Advanced Estate Planning

The House has just approved the Senate bill. President Obama will sign it later this week.  Now what?  [Hint:  You’ll be doing NEARLY EXACTLY what you’ve been doing the past few months, but without the time pressure.]

Estate Planning:

1. We now have a “permanent” $5MM (indexed for inflation) estate, gift and GSTT exemption and a 40% tax rate.  Remember that the word “permanent” really means “until they change it next time”.  This is an opportunity for all of your clients to continue to use their $5MM gift and GSTT exemptions by making gifts into Dynasty Trusts.  All of our wealthy clients should continue to make these gifts.  This is a great opportunity.  We don’t know when Congress will next change the exemption.  Don’t procrastinate.  It might be one year, might be two years, might be three years, etc.  Look at Nevada as the jurisdiction of choice.  See the Dynasty Trust State Rankings Chart.
2. Congress hasn’t touched valuation discounts, GRATs and other techniques.  Again, keep using them.  Great news that our tools are intact.
3. Income taxes were raised for the wealthy.  So CRTs should be more on your mind.  Don’t rush and do them for everyone.  They’re still overused.  But at least consider them more than before.
4. High early cash value life insurance should be used even more than before given the higher income taxes.  Those of you who don’t understand this product should take your favorite life insurance agent out for lunch and get up to speed.

Asset Protection Estate Planning:

1. The congressional bill DID NOT change the fear of law suits and divorces.  You should continue to suggestion Dynasty Trusts for asset protection planning and also Domestic Asset Protection Trusts – especially using the Hybrid Version (see http://www.oshins.com/images/Hybrid_DAPT.pdf).  And I can’t find any reason not to use Nevada as the jurisdiction of choice given that it’s ranked #1 in the DAPT State Rankings Chart (Download Chart)
2. Combine the DAPT with the Double LLC strategy for extra protection.

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada.  Steve is a nationally known attorney who is listed in The Best Lawyers in America® and has been named one of the Top 100 Attorneys in Worth magazine.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He has written some of Nevada's most important estate planning and creditor protection laws, including the law making the charging order the exclusive remedy of a judgment creditor of a Nevada LLC and LP (in 2001, 2003 and 2011), the law changing the Nevada rule against perpetuities to 365 years (in 2005) and the law making Nevada the first and only state to allow a Restricted LLC and a Restricted LP creating larger valuation discounts than any other state allows (in 2009).  He is also the author of the Annual Domestic Asset Protection Rankings which you can download from our Free Resources page.  Steve can be reached at 702-341-6000, x2 or at soshins@oshins.com.  His law firm's web site is http://www.oshins.com.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Nearly everybody is out of 2012 capacity at this point.  So...

1. Consider setting up a simple one-page gift trust with just the essential terms so you have a valid trust under the state law you are selecting. 
2. Give the settlor’s best friend as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in that Trust Protector’s sole and absolute discretion (and obviously draft around a GPOA).
3. Get it fully executed and funded with the $5MM gift before year-end.
4. Enjoy the New Year’s.  Take a deep breath.
5. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions.  The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038.
6. Charge the client a premium for doing this so late in the game. You’re entitled to it.

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada.  Steve is a nationally known attorney who is listed in The Best Lawyers in America® and has been named one of the Top 100 Attorneys in Worth magazine.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He has written some of Nevada's most important estate planning and creditor protection laws, including the law making the charging order the exclusive remedy of a judgment creditor of a Nevada LLC and LP (in 2001, 2003 and 2011), the law changing the Nevada rule against perpetuities to 365 years (in 2005) and the law making Nevada the first and only state to allow a Restricted LLC and a Restricted LP creating larger valuation discounts than any other state allows (in 2009).  He is also the author of the Annual Domestic Asset Protection Rankings which you can download from our Free Resources page.  Steve can be reached at 702-341-6000, x2 or at soshins@oshins.com.  His law firm's web site is http://www.oshins.com.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

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Leading tax and estate planning experts, Martin Shenkman, J.D., CPA, MBA, Jonathan Blattmachr, J.D. and Robert S. Keebler, CPA, MST, AEP (Distinguished) have come together for the very first time to co-author the single most authoritative practical guide to crucial, last-minute planning for 2012.

This unique book is written technical enough to assist professionals like you to understand the key planning choices and how to avoid the traps involved with each - - and written in plain-English enough for the sophisticated client who wants to better understand complex planning or needs some motivation to move ahead and do something!

This one book covers all of the following:

• Irrevocable Life Insurance Trusts
• Grantor Retained Annuity Trusts
• Valuation Discounts
• Defined value Clauses
• Sales to Intentionally Defective Grantor Trusts
• Qualified Personal Residence Trusts
• Beneficiary Defective Inheritor's Trusts
• Split Dollar Loans
• Domestic Asset Protection Trusts
• Last Minute Income Tax Planning
• How to Overcome the Biggest Client Objections
  • Complexity
  • Cost
  • Law Uncertainty
  • Clawback
  • Fear of Giving Up Assets
  • Fear of Giving Up Income
• And much, much more!

Click here to review the complete Table of Contents.

You can receive this this one-of-a-kind, extremely timely book immediately when you purchase it in downloadable PDF format, so you can use it now before the window of opportunity closes.  Plus, since it’s in a PDF format, you can readily print out and give certain sections of the book to clients, as needed.  The best part is that you can get all of this for just $39.95.

In addition, you will get 4 special bonuses for purchasing the book by this Friday, September 21st!

BONUS #1: Access to a special website where you can immediately customize, address and mail out the provided marketing postcard, so you can get clients and prospects to start calling you for appointments!*

BONUS #2: Access to one archived On-Demand Ultimate Estate Planner program of your choice on an advanced estate tax planning topic, so you can get your technical knowledge up to speed even more quickly!

BONUS #3: A 50% discount toward estate tax and asset protection expert, Steve Oshins’ “Advanced Estate Tax Planning Sales Tools” - - extremely helpful sales tools to help you get clients and prospects to engage you!

BONUS #4: A sample client marketing letter used by Phil Kavesh for his law firm clients to get them to move before it’s too late!

*Does not include discounted printing fee and postage.

For more information and to get your 4 special bonuses, order your book today!

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

At The Ultimate Estate Planner, Inc. it's important to us to keep our customers and the rest of the estate planning community informed about very important and exciting updates as it happens.  A special thank you to Joseph C. Mahon featured on WealthManagement.com.

On Aug. 16, the Internal Revenue Service released a draft version of a revised Form 706 (the 706), “United States Estate (and Generation Skipping Transfer Tax) Return.”  www.irs.gov/pub/irs-dft/f706--dft.pdf.  It didn’t release instructions.  The revisions implement two major changes in the law. First is the allocation of a decedent’s unused estate tax exemption to his surviving spouse under Internal Revenue Code Section 2010(c)(4) beginning in 2011, the portability of the deceased spouse unused exemption (DSUE) under Treasury Regulations Section 20.2010-2T.  Second is the filing of protective refund claims for unresolved claims for debts and administration expenses to take into account post-death events under the revisions to Treas. Regs. Section 20.2053-1 that apply to the estates of decedents dying after Oct. 19, 2009.

Portability
Conceptually, the DSUE revisions are the most remarkable.  They allow the filing of the return when it’s not required.  The executor makes the portability election simply by filing the 706; the executor isn’t required to make a specific election.  Rather, a check-the-box option is provided for opting out of portability.  The draft form permits other elections to be made, including the qualified terminable interest property (QTIP) election for marital deduction purposes and the election to apply the decedent’s generation-skipping transfer tax exemption to the QTIP property.  The election to take administration expense deductions for either estate or income tax purposes will also be required.  The revisions may force consistent positions to be taken for state tax purposes for decedents in states imposing estate taxes.  And, the revisions introduce the concept of estimated valuation for estate tax purposes in limited circumstances when property qualifies for the marital or charitable deductions.

Part 6 of the 706 addresses portability, on a new p. 4.  The option to elect out is at Part A.  The actual computation of DSUE being ported to the surviving spouse is at Part C.  And the calculation of DSUE available to claim by the estate of the surviving spouse is set forth at Part D, taking into account the DSUE received from the most recent deceased spouse and the DSUE received from one or more other deceased spouses and used by the current decedent.  The result is then carried to line 9b of the tax computation on p. 1.

The DSUE arising when property passes to a qualified domestic trust (QDOT) for the decedent’s surviving spouse who’s a non-citizen of the United States becomes tentative, subject to re-computation after the application of the tax due under IRC Section 2056A in the subsequent administration of the QDOT.   (See Section B of Part 6.)

The estimated valuation provision, referenced on almost every schedule and at Parts 1 and 5 of the 706, is likely to be of limited use.  While the regulations refer to a range of estimated values being provided in the instructions to the 706, Treas. Regs. Section20.2010-2T(7)(ii)(B), the instructions aren’t yet available.  Estimated valuation only applies to property qualifying for either a marital deduction or a charitable deduction when the value doesn’t affect the value passing to any other beneficiary or any elections to be made.  (Treas. Regs. Section 20.2010-2T(7)(ii)(A).)  For bank and brokerage accounts, the actual valuation of the property is likely to be readily available.  For other assets, valuation may be required for other reasons, including establishing basis for income tax purposes or for the application of state death taxes.  An alternative tax planning strategy for charitable bequests is to give the asset to the surviving spouse, so that he may then make the donation and claim a deduction for income tax purposes. 

Unresolved Claims
Schedule PC, “Protective Claim for Refund,” provides a permissive method to preserve a claim for deduction under Treas. Regs. Section 20.2053-1(a)(5) for “unresolved claims” against the estate for either administration expenses or for debts.  Schedule PC is required: (1) to be completed separately for each unresolved claim or expense that may not become deductible under IRC Section 2053 until the limitations period has expired; and (2) to be filed in duplicate. 

Schedule PC has three parts.  Part 1 requests general information concerning the estate, including the number of protective claims being filed with the 706.  Part 2 requests information about the specific claim being reported, including the amount in controversy, the parties, the basis for and a description of the claim, its status and copies of relevant pleadings or other documents.  Given the information requested and the space provided on Schedule PC, attachments to substantiate the claim will likely be needed.  No provision is made for a computation of the amount of tax reduction or refund due, consistent with the regulatory provision that the protective claim doesn’t need to state a particular dollar amount or demand an immediate refund. 

Schedule PC appears designed to be filed with the 706 and as a separate, stand-alone filing.  It anticipates multiple filings with respect to specific claims, with subsequent filings reporting either partial payment or complete resolution of the claim.  (See Part 2, lines b and c.)  Once a claim is resolved, the regulations indicate that the resolution is to be reported within a reasonable time.  At Part 3, Schedule PC provides for a listing of any Schedules PC or Forms 843, Claim for Refund, previously filed with respect to the unresolved claim.  A necessary step in the estate administration process will be filing refund claims to follow up on the estate’s payment of contingent expenses and liabilities as they get resolved.  Since Form 843 does provide for the computation of the refund amount due, in contrast to Schedule PC, it may be the preferred form to file.  Hopefully, the instructions will provide guidance on the coordination of filing these different forms.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: paelderestatefiduciary.blogspot.com
Source: WealthManagement.com

With the Hollywood star’s $250-million-plus fortune already locked up, high-profile lawyers stress sensitivity to residency and religion as key differentiators for celebrity clients looking for discreet resolutions.

While Katie Holmes and Tom Cruise raised plenty of eyebrows during their five-year marriage,  their divorce is practically a model for advisors who want to shield their clients’ feelings while protecting their wealth.

It only took 11 days for the lawyers to reach a settlement, saving both stars the expense, trauma and risk of career blowback of an extended or messy public custody fight.

And thanks to the smart decision to file in New York instead of Hollywood, Katie’s people managed to keep the details of how she’ll raise Suri almost entirely out of the public eye.

“Unlike California, divorce filings are not open to the public,” notes Manhattan family attorney Daniel Clement. “I suspect the main reason that Holmes filed in New York rather than California is privacy.”

Getting that privacy evidently mattered to Katie and her advisors made sure she got it.

To get a divorce in New York, she needed to establish at least two years legal residence on the East Coast, so she’s been working toward this — and documenting her visits — since at least 2010.

The minute she ran out the clock, she filed the papers, found another apartment and enrolled Suri in an elite local school.

Location is everything

Other than confidentiality and the right to petition New York courts if something goes wrong with custody of Suri, shifting venues didn’t really buy Katie much.

Despite speculation elsewhere, New York has finally joined the rest of the country as a no-fault state, lawyer Daniel Clement says, so it didn’t really matter who the aggrieved party was.

Both states also divide marital property equitably, which would leave Katie with the same split of the couple’s — mostly Tom’s — wealth either way.

But it’s not hard to imagine scenarios where a change of residency makes a huge difference for a client who may benefit from a different spousal division of the assets.

Smart premarital planning means smoother divorces

For Katie, marital property would be moot even if she didn’t have the luxury of picking an address from which to file the papers.

From all reports, Tom’s people got her to sign a prenuptial agreement that renounced her right to seek half of the roughly $250 million he amassed as the world’s top-paid movie star.

Simply having that deal in place puts them miles ahead of plenty of messy celebrity splits right there.

Furthermore, while the gossip columnists have speculated about the agreement awarding Katie $40 million to $50 million, her people insist that she walked away without taking a dime from Tom.

Why so magnanimous? Granted, Katie was a TV star in the ‘90s and has appeared in some movies, but at a measly-for-Hollywood $30,000 an episode, she’s not exactly a billionaire in her own right.

Unless she made some extremely good investments, estimates of her personal net worth being around $25 million are probably inflated as a matter of pure career earnings.

However, the $15 million Tom’s lawyers reportedly put in a trust for her and Suri before the wedding probably have something to do with it.

Remember, a substantial transfer of assets from the rich partner traditionally makes the contract go down a lot easier — and Katie’s father just happens to be a divorce lawyer, so he knows the drill.

Handing his fiancee $15 million five years ago likely saved Tom $120 million or more, not to mention the airing of whatever secrets he might have in court.

That works out for both parties, says Daniel Clement.

Otherwise, “as part of the divorce and the custody fight, Holmes and Cruise would have to expose not only details about their finances, but intimate details of their lives,” he says.

On the other hand, Tom has reportedly agreed to pay $10 million in annual child support for the next 12 years — a lot more than the normal New York cap of $23,000 a year — so it all comes out in the end.

She’s set up for the rest of her life even if she never works again. And she has no motive to complain.

Religion and other intangibles

With the money questions sewn up in advance, the lawyers got to spend those 11 days ironing out how Suri will be raised and how the stars would characterize the break-up to their fans.

“It’s clear that the spiritual upbringing of the couple’s only child Suri played a central role in the pair’s split,” says New Jersey divorce lawyer Bari Weinberger.

Katie has gone back to Catholicism and has signed Suri up for a church school. That’s controversial for Tom’s friends in the Church of Scientology, to say the least, but the religious terms of the settlement are under wraps.

Weinberger sees a lot of these “intangibles” play a huge role in divorce proceedings, so she’s sure to raise emotional and spiritual concerns with clients.

After all, couples may fight over money but it rarely makes them break up.

She’s even worked with clients to get them back together with their spouses when the emotional problems weren’t really as insurmountable as they thought.

That probably wouldn’t have worked for Tom and Katie, but your clients might have better luck.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Source & Photo Credit: Scott Martin / TheTrustAdvisor.com

By Robert L. Moshman, Esq. | The Estate Analyst

Since 1997, 13 states have enacted laws permitting self-settled trusts. Including Colorado, which has had a highly questionable statute on its books since long before the other states, there are a total of 14 states with some form of domestic asset protection trust (DAPT) laws. Each of these DAPT jurisdictions has taken its own approach, and there are critical variations.

To some extent, the 14 states have jockeyed for competitive edge to position themselves as attractive havens for trust funds. Here, we have consulted Nevada attorney Steve Oshins, an authority on the subject, to consider the best DAPT jurisdictions, as well as a new “Hybrid DAPT” approach that enhances the asset protection.

Our Litigious Society

By one poll, three in ten businesses have been sued or threatened with a lawsuit in the last five years. A lawyer can expect to be sued at least once during a career—more depending on the type of practice. Nursing homes experience a steady stream of lawsuits, the majority of which are settled; nursing home clients going forward have to pick up the expense in higher fees.

Anyone with assets can expect to be sued. For physicians, the combination of injured people, risky surgeries, and wealthy physicians results in staggering statistics. Three quarters of physicians in low-risk specialties face malpractice claims, and virtually all physicians in high-risk specialties face claims during their careers. A 2011 study of 40,000 doctors that was published in the New England Journal of Medicine revealed the following.

1. 7.4% of all physicians have a malpractice claim each year.
2. By age 45, 36% of physicians, generally, will have encountered their first claim. For the higher risk specialties, that number shoots up to 88%.
3. By age 65, very few physicians have not been sued. As many as 75% of physicians with low-risk specialties will have been sued by age 65; approximately 99% of physicians with high-risk specialties will have had malpractice suits by that age.

Offshore Asset Protection

A completed gift or a gift in trust can put assets out of harm’s way, so long as the transfer takes place before litigation, is irrevocable, and is undertaken without any fraudulent intent. But this approach divests the grantor of beneficial use and control of assets. However, the completed gift approach is more closely associated with estate planning techniques as opposed to pure asset protection and for many years, asset protection had focused beyond our nation’s borders. 

The offshore option has worked for some people and purposes, but there are certainly shortcomings. There are rules to research and inconveniences for each jurisdiction.  Generally, by the time people go to the trouble of moving assets into a foreign trust, they are often so deep in trouble of some kind that the transfer will be deemed fraudulent. At first blush, a debtor transferring assets to a jurisdiction like St. Vincents in the West Indies might feel reassured that creditors will be forced to prove a transfer was fraudulent by a high burden of proof (beyond a reasonable doubt) and will have a one-year statute of limitations that begins to run from the time of the transfer. 

Making matters worse, a body of law has been developing that may undermine the offshore approach. In Dexia Credit Local v. Rogan, 2009 WL 648634 (N.D. ILL. 2009), for example, an offshore trust from the Bahamas was disregarded when the court determined that a choice of law provision would violate Illinois public policy against self-settled trusts.

The Best DAPT States

In the late 1990s, a number of domestic jurisdictions, such as Alaska, Delaware, and Nevada, began developing laws that made these states domestic financial havens with beneficial tax laws and more favorable asset protection rules. Establishing statutes to permit self-settled trusts has allowed many people to establish their asset protection trusts in these domestic havens.

In a 2010 article written by reporter Ashlea Ebeling, Forbes magazine provided letter grades for the 12 domestic jurisdictions that permitted self-settled trusts at the time the article was written. Leading that list was Nevada, which was the only state to receive an A+. 

Context is critical. A trust set up in a particular state has to contend with that state’s income tax, as well as the other laws of that state. As a starting point, states that have no income tax have an advantage. Virginia, which joins the DAPT list as of July 1, 2012, has an income tax.

The statute of limitations for preexisting and future creditors is also relevant. Nevada and South Dakota have two-year limits, while states such as Alaska and Delaware have four-year standards. There is a tolling period for preexisting creditors. The shorter the period, the sooner the trust assets are protected. 

Most of the DAPT states have carved out exceptions for alimony, child support, and certain torts. Nevada stands alone in not permitting any exceptions.

The Definitive Chart

For the past three years, the definitive DAPT chart comparing jurisdictions has been developed and maintained by Nevada attorney Steve Oshins. 

The chart provides instant comparisons of the statutes of limitation and exceptions applicable to each of the DAPT states. There is also a numerical grading based on a weighting of the various categories.  To download a copy of the Oshins DAPT chart, click here. 

Mr. Oshins also answered questions about the chart, as well as a new “Hybrid” variation he has developed for the DAPT.

Interview with Steve Oshins

Q: So far there are 14 jurisdictions that have adopted some form of DAPT. Is this now a trend that will gather momentum in another 36 states, or have we arrived at a plateau?

A: It’s probably similar to what we have seen over the years with states modifying their perpetuities laws. I expect that we will see a few more of the more progressive states enact DAPT statutes, but I doubt we will see very many more states enact these laws. All of the states that I would expect to enact DAPT laws have already done so.

Q: Some people will always consider domestic trust havens as inferior to offshore trusts. Which option do you think is more protective?

A: At this point, it is still unclear whether a DAPT is more protective than an offshore asset protection trust. Both of these options are a nine out of ten, in my opinion in terms of protection. The offshore option has in nearly every circumstance scared the creditors away, while the DAPT, albeit probably in many less circumstances, has scared the creditors away every time. However, the only type of trust that is nearly a 10 out of 10 in degree of protection is a trust in which the grantor is not a discretionary beneficiary. This is the reason that I came up with the Hybrid DAPT idea.

Q: Among the domestic states, there are upper “A” level states, such as Alaska, Delaware, Nevada, and South Dakota, and second-tier “B” states, such as New Hampshire, Rhode Island, and Tennessee. Is there a big difference?

A: The first-tier states – Alaska, Delaware, Nevada, and South Dakota – get nearly all of the out-of-state business. The second-tier states have excellent DAPT laws, but they fall a little short and thus tend to be good for residents of those states, but there’s just too much competition at the top. Delaware is a wildcard state. Its laws aren’t as protective as the laws of the other so-called first-tier states and are very similar to those of New Hampshire, Rhode Island, and Tennessee. But Delaware tends to get grouped with the first tier because it is so heavily marketed and thus gets a very high percentage of the DAPT business.

Q: You’ve developed a twist on the regular DAPT that you call a Hybrid DAPT, in which the grantor is not initially a discretionary beneficiary but can be added as one later by an independent trustee or trust protector. In what context do you see this as being the most beneficial?

A: This is something that I came up with years ago and have been using for quite some time. I finally gave it the name “Hybrid DAPT” recently and wrote an article on the technique and got an amazing response.

It’s a very simple concept. Basically, the concept is that there is no good reason to include the grantor as a discretionary beneficiary, especially if the grantor won’t need any distributions from the trust anytime soon. This is especially true if the grantor’s spouse is a beneficiary and thus can receive distributions that can be “shared” with the grantor. Therefore, the initial trust document is nothing more than a third-party trust where the grantor is not a beneficiary and thus has a higher probability of protection and should be much more intimidating to a prospective creditor of the grantor.

Only if the grantor actually needs a distribution would the independent trustee or trust protector add the grantor in as a discretionary beneficiary under a provision we build into the trust agreement allowing this. With most DAPTs, because the grantor generally leaves sufficient cash flow out of the DAPT, it would take both a cash flow problem and the grantor to have no spouse to whom a distribution could be given for the grantor to need to be added into the trust as a beneficiary.

Thus, this is a Hybrid DAPT because it starts as a third-party trust and then can be converted into a DAPT at a later date. So the bottom line is that, in my opinion, most DAPTs should be set up as Hybrid DAPTs.

Q: Does the clawback statute in the 2005 Bankruptcy Act have any effect on the Hybrid DAPT?

A: It is extremely unlikely that a DAPT grantor will file for bankruptcy, especially if the grantor has an “old and cold” DAPT that is past the applicable state’s statute of limitations period. In fact, of the hundreds of DAPTs I have created, not one of those clients has gone through bankruptcy.  That being said, it is interesting to note that the Hybrid DAPT most likely does not fit the definition required by §548(e) of the 2005 Bankruptcy Act that would otherwise potentially claw back the assets of a traditional DAPT. One of the requirements of §548(e) is that the debtor must be a beneficiary of the trust. Unless the grantor is added as a discretionary beneficiary of the Hybrid DAPT, this requirement doesn’t exist.

Q: Your DAPT State Rankings Chart has become a great resource that I frequently consult. How has your chart been received by the asset protection community?

A: It has been extremely well-received. I initially put it together three years ago because I found that there was no one-page comparison of the DAPT jurisdictions in our industry. I decided that our industry needed a chart that shows the material differences among the DAPT jurisdictions in an easy-to-read format. I am glad that you use it as a resource. In this year’s version of the chart, for the first time ever, I decided to not only rank the states, but also to assign numerical scores to each state. The numerical scores help show the degree of differences among the states and help break them into tiers.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Reposted with permission from The Estate Analyst Robert L. Moshman, Esq. & Steven J. Oshins, Esq.

Reposted from TheTrustAdvisor.com

Many states have recently enacted or introduced decanting legislation and several states have recently enacted or introduced directed trust legislation.  As part of continuing efforts for states to stay competitive, domestic asset protection may be the next trend.

Virginia recently enacted asset protection legislation, which will become effective July 1, 2012. Now Ohio becomes the latest state in which asset protection legislation has been introduced.  One of the reasons for the introduction of detailed legislation in Ohio on May 23, 2012 is reportedly to enhance the attractiveness of Ohio as a jurisdiction in which to remain, rather than having residents move to other states to protect their wealth.

Included in the Ohio proposal is the Ohio Legacy Trust Act, which contains detailed asset protection provisions.

Ohio Legacy Trust Act – Domestic Asset Protection Proposal

The proposal allows for the creation of a “legacy trust” by which a ”transferor” is given the ability to make a “qualified disposition” of assets and remain a beneficiary through actions of a “qualified trustee.” The transferor must sign a notarized “qualified affidavit” before or contemporaneously with the qualified disposition and provide that the transferor will not be rendered insolvent, does not intend to defraud creditors, has no pending/threatened court actions and does not contemplate bankruptcy.

Creditors would generally be prohibited from bringing any action against any person who made or received a qualified disposition, against any property held in a legacy trust or against any trustee of a legacy trust.  A creditor can bring an action to avoid a qualified disposition on the grounds that the disposition was made with specific intent to defraud the specific creditor bringing the action.

If the creditor was a creditor before the qualified disposition, the action must be brought by the later of (1) 18 months after the qualified disposition or (2) 6 months after the qualified disposition is or could reasonably have been discovered if the creditor files a suit or makes a written demand for payment within 3 years after the qualified disposition. If the creditor became a creditor after the qualified disposition, the action must be brought within 18 months.  The burden is on the creditor to prove the matter by a preponderance of evidence.  The court must award attorney’s fees and costs to the prevailing party. Protection is provided for trustees and attorneys involved in the creation and administration of a legacy trust.

Any person can serve as an advisor of a legacy trust, except that a transferor can act as an advisor only in connection with investment decisions.  Advisors are considered fiduciaries.

The transferor may retain the right to veto distributions from the trust, remove and appoint advisors or trustees, hold a special testamentary power of appointment and be a discretionary income or principal beneficiary.

The trust must (1) have at least one trustee who resides in Ohio or is an entity authorized to act as trustee in Ohio who materially participates in the administration of the trust, (2) expressly incorporate Ohio law to wholly or partially govern its construction and administration, (3) expressly state it is irrevocable and (4) include a spendthrift provision. The new law would apply to all qualified dispositions made on or after the legislation’s effective date.

In addition to the Legacy Trust Act, other significant changes to Ohio law are proposed, including the following:

Increase in Homestead Exemption

The interest in a residence that is exempt from creditors would increase from $20,200 to $500,000.

529 Plan Exemption

The current exemption for certain payments or rights to assets in accounts, such as IRAs, would be expanded to 529 Plans.

Reimbursement of Income Taxes to Grantors of Intentionally Defective Grantor Trusts

Whether or not the trust contains a spendthrift provision, a trustee’s discretionary authority to pay directly or reimburse the settlor amounts for income taxes payable on trust income will not subject those amounts to the claims of the settlor’s creditors.

As you may recall from previous emails, a similar provision was recently enacted in Virginia (effective as of July 1) and another (modeled on current New York law) is pending in New Jersey, but has not yet passed either house.

Payment of Beneficiary’s Expenses Permitted

Regardless of whether a beneficiary is subject to creditors’ claims, a trustee can pay any expense of a beneficiary permitted by a trust instrument. Even if the payments exhaust the trust funds, the trustee will
not be liable to a beneficiary’s creditors.

Administrative Fiduciaries Have No Other Responsibilities

If a fiduciary is appointed to handle only administrative duties, the fiduciary will have no duties other than administrative duties specifically described and will have no obligation to perform investment reviews or make investment recommendations if there is an investment director.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Source: Sharon L. Klein, Lazard Wealth Management & TheTrustAdvisor.com

Reposted from TrustandEstates.com | By Conrad Teitell, A.B., LL.B., LL.M

Many people still believe that Jacqueline Kennedy Onassis created a charitable lead annuity trust in her will. Why? The New York Times and other newspapers obtained a copy of her will from the New York Surrogates Court and reported the terms that spelled out her lead trust. So, how could it be that the CLAT wasn’t created?

First, I’ll tell you about the CLAT as it appeared in her will. (You’ll see how beneficial CLATs can be.) Then, I’ll report on recent CLAT Treasury regulations and a recent letter ruling. At the end of this article, I’ll tell you how it came to pass that Mrs. Onassis’s CLAT was never created.

MRS. ONASSIS’S NOT-CREATED CLAT

Payments to charity. The C & J Foundation would have paid to charities for 24 years "an annuity amount" equal to "eight percent (8%) of the initial net fair market value of the assets of the Foundation as finally determined for federal estate tax purposes."

Selecting the charities. The payments would have been to qualified charitable organizations (described in Sections 170(c) and 2055(a) of the Code), selected by her trustees in their absolute discretion:

"It is my wish, however, that in selecting the particular qualified charitable beneficiaries which shall be the recipients of benefits from the Foundation the independent Trustees give preferential consideration to such eligible organization or organizations the purposes and endeavors of which the independent Trustees feel are committed to making a significant difference in the cultural or social betterment of mankind or the relief of human suffering."

Remainder to family members. At the end of the Foundation's 24-year term, the assets would have been distributed to family members. A number of contingencies were covered, but, basically, the assets would have gone to the descendants of her children.

What's in a name? Mrs. Onassis's will called the just-described arrangement a Foundation, but it was really a CLAT. Call it what her will wills, it still smelled sweet for the charities that would have benefitted handsomely for 24 years. And, the estate tax and generation-skipping transfer (GST) tax savings would have been fragrant too.

The trustees. Mrs. Onassis's daughter, Caroline B. Kennedy, her son, John F. Kennedy, Jr., Alexander D. Forger and Maurice Tempelsman would have been the trustees.

The Foundation administrator. The will provided:

"To assist the independent Trustees I authorize, but do not direct, that they retain my close friend and confidante Nancy L. Tuckerman to assist them in the administration of the Foundation. Should the independent Trustees deem it advisable to retain Nancy L. Tuckerman, they shall pay to her from the assets of the Foundation reasonable compensation for the services she shall render. But such compensation shall not be charged against the annuity amount in any full taxable year of the Foundation nor against the appropriate fraction of said amount, determined as herein provided, payable to the qualified charitable beneficiaries in any short taxable year of the Foundation but shall rather be paid from the assets of the Foundation at large."

The would-have been estate tax charitable deduction. I don't know the value of Mrs. Onassis's residuary estate that would have funded the CLAT. Based on press reports, let's assume a $100 million residuary estate (a nice round number).

Mrs. Onassis died in May of 1994. When computing the estate tax charitable deduction for the value of the charitable lead interest, her estate could have used 120 percent of the Treasury's mid-term federal rate for split-interest gifts for the month of her death or the rate for either of the two preceding months. Using the March Internal Revenue Code Section 7520 rate (the lowest rate and thus the largest estate tax charitable deduction for charitable lead trusts) the estate tax charitable deduction for a $100 million charitable lead trust paying charities $8 million a year for 24 years would have been approximately $96.8 million. So, only $3.2 million of the $100 million trust would have been subject to estate tax. Again, the value of the residuary estate is assumed. Whatever the value, however, the estate tax charitable deduction would have equaled approximately 96.8 percent of the amount funding the charitable lead trust.

Which generation has a rendezvous with Treasury? Looking down the road, the GST tax would have been payable at the end of the 24-year term. The amount would have depended on the value of the trust at that time and the then-effective interest assumptions.

Assuming: (1) the trust would have been funded with $100 million; (2) it would have used the lowest allowable monthly discount rate — the IRC Section 7520 rate for March 1994 — 6.4 percent; (3) it would have earned 8 percent each year and appreciated 2 percent annually; and (4) it would have made annual end-of-year payments to charity, the value of the assets after 24 years would have been approximately $213.76 million. The GST tax at that time (assuming that the GST is still in existence) would have been approximately $115.13 million, leaving roughly $98.63 million for the family. (Note, with historically low IRC Section 7520 rates, CLATs are now better than ever.)

In my sister's house are many lead trusts. Each of Lee B. Radziwill's children would have been remainderpersons of separate 10 percent lead annuity trusts—each to be funded with $500,000. Each trust would have paid $50,000 annually for ten years to charities selected by the trustees.

Why was the CLAT called the C & J Foundation? When Abe Lincoln was asked how many legs a sheep would have if its tail were counted as a leg, he responded: "Four. No matter what you call a tail, it's still a tail." But, it's OK to have a lead trust in foundation clothing—especially where the trustees have discretion to select the charities. Actually, you could say that Mrs. Onassis would have created a term-of-years foundation.

What is a foundation anyway? A large body of money surrounded by those who want some.

“ORDERING” RULES FOR CHARITABLE LEAD TRUST PAYMENTS DISREGARDED . . . FINAL REGULATIONS

Bottom line on the top. Treasury regulations (effective April 4, 2012) adopt, with one insignificant change, the June 2008 proposed regulations. A CLT provision (or local law) that specifies the source of income from which amounts are to be paid to the charity has no economic effect independent of income tax consequences and will be disregarded. T.D. 9582, 2012-18 IRB 868 (April 30, 2012).

Thus, payments to a charity will consist of the same proportion of each class of the items of income of the trust as the total of each class bears to the total of all classes. The regulations apply to charitable lead trusts and other trusts making payments or permanently setting aside amounts for a charitable purpose.

Why is Treasury concerned about an ordering (rather than a pro rata) payment provision? My opinion: The Treasury and the IRS want to maximize taxes. Income ordering provisions in lead trusts are designed to minimize them and to maximize the charity’s benefits. Charitable lead trusts (as differentiated from charitable remainder trusts) aren’t tax exempt and are subject to the complex trust rules (unless drafted as a grantor trust).

Charitable deductions for lead trusts. A lead trust itself is allowed a charitable deduction for gross income (the annuity or unitrust amount) paid to the charity. Income above the required payment is taxable to the trust. However, a charitable deduction isn’t available to a lead trust for tax-exempt income because it isn’t includable in the trust’s gross income. And, a lead trust’s IRC Section 642(c) charitable deduction is disallowed for unrelated business taxable income (UBTI) paid to charity. Thus, a CLT has to pay tax on the UBTI. But the trust can qualify for a charitable deduction under IRC Section 512(b)(1) if the UBTI is paid to a public charity during the taxable year. Reg Section 1.642(c)-3(d). However, the deduction is limited to the 50 percent ceiling for individuals. Who says this stuff is complicated?

As noted, ordering provisions are designed to minimize taxes to the lead trust and to maximize the charity’s benefits. They do so by providing that income that won’t qualify for a charitable deduction be paid out last.

Here’s a seven-tier ordering provision—given as an example in the final regulations—on which Treasury has put the kibosh.

Example 1. A CLAT has the calendar year as its taxable year and is to pay an annuity of $10,000 annually to an organization described in Section 1170(c). A provision in the trust governing instrument provides that the $10,000 annuity should be deemed to come first from ordinary income, second from short-term capital gain, third from 50 percent of the unrelated business taxable income, fourth from long-term capital gain, fifth from the balance of unrelated business taxable income, sixth from tax-exempt income and seventh from principal. This provision in the governing instrument does not have economic effect independent of income tax consequences, because the amount to be paid to the charity is not dependent upon the type of income from which it is to be paid. Accordingly, the amount to which Section 642(c) applies is deemed to consist of the same proportion of each class of the items of income of the trust as the total of each class bears to the total of all classes.

The Final Regulations’s Preamble Summarizes the Public Comments on the Proposed Regulations and the Treasury’s Response.

Commentators said: Treasury’s proposed regulations are contrary to the clear language of IRC Sections 642(c) and 643(a)(5) and the existing regulations.

Treasury’s response. The IRS and Treasury have carefully considered these arguments and the analyses suggested by the commentators. We continue to believe that the position clarified in the proposed regulations, requiring that a specific provision of the governing instrument or a provision under local law have economic effect independent of income tax consequences in order to be respected for Federal tax purposes, is the proper interpretation of the relevant Code provisions and is a principle that applies throughout Subchapter J.

One commentator said: Income ordering provisions in CLTs have economic effect independent of income tax consequences, because disregarding an income ordering provision could increase a CLT's tax liability, thereby reducing the value of the trust and, in turn, reducing the annual lead unitrust payments to the charitable beneficiaries and increasing the risk that the trust's assets in lead unitrusts and annuity trusts will be depleted before the end of the trust term.

Treasury’s response. Although the general pro rata allocation rule may increase a trust's tax liability and, thereby, reduce the value of the trust's corpus, the effect of the payment of the trust's income tax liability is not an economic effect independent of income tax consequences as described in these regulations. Any possible reduction in the unitrust amount subsequently paid to the charitable beneficiary would be the direct result of the payment of income taxes by the unitrust. The use of an income ordering rule in a CLT directing the tax characteristics of the unitrust or annuity payments to the charity is primarily, if not exclusively, an attempt to minimize the tax liabilities of the trust and its remainder beneficiaries. The only effects of the use of an ordering rule are, in fact, dependent solely upon tax consequences: specifically, the reduced amount of tax paid and the trust's retention of the income tax savings.

Ordering provisions in CLTs will never have economic effect independent of their tax consequences, because the amount paid to the charity is not dependent upon the type of income it's allocated. An annuity payment is a fixed amount from year to year, and although a unitrust amount may fluctuate annually, the amount is based upon a predetermined percentage of the trust's value.

Permitting an ordering rule with no economic effect independent of income tax consequences to supersede the pro rata allocation rule generally applicable under Subchapter J would, in effect, permit taxpayers to deviate at will from the general rule imposed throughout Subchapter J in the case of all kinds of complex trusts.

One commentator said. The proposed regulations are contrary to the Federal government's long-standing policy to encourage charitable gifts and to benefit and protect charities.

Treasury’s response. The IRS and Treasury have carefully considered the merits and implications of this suggestion. We believe, however, that the proper interpretation of the relevant Code sections does not permit the creation of a special rule for CLTs. A CLT is treated and taxed in the same way as any other complex trust under Subchapter J. Subchapter J does not differentiate between CLTs and other types of complex trust, and there is no provision of Subchapter J that applies exclusively and expressly to CLTs. Thus, any income tax rule applicable to a CLT will apply in the same way to every other complex trust.

The Treasury obliges. One commentator requested an example of a provision in a governing instrument that would have economic effect independent of income tax consequences. Thus, the final regulation gives an additional example. Reg. Section 1.642(c)-3(b)(2).

Example 2. A trust instrument provides that 100 percent of the trust's ordinary income must be distributed currently to an organization described in Section 170(c) and that all remaining items of income must be distributed currently to B, a noncharitable beneficiary. This income ordering provision has economic effect independent of income tax consequences because the amount to be paid to the charitable organization each year is dependent upon the amount of ordinary income the trust earns within that taxable year. Accordingly, for purposes of Section 642(c), the full amount distributed to charity is deemed to consist of ordinary income.

I submitted comments to the Treasury in 2008 on the proposed regulations on behalf of the American Council on Gift Annuities and the National Committee on Planned Giving (now the Partnership for Philanthropic Planning). If you would like a copy of those comments, e-mail me at: cteitell@cl-law.com.

Hard to believe. The Treasury didn’t change its position based on my comments.

If one were to do battle with the IRS in court over this issue (and I’m not suggesting doing so), perhaps my comments would be helpful in writing the brief for the taxpayer. Again, I’m not suggesting that a taxpayer go to court on this issue, but if the decision is made to do so, consideration should be given to litigating in a federal district court rather than in the U.S. Tax Court.

Every client is entitled to his decade in court—keeping in mind that it’s a long way to certiorari.

CLAT’S ASCENDING ANNUITY PAYMENTS—OK (Letter Ruling 201216045)

Quick background. Treasury regulations (above) specify how payments from charitable lead annuity and lead trusts are taxable. CLT income payments consist of a pro-rata share of each item of trust income. Any trust provisions (or state law) directing payments under an ordering provision will be disregarded. Treas. Regs. Sec tion 1.642(c)-3(b)(2).

Time now for a different CLT issue. Most charitable lead trusts are lead annuity trusts, few are lead unitrusts.

Now that we know how the payments are deemed taxable (pro-rata rule, not ordering rule), how is the payment itself set? Generally, it's specifically set in the trust instrument.

Example. Charitable lead annuity trust is funded with $1 million and the annual payment is set at $30,000 for the ten-year term. Then the trust assets go to the family members.

Example. Charitable lead unitrust is funded with $1 million and the annual payment is to be 3 percent multiplied by the net fair market value of the trust’s assets, as revalued each year, for the ten-year term. Then the trust assets go to family members.

Unlike charitable remainder trusts, lead trusts have no 5 percent minimum and no 50 percent maximum payment requirements. And there is no 10 percent minimum remainder interest requirement. In fact, CLTs are often drafted with as small a remainder as possible in order to avoid making gifts to the family remainder takers. This is especially so when the IRC Section 7520 rate is low—the current case.

The mechanism to try to achieve as small a remainder interest as possible is using a formula for setting the annual payout. Read on, and you’ll learn about that in the following letter ruling.

Facts. A CLAT created at the donor’s death is to make payments to a private foundation (or its successor in interest) for 10 years. Then the trust corpus will be distributed per stirpes to trusts for the benefit of the donor’s descendants. If there are no remaining descendants, the trust corpus will be distributed to the Foundation or a similar qualified organization.

The trust states that it is the donor’s intent that the CLAT “qualify as a charitable lead [trust] so that the value of the interest passing to charity is deductible as a charitable lead interest under Sections 2055 (e)(2)(B) and 2522(e)(2)(B) of the Code, and so that the payments of the amount to charity will be deductible from the gross income of the trust to the extent provided by Section 642(c).”

The trust uses this formula to determine the annual annuity amount:

Accounting from the beginning date, the annual annuity amount shall be an amount that will produce a present value under §7520 of the Code for the non-charitable remainder interest equal to zero or as close to zero as possible without exceeding zero.

The trustee is prohibited from exercising any power or discretion granted by state law that would be inconsistent with the CLAT’s qualification as a charitable lead trust under IRC Section 2055(e)(2).

The donor’s United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706, was timely filed. On Schedule O of Form 706, the estate claimed a charitable deduction under IRC Section 2055(a) for the present value of the property passing to the CLAT. The estate received a closing letter from the IRS accepting the estate tax return as filed.

The CLAT trustees, with the consent of the Foundation and the remainder beneficiaries, and with notice to the state attorney general’s office, filed a complaint with the state probate court requesting that the court construe the formula for determining the annuity amount to permit variable ascending annuity payments, commencing on the donor’s date of death and continuing for the 10-year annuity term, with the annuity payments made to ascend each year by 120 percent of the prior year’s payment over the annuity term, rather than a straight-line annuity payment over the 10-year term.

The complaint explained that construing the formula as a straight-line annuity would make it unlikely that the trustees could make the annuity payments over the entire term. Therefore, the trustees would be unable to satisfy the donor’s intentions regarding the gift of the lead annuity interest to the charitable beneficiary. According to the letter ruling, the court was given schedules showing a comparison to the straight-line method that demonstrated that a variable ascending annuity payment method would result in a higher total payout to the Foundation.

The state probate court found the material allegations to be true and the relief requested to be in the best interests of the beneficiaries. Further, the variable ascending method conforms to the terms of the trust and meets the donor’s intent and tax objective. The court issued an order construing that both straight line and variable ascending annuity payment formulas are actuarial equivalents (based on the IRC Section 7520 rate applicable at the donor’s death) and either form of payment is permitted under the CLAT agreement.

The probate court ruled that its order is subject to the condition that the trustees request and receive a favorable private letter ruling from the IRS.

Key to all the favorable IRS rulings that follow: “We [the IRS] conclude that the construction of Trust’s formula for determining the Annuity Amount to permit variable ascending annuity payments resolves a genuine ambiguity in Trust and therefore the court order issued [Date] will be treated as the settlement of a bona fide contest. Payments of gross income made under that construction will be considered pursuant to the terms of the governing instrument within the meaning of [IRC] §642(c)(1).”

The IRS rules (Letter Ruling 201216045):

1. The CLAT’s terms, as construed by the state court’s order to permit variable ascending annuity payments, commencing on the decedent’s death and continuing for the 10-year annuity term, will satisfy the requirements of IRC Section 2055(e)(2) for a guaranteed annuity interest (for example, an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years) and, therefore, property of the taxable estate of the decedent passing to the charitable lead trust will qualify for a charitable deduction under IRC Section 2055(a).

2. The CLAT will be allowed a deduction under IRC Section 642(c) for each taxable year in an amount equal to the annuity amount paid from the charitable lead trust’s gross income during the taxable year in accordance with the CLAT’s terms, as construed by the state court’s order to permit variable ascending annuity payments, commencing on the donor’s death and continuing for the 10-year annuity term, except that no charitable deduction will be allowed for any amounts allocable to the trust’s unrelated business income for the taxable year.

3. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over the 10-year annuity term, will not constitute a termination under IRC Section 507 of the CLAT’s private foundation status.

4. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over the 10-year annuity term, will not be self-dealing under IRC Section 4941.

5. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over a 10-year annuity term, will not subject the charitable lead trust to tax on the undistributed income of a private foundation under IRC Section 4942.

6. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over a 10-year annuity term will not subject the charitable lead trust to tax on excess business holdings under IRC Section 4943.

7. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over the 10-year annuity term, will not be an investment, which jeopardizes charitable purposes subject to tax under IRC Section 4944.

8. The construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over a 10-year annuity term, will not be a taxable expenditure under IRC Section 4945.

9. To the extent that the construction of the terms of the CLAT by the state court’s order, allowing ascending annuity payments over the 10-year annuity term, is a transaction with respect to the CLAT’s interest or expectancy in property held by the estate, the living trust or the non-exempt marital trust such transaction will not be self-dealing under IRC Section 4941.

FINALLY, WATSON HERE’S THE SOLUTION TO THE CASE OF JACKIE O’S LEAD TRUST THAT NEVER WAS

Mrs. Onassis’s inter vivos revocable living trust gave almost her entire estate outright to her two children, Caroline and John. It provided that to the extent that her children disclaimed their inheritance, the disclaimed amounts would pour over to the C & J [CLAT] Foundation created by her will. Well, the kids didn’t disclaim.

This was savvy estate planning. She wanted her children to make the final decision whether a CLAT should be created.

Inter vivos trusts generally provide privacy—not available with wills. In this case, however, a New York Times investigative reporter working on a follow-up article on Mrs. Onassis’s CLAT, checked with the New York State Attorney General’s Charity Bureau. He learned that the C & J Foundation was not funded. This was reported in a Saturday edition of The New York Times and in hardly any other publications.

And that dear readers, is the news from Lake Taxbegone.

© Conrad Teitell 2012. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.  For information about Conrad Teitell’s publications and lectures visit: taxwisegiving.com. For information about Cummings & Lockwood visit: cl-law.com.

_________________________________________

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Renowned Attorney and CPA, Martin M. Shenkman will be holding a special teleconference for us on Wednesday, June 13th at 9am Pacific Time entitled, "Creative & Overlooked Charitable Planning Techniques Every Advisor Should Know".  For more information, call us at 1-866-754-6477 or you can register online by clicking here.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Reposted from Forbes.com | By Robert W. Wood

What a week! First an unprecedented IPO, then marriage. Yes, Facebook’s Zuckerberg Marries His Longtime Girlfriend Priscilla Chan. And California marriages are, well different, as California divorce lawyers–aka “family lawyers”–will tell you.

The water cooler debates about taxing Mark Zuckerberg have been vitriolic for weeks now–not to mention the endless likes and dislikes over the expatriation of one-time co-founder Eduardo Saverin. It’s only natural that we’ll all worry over this one too. After all, what does this latest one-two development mean for the Zuckerberg family tax return?

Joint v. Separate? Mr. Zuckerberg and his new wife could file married filing separate or married filing joint for this year, even though they married part-way through the year. While 95% of married couples file joint tax returns, you might be surprised to find that the tax savings by filing jointly are often small. If Mr. Zuckerberg hopes to keep assets separate–more about that below–he’s better off filing separately.

Separate v. Community? One of the big issues in California and the handful of other community property states is separate v. community. What each person acquires prior to marriage is separate property. That means all the billions Mr. Zuckerberg had before tying the knot remain his separate property.

But you might be surprised how that can get confused over time. If there’s a prenup–and I presume there is–it might say that no matter what, it stays separate. But separate property can be transmuted into community property not only by agreement but by actions too. Seemingly innocuous acts–like one person making a mortgage payment on their spouse’s separate residence–can have an impact.

Business and Investment Management? One of the biggest risks is where a couple works together or even undertakes joint management of assets or business interests. What is considered a contribution to the community can become murkier still. Even if Mr. Zuckerberg’s Facebook stock and cash are all separate up until he marries, earnings from his work at the company during marriage are generally considered community. That is likely to include more options in the future.

Gifts During Marriage? One thing that’s not a tax problem during marriage is the gift tax. Married taxpayers can give as much property as they want to their spouse during marriage free of gift tax. So if Mr. Zuckerberg wants to give his bride a billion dollar wedding gift of Facebook stock, there’s no gift tax.

There’s no income tax either, unless she sells it. Then, because her tax basis in the shares would be the same as the stock’s basis was in her husband’s hands before the gift, she would pay tax on the gain on sale.

Divorce Rules. Sorry to be a killjoy, and I truly wish the newlyweds well. But the biggest and most important tax rules about marriage apply to its unwinding. Since these tax rules only work on unwinding a legal marriage and not on any form of cohabitation, they remain a gross tax inequity the gay marriage debate has never thoroughly addressed.

Like gifts during marriage, property transfers incident to divorce don’t trigger gift or income taxes. Alimony or spousal maintenance if structured properly is income to the recipient spouse and deductible by the payor spouse. Child support is neither deductible to the payor nor income to the child or the recipient spouse with custody.

All these rules may sound simple and they are simple to state. But the tax cases in which they are misapplied and audited are legion.

Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Source & Photo Credit: Forbes.com

A prospective new client contacts you about working with him. Within minutes, you learn that he wants you to also work with his partner, and that they are unmarried with each having children from prior relationships as well as one of their own together. Do you experience a thrill of excitement at having such a complex and fascinating potential couple to work with, or does this scenario strike fear in your heart? If you're like most of the estate planners we work with, fear is the first response, and, in most instances, the prospective client is afraid as well, but for different reasons.

In Estate Planning for the Blended Family (Self-Counsel Press 2012), we identify and discuss 11 fears that clients can have when it comes to the estate planning process, which include everything from contemplating death to fear of the estate planning process itself. The biggest issue that is front and center in the estate planner's mind (or should be if it's not already) is the likelihood of conflict of interests within the blended family system.

The reality is that estate planners need to be able to manage their own emotions, as well as those of their clients, around these fears and conflicts. It's not enough to understand the intricacies of estate planning vehicles to avoid taxes and transfer assets efficiently - it's also necessary to make sure you are addressing the core concerns (and yes, fears) that are part of the process. These fears prevent people from doing estate planning, or cause them to procrastinate in their estate planning. Fears lead to avoidance strategies that cause delays in estate planning. More often than not, people tend to avoid those conversations due to a lack of awareness about how to have the conversations effectively.

Estate planning for the blended family client can present some of the most challenging work that an estate planner ever does. One of the reasons why this is so is that most professionals in the field of estate planning aren't sufficiently trained or experienced in the "human side" of the process, which is the "heart" of estate planning. Most attorneys, accountants, and financial advisors are trained in the "head" side of estate planning. The key to successfully navigating the often treacherous waters of estate planning for the blended family is properly balancing the head and heart.

Tomorrow, May 22nd, we will present the third session of our Estate Planning for Blended Families 3-Part teleconference series, diving into the key issues around testamentary planning for blended family couples.  During this presentation, participants will learn ways to ensure that no changes are made to an estate plan of a partner, including the use of mutual wills, contracts to make a will, marriage contracts and in terrorem clauses. The session will also discuss the use of QTIP trusts and available planning options and issues relating to their use. Additionally, we'll cover selected will and trust drafting issues that revolve around the blended family client. Moreover, we'll also deal with a panoply of other issues involving testamentary planning for the blended family client, including: powers of appointment and the options and traps that are involved with them, identities of the agents; personal representatives and successor trustees, and how to plan around those matters; the potential spousal election; life estates and estate equalization. Finally, we'll cover a number of issues that arise during the administration of a blended family partner's estate.

The session once again marries the "head" and the "heart" of estate planning.

Today is the last chance to register to participate on tomorrow's live teleconference!

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It's not too late! All of our teleconferences are recorded and the handout materials and audio recordings for the first two sessions are available for immediate download! 

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We hope this helps you help others,
Paul & Emily
estateplanning@blended-families.com

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Emily Bouchard and L. Paul Hood, Jr. © 2012