the family limited partnership a less attractive option for estate planning.¹¹

The limited liability company (LLC) is a more effective estate tax planning tool post-Cannon.¹² Although the extent to which Cannon will affect future partnership valuation is uncertain, the probable result is a higher valuation placed on partnership interests.¹³ However, the law on LLC interest valuation after death is different from the law for standard partnerships.¹⁴ This difference makes the Cannon decision inapplicable to LLC valuation upon death, meaning Louisiana LLC interests will still be eligible for the valuation discounts that are desirable in estate planning. The uncertainty surrounding partnership valuation post-Cannon can be avoided through the use of LLCs in estate planning.

Part I of this Note discusses relevant partnership withdrawal law and the judicially crafted valuation method that existed prior to the Cannon decision, as well as relevant estate tax law. Part II presents and analyzes the Cannon decision. Part III explains the effects of state law on estate tax and examines the effects of Cannon on the valuation of partnership interests for estate tax purposes. Part IV discusses the family limited partnership and presents the limited liability company as a more effective estate planning alternative post-Cannon.

Forms For Purchase in 2012

The ALI-ABA has released its online forms library update for January 2012. The following forms will be available:

• Buy-Sell Agreements (includes checklist and sample agreements) - $39
• Getting the Family Business Ready to Sell - $39
• Buy-Sell Agreement - $19
• Mergers &Acquisitions of S Corporations: How to Structure the Deal - $39
• Sample Disability Guidelines for Clients with Pets - $19
• Marketing Brochure Sample for Pet Trusts - $19
• Pet Alert Card - $19
• Sample Comprehensive Pet Trust - $19

To purchase these agreements, you can visit the following link: ALI-ABA Forms 

Recreational Path is An Exempt Purpose

A private foundation built a path on an island that only had one paved road previously. The path was made to provide safe access for pedestrians and bicyclists to “private” portions of the island. The agent who examined the path thought that access was too limited. The National Office disagreed and said that the resident population of the island along with the population of the municipality that the island was a part of is a large enough community for the path to be considered as a benefit to the general public.

The recent technical advice memorandum based on the facts above states that a private foundation can keep its exempt status when it builds and maintained a recreational path limited to residents of the municipality.

See TAM 201151028 (Sept. 23, 2011); see also TAM 201151028 – Maintaining Recreational Path is an Exempt Purpose, CharitablePlanning.com, Dec. 27, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention. 

Case Study on Purchasing Life Insurance

An overview of a case study provided by Peter C. Katt (life insurance provider and sole proprietor of Katt & Company, Kalamazoo, Michigan) is below. The case study is intended to help individuals understand issues they can use in their own life insurance purchases.

Doug (72) and Helen (71) considered purchasing $50 million of life insurance in 2007 and sought to purchase the life insurance and receive advice from the son of Doug’s long-ago college roommate, Marty. Marty suggested that the couple buy no-lapse UL policies with premiums guaranteed until Helen reached age 100. The premium amounts did not appeal to Doug and Helen, but Marty convinced the couple that they could reduce the amount of life insurance and premiums by selling them in the life settlement market. In 2011, Doug and Helen could not continue with their current premium burden, so they hired Katt. A list of a few of the problems surrounding the couple’s life insurance purchase is below:

• Marty was inexperienced and unable to put together this program. Clients should be very wary of buddy-buying.
• Clients should not buy life insurance amounts that border on or breach the client’s tolerance for premium amounts.
• Marty failed to consider other options of life insurance, instead focusing only on level death no-lapse UL with premium and death benefit guaranteed to age 100.
• In 2011, Doug and Helen reduced the amount of life insurance by $20 million (40%), and the policy has no surrender value because of surrender changes. Therefore, the possibility of selling off their policies was nonexistent because they were both in the same good health as they were at the time they purchased the policies in 2007.

See Peter C. Katt, Life Insurance Options, and What Lies in the Shadows, Journal of Financial Planning, Nov. 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

How the Model Rules of Professional Conduct Govern a Firm’s Website

David A. Grossbaum (Attorney, Boston, MA) gave a presentation on avoiding malpractice in the internet age during the National Academy of Elder Law Attorneys’ 2011 National Aging & Law Institute. Grossbaums’ lecture focused on helping attorneys avoid putting something on their websites or other electronic communication that could be the basis of a malpractice claim.

Model Rule 7.1 of the Rules of Professional Conduct states that an attorney must only put accurate information on the internet. Grossbaum suggested that attorney keep copies of different versions of the firm’s web site and to make sure that internet information is accompanied by the author’s contact information, date the information was last reviewed, and a disclaimer.

Model Rule 1.18 (Duties to Prospective Clients) may govern an attorney’s inquiry into a visitor of the firm’s web site. This rule arises when a person “discusses” the possibility of creating an attorney-client relationship with the attorney. The ABA has stated that a web site that invites visitors to submit information regarding a possible attorney-client relationship is a “discussion” as found in Rule 1.18. Graossbaum stressed the importance of using disclaimers on a firm’s website that inform visitors that any unsolicited information will not be kept confidential and that the firm retains the right to represent the visitor’s adversary. Grossbaum noted that “click-through” disclaimers help ensure that visitors are not misled while visiting the site or sending information.  

See Avoiding Malpractice in the Internet Age, ElderLawAnswers, Dec. 02, 2011.

Income+, Helping Employees Prepare for Retiment

Many employers have started providing ways to help prepare employees who are nearing retirement age prepare for the financial reality of retirement. One company, Financial Engines, introduced a new service called Income+ that is aimed at protecting the portfolio of employees before the employees stop working. The service also aims to generate consistent monthly payments that employees can deposit into their checking accounts after retirement.

The service is customizable, but the general model has the employee live on his portfolio income through age 85. The employee can also use another portion of his savings to purchase an immediate annuity before age 86 that will allow the employee to collect the same amount of income for the remainder of his life. This service gradually makes the employee’s portfolio more conservative as the employee nears retirement, with about 58% of a typical portfolio invested in stock funds by the time the employee is around age 60. By the time the employee retires, about 20% of the portfolio is invested in stock funds, 65% in fixed income, and 15% in bond funds.   

The service can cost an employee 0.25% to 0.60% of his assets, though the amount may increase based on the employee’s account balance. However, employees should compare this service with the option of rolling assets into an I.R.A as the latter may be a better option for some employees after retirement. Many employers with 401(k) plans have already signed up with Financial Engines for Income+, and some of the employers will automatically enroll their 401(k) participants into the plan when the employees reach age 60.

For more information on Income+, see Tara Siegel Bernard, More Advice for Pre-Retirees Coming to 401(k)’s, The New York Times, Dec. 2, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Avoiding Ademption

Matthew Groves (Associate Professor of Law, Monash University School of Law) recently published his article entitled Adeptly Avoiding Ademption, 84 Law Institute Journal 36 (2010). The abstract available on SSRN is below:

Many things can change between the drafting of a will and the death of a testator. One increasingly common event is that testators require specialist aged care and their only substantial asset – the family home – is sold to fund that care. These arrangements can have an unexpected impact on the will. The doctrine of ademption can cause a specific gift of the house to fail, though there is growing recognition of an exception for cases involving the sale of property made on behalf of an infirm testator.

Company Gets Extension To File a Section 754 Election To Adjust Basis of Partnership Property

Regulations for section 754 provide a deadline for companies to elect to adjust the basis of partnership property. The IRS granted a company an extension to file this election in Private Letter Ruling 201149008. The IRS will consider an extension if the taxpayer acts in good faith and reasonably and if the extension does not “prejudice the interests of the Government.”

See PLR 201149008 (Aug. 22, 2011); see also Andrew Hodes, PLR 201149008: IRS Grants Extension to File a Section 754 Election to Adjust Basis in Partnership Property, Wealth Strategies Journal, Dec. 16, 2011. 

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention. 

Should Doctors Offer Overall Prognosis to Patients who are Not Terminally Ill?

Dr. Alexander Smith is a proponent of offering to discuss overall prognosis with patients even if they’re not terminally ill. Researchers say this could be beneficial to anyone who has less than 10 years to live or has reached 85 years old. The average life expectancy for an 85-year-old is six years. Giving an overall prognosis can help patients get their affairs in order and focus more on the quality of the life they have left rather than toiling with medications and procedures in an attempt to prolong life.

Opponents to this idea say that patients don’t want to hear such grim news, and that there is no way to accurately predict life expectancy anyways. A small minority of patients prefer not to know their overall prognosis. Dr. Smith only proposes presenting the option to discuss this with patients, and the prognosis would not be forced upon anyone.

Dr. Smith also says that several geriatric calculators can reasonably predict life expectancies that are based on factors such as age, cognitive abilities, and sometimes lab test results. One index can accurately predict mortality within 4 years about 75% of the time.

See Paula Span, The Unspoken Diagnosis: Old Age, New York Times, Dec. 29, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention. 

CLE on S Corporations

The ABA Section of Real Property, Trust and Estate Law is hosting a CLE entitled “S Corporation Tricks, Traps and Solutions.” The program will be held on Tuesday, February 7, 2012 and it is available as a 90-minute teleconference and live audio webcast. Panelists include: Steven B. Gorin, Christopher R. Hoyt, Daniel H. McCarthy, and Amber K. Quintal.

For more information including registration rates, please visit the following link: ABA

Duties of a Trustee

If someone has appointed you trustee of a trust, that is a vote of confidence in you, but it is also a lot of responsibility. Below is a list of your main responsibilities:

1. Fiduciary Duties – you are held to a very high standard in a fiduciary role in relation to the beneficiaries or remaindermen of the trust.

2. Trust’s Terms  - be sure to read the trust terms carefully and abide by the trust’s directions

3. Investment Standards – you must make prudent investments that consider the interest of current and future beneficiaries alike.

4. Distributions – sometimes you will have discretion in what distributions you make. You should consider the beneficiary’s other sources of income along with his/her needs. You also need to be able to say no if a distribution is not for the well being of the beneficiary or consistent with the trust terms.

5. Accounting – you need to keep track of all income to, distributions from, and expenditures from the trust. You will need to give an accounting to the beneficiaries annually.

6. Taxes – be sure to keep good records for when you need to file an annual tax return and pay taxes for the trust.

7. Delegation – You cannot delegate your responsibilities, but you can delegate some of your functions as trustee. Be sure to delegate these functions prudently.

8. Fees – As trustee, you are generally entitled to a reasonable fee for your services. In general, what is reasonable will depend on the resources of the trust, the experience of the trustee, how much work the trustee is doing, among other factors.

 See A Brief Overview of a Trustee's Duties, Elderlawanswers, Dec. 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.  

Young Parents Should Create Estate Plans Now, Not Later

Parents of young children should make an estate plan now to ensure that their children will be cared for in the event an unexpected tragedy hits. However, many parents of young children are so busy caring for their children and thinking about everyday occurances(school, soccer games, PTA, ect.) that sitting down to create an estate plan gets put on the wayside. Additionally, many parents find the financial cost of creating an estate plan to be too large of an investment at the present time, especially when compared to mortgage payments and other more common costs.

A proper estate plan, however, can be incredibly beneficial in providing for children and ensuring they are cared for in the future. An estate plan can help send a child to college, maintain support for a child with special needs, and provide food, clothing and shelter for children in the event of the parents’ deaths. Parents should consult an attorney as opposed to filling out the simple will forms online because these simple forms are not adequately designed to take into account young children. Parents should keep and maintain a list of property (including non-probate assets) to help the attorney determine the proper proper estate plan to create. It is also important that parents continue to review and change their estate plan over the years, especially when life changing events take place.

See Gerry Kane, Got Kids? Get an Estate Plan, Gerry Kane’s Estate Planning Law Blog, Oct. 1, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.  

Trust Asset Protection Provision Holds Up in Court

The debtor’s mother created a revocable living trust, naming her son (the debtor’s brother) as the sole trustee. The trust, created in 2000, contained a provision giving the beneficiary the right to direct the trustee in writing to retain authorized or required distributions. In 2002, the mother revised the trust to include a creditor protection provision for the beneficiary.

In 2009, the mother passed away. The debtor received $20,000 “free of trust” on January 1, 2010 and voluntarily filed for Chapter 7 bankruptcy in October of the same year. The Bankruptcy Trustee demanded that the debtor turn over the $20,000 the debtor was to receive from the trust on January 1, 2011. The debtor informed the Bankruptcy Trustee would the brother/trustee be exercising his discretion to not make a distribution, and the Bankruptcy Trustee sued both the debtor and the brother/trustee. The debtor and her brother/trustee moved for summary judgment.

The court in In re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) stated that:

[G]enerally only payments that have been distributed become subject to the claims of creditors, rather than all subsequent payments of principal that may be distributed. Therefore, even if the debtor received one principal payment, as long as any subsequent payment she is entitled to receive remains in trust, it is still protected. Only payments that the trustee declares he will make or that the debtor actually receives will lose the spendthrift protection.

The court held that the brother/trustee properly withheld future payments, thus protecting the payments from the Bankruptcy Trustee’s attempt to enforce a turnover.

See Jay Adkins, The Real McCoy: Living Trust Provides Spendthrift Protection to Assets of Beneficiary in Bankruptcy, Forbes, Dec. 28, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Using Tax Provisions to Make Larger Charitable Donations

Many tax code provisions can help taxpayers afford to give more during their charitable givings. Taxpayers who give appreciated assets to a qualifying charity, as opposed to giving cash, can increase their tax savings by avoiding capital gains tax. Taxpayers considering making a large charitable donation of appreciated property should seek out legal advice as the rules can be quite complicated.

A donor advised fund is another way taxpayers can make larger charitable contributions. Typically, taxpayers preparing to retire will set up a donor advised fund though a community foundation or financial institution using a large lump sum. The gift is spread out over several years, but the donor can put the money in and receive the tax deduction in one year. 

A few additional tax tips for taxpayers considering making a charitable donation are below:

• Ensure the charitable organization is qualified (I.R.S. Publication 78).
• Keep written records of charitable contributions from recipients of gifts of $250 or more.
• The income rates recommended by the American Council on Gift Annuities are generally slightly lower than before for taxpayers who are sixty-nine and younger. The rates are slightly higher for taxpayers who are seventy-five and older.
• Taxpayers who hold empty stock that includes net unrealized appreciation may benefit from making a direct gift to a charity because a charitable deduction is available for the full market value of the stock even though only the basis of the stock must be picked up as income.   

SeeJan M. Rosen, Tax Rules Allow an Array of Givers to Be More Generous, The New York Times, Nov. 1, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Civil Law Countries and Their Adoption of the Common Law Trust

Iris Goodwin (Professor of Law, University of Tennessee College of Law) recently published her article entitled, Why Civil Law Countries Might Forego the Individual Trustee: Provocative Insights from the New-to-the-Fold, The Worlds of the Trust, L. Smith, (Cambridge University Press 2011). The abstract available on SSRN is below:

At the center of this article lies a decision in several civil law countries that have adopted the common law trust to restrict the office of trustee to banks and similar financial service institutions. Having had an opportunity to consider the trust anew, these countries represent a challenge to the common law where the individual – indeed the untutored individual – can still qualify as trustee (and serve in this capacity alone). This permissive common law regime obtains notwithstanding the size of the trust endowment or the number of beneficiaries whose interests might be at stake. Indeed, in some common law countries individuals can qualify as trustee not only of a personal trust (for transmission of family wealth), but also of a pension trust holding assets under a retirement plan sponsored by a large employer, or even of an indenture for holders of significant corporate debt. While it may be a rare individual who would be nominated to serve in these latter situations, nothing in the law directly precludes an individual from qualifying as sole trustee of even these trusts.

Beneficial For Business Owners to Have A Succession Plan

70% of Americans are without an estate plan and an even higher percentage of business owners still may not have a succession plan.

For a client who was in the minority and did have a succession plan for his business, things still did not go exactly as planned. Three men had been successful in the construction industry and they created a plan that they funded with life insurance.

Over time, the construction industry experienced a decline, the business became unprofitable and one of the main partners passed away. The remaining owners turned to the plan that had been drawn up to see what the next step should be.

The remaining partners had to compromise with the surviving spouse of the business partner. Both had expectations from the floundering business. The company was valueless at this point because it owed more than it had made. There could have been litigation over the money that the two surviving partners were owed and the money that the surviving spouse of the deceased partner expected to get. Instead all parties reached an agreement in line with the written plan and the spirit of the partnership.

See Peggy Hoyt, Creating an Exit or Succession Plan for Your Business, WealthCounsel, Dec. 28, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.