Marty Shenkman

Thursday, April 19, 2012

Practical Planner - Checklist: Capacity (Volume 7, Issue 2)

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant who authors a number of publications each month, including his monthly e-mail newsletter, "Practical Planner".  Below is the second installment from Marty's March/April 2012 newsletter.  To be added to Marty's monthly e-mail distribution list, e-mail newsletter@shenkmanlaw.com.

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

√ Many chronic illnesses, in addition to physical or other symptoms, are coexistent with depression. Depression can be part of the symptoms of the illness itself, or as the result of the impact of the illness on the client’s quality of life, or a consequence of medication used to treat the illness, or a combination of all three factors. Depression may affect your objectives, capacity, and risk for being unduly influenced. With depression sleep may be impaired, you may see the world through dark colored classes, you may have little energy and no ability to concentrate, etc. Depression may make you more susceptible to undue influence. If concentration is significantly impacted, your cognitive function may also be affected.

√ Consider who is making the assessment of your competency (capacity). Many primary care physicians don’t have the expertise to make these diagnosis, yet often lawyers rely on reports from primary care physicians to support their ultimate legal determination as to capacity. For patients with known depression, less than 25% were documented as being depressed in their primary physicians’ charts. Less than 10% were taking medication for depression. The statistics concerning the diagnosis of cognitive impairment are similarly weak. For a proper diagnosis, a number of different disciplines might be tapped. The basic analysis should include a bio-psycho-social framework. It is important to look at the entire person and not just a part. Evaluating medical records might be a good start, but when a full picture, including the patient’s social environment, is obtained, everything is put in context.

√ The testing process itself may yield a false positive. If someone age 85 is put through a 6 hour neuropsychological test, at the end of the test his performance could be affected as a result of the fatigue caused by the testing process itself!

√ How at risk are you to undue influence? What can be done to ascertain or corroborate you true wishes? Even if there is a strong risk of undue influence, if you’ve been consistent for decades (e.g., your will has always left your son a double portion), your wishes may be clear. The real challenge is in assessing the reality of undue influence if you’re living with moderate dementia. While changes in your historical pattern of disposition of assets might suggest an issue, is it?

√ A court might find that you had sufficient capacity to make a will, but then disqualify the will because of undue influence. In re Estate of H. Earl Hoover, no. 73519, Illinois, 6/17/93. Since capacity is a continuum, even if capacity is diminished, it may prove easier to challenge the will by demonstrating undue influence.

√ In early stages of even Alzheimer’s disease no one should assume that sufficient capacity does, or does not, exist. If the diagnosis was made by a primary care physician, what reliance is reasonable to place on the conclusion? What precautions should your lawyer take? The fact that you were prescribed a drug, such as Aricept, does not necessarily prove your cognitive status.

√ Competency is also situational. You may lack competence at one point in time, but you may be competent at another point in time. For example, you might feel so anxious in your attorney’s office that you  cannot adequately respond to the queries your attorney believes essential to the demonstration of adequate capacity. Perhaps your lawyer should have a therapy dog present and serve lots of great snacks to put you at ease! Documenting the situational impact on competency presents another type of challenge.

Thanks to Sanford I. F, MD, Clinical Professor of Psychiatry at the University of Chicago Medical School and William Andrews, Esq. of Santa Rosa, California. PP

To download the complete newsletter and prior newsletters, click here.

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ABOUT THE AUTHOR: Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.

Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

Tuesday, April 17, 2012

Practical Planner: 2012— ACT NOW! (Volume 7, Issue 2)

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant who authors a number of publications each month, including his monthly e-mail newsletter, "Practical Planner".  Below is the second installment from Marty's March/April 2012 newsletter.  To be added to Marty's monthly e-mail distribution list, e-mail newsletter@shenkmanlaw.com.

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

• Point 1:  Uncertainty shouldn’t be an excuse for inaction. If the weatherman says 20% chance of a horrible storm, you’d carry an umbrella. Uncertainty may also mean opportunity. If you don’t act now 2013 is scheduled to bring a $1 million exemption and 55% rate. President Obama has continued to propose estate and gift tax changes that will undermine much of the planning arsenal, making his proposed 45% rate and $3.5 million exemption far more costly than most imagine. Consider that the left end of the tax continuum. True, the future is uncertain. Perhaps the Republicans will sweep the election and repeal the estate tax.  Consider that the right end of the tax continuum. If you don’t act now and the left end materializes you (not only your heirs) may lose out big time. If the right happens worst case you’ve wasted the cost of the planning, but have you? The trust planning that will serve your estate planning needs will also provide asset protection benefits, including divorce protection for heirs, and better control and management of your assets. So the planning in the best tax case scenario won’t be for naught, you’ll just have one less benefit. And by the way, even if the estate tax is repealed (and ya shouldn’t hold your breath hoping for that one) the gift tax may remain intact with a $1 million exemption even under Republican control. Most folks forget that the gift tax is an integral backstop for the income tax, not only for the estate tax. Look at what happened in 2010 with the gift tax.

• Point 2:  Planning is not only for Richie Rich. If you have a non-married partner a $1 million gift exemption in 2013 may make it costly to shuffle ownership of assets between you and  your partner. Everyone, not just surgeons, should be concerned about asset protection. Nothing anyone in Washington does will change the litigious nature of our society. About a score of states have decoupled from the federal estate tax system so that lower amounts of wealth may trigger state death tax. A simple gift today might be all it takes in many situations to reduce or eliminate state estate tax. Use the current favorable tax environment to shift assets into protective structures before the party ends. A $1 million gift exemption will render much of this planning costly, impractical, or impossible. Remember at midnight 12/31/12 the carriage turns back into a pumpkin and the ride is over.

• Point 3:  Start with a Financial Plan. While your estate planner might think he or she holds the keys to the planning kingdom, this kinda planning should have at its foundation a well thought out financial plan. Does this suggest your wealth manager should be driving the bus? Nah, but they should be a co-pilot. How much can you afford to give away and be really assured that you won’t be asking the kids for a loan? Which assets can or should you give away? Do you need additional life insurance for coverage in light of components of the plan? Do you need access to the money you give away and if so how much? This analysis is meant to insure that you’re left with more than adequate assets to maintain your lifestyle after the transfers. This can deflect an IRS challenge that you had also an implied understanding with the trustees (or managers of an LLC) to get money back because you left yourself with insufficient resources. It can make it harder for a creditor to prove later that your transfers constituted a fraudulent conveyance.

• Point 4:  Make Gifts in Trust. Whatever amount you determine to give away, give it to one or more trusts, not outright to an heir. Trusts provide asset protection, divorce protection, preserve generation skipping transfer tax benefits (in English they can keep the assets out of the transfer tax system forever). Trusts can be structured as “grantor trusts” so you can sell assets to them without triggering capital gains tax and you can pay the tax on trust income and gains thereby growing the value of the assets inside the trust faster while shrinking the assets left in your name, thus reducing assets reachable by creditors or subject to estate tax.  Both of these bennies are on President Obama’s hit list, so get ‘em while you can. Perhaps the biggest vig of gifting to a trust is you can retain the ability to benefit from the assets in trust. Say you set up a trust for your spouse/partner and all future descendants. So long as your spouse/partner is a beneficiary you can indirectly benefit. Alternatively, you can set up a Domestic Asset Protection Trust (DAPT) and be a beneficiary of your own trust. Even if you’re mega rich, but much of your wealth is concentrated in a business, be very cautious about cutting off your access to trust assets. Don’t forget the harsh economic lessons of 2008-10+.

• Point 5:  Sell Assets to Trusts. While gifts can take advantage of the current law, sales of assets to trusts can also provide a huge benefit now, that may also disappear when the ball drops in Times Square. If you sell 45% of your interest in a family business valued with a 40% non-marketability and lack of control discount, that’s huge leverage. Discounts may head the way of the Dodo bird. Since few trusts will have sufficient cash to pay for the purchase these sales are structured as note sales. Interest rates remain at historic lows. So transfers well beyond the $5.12 million are “can do.” For many folks the better approach is a technique described in prior newsletters called a Beneficiary Defective Irrevocable Trust (BDIT) that will depend on this sale technique. Sell ‘em while you can!

• Point 6:  Design the Trusts Right. The trust or trusts you’ll use should not be off the rack. This is the time to step up to the custom tailored suit. Navigating Scylla and Charybdis is child’s play by comparison. Some of the issues to consider include:
  • Should you be a beneficiary or not? If yes, there are precautions to take and only certain states in which the trust can be established.
  • Is there any reason the trust should not be a grantor trust? Unlikely, but ask. If it is a grantor trust what happens if there is a big capital gain? Example – you transfer your family business to the trust and 5 years from now sell out to a public company for big bucks. You have to pay the gain but the bucks are in the trust. Some practitioners use a tax reimbursement clause but caution is in order. These clauses have to be handled correctly and the trust must be in a state with appropriate laws. Also, worrisome is that if the trustee just so happens to reimburse you, the IRS might argue that you had an implied agreement with the trustee to reimburse you for the capital gains tax on a big sale.  There may be better approaches.
  • If you and your spouse/partner both set up trusts, the trusts need to be sufficiently different to avoid the IRS arguing what is called the “reciprocal trust doctrine” -- that they are so identical that they should be “uncrossed” so that the trusts are taxable in each of your estates. That would entirely negate the planning. Differentiate the trusts using different powers, different distribution standards, set them up in different states, sign them on different dates, use different assets, print them on different color paper (just kidding on that one), etc.
  • If you own all the assets to be given can you set up a trust and gift $10.24 million and have your spouse treat the gift as if it is ½ his thereby using up his exemption? While spouses can gift split, if your spouse is a beneficiary of the trust which is the recipient of the gift, that is a no-no.
  • What if you gift $5.12 million to your spouse, and he then gifts it to his trust to avoid the gift splitting issue? Nice try but maybe no cigar. The IRS could attack using the “step transaction doctrine.” If the IRS wins they might treat your gift to your spouse, and his gift to the trust, as an indirect gift by you to his trust. Thus, you’d be treated as making two $5.12 million gifts and owe about $1.8 million in gift tax. Ouch!
  • There has never been a time in history when so many taxpayers may feel so compelled to make so many large transfers in such a short time period. Big brother will be watching so more caution and planning then ever before should be exercised.
  • You want to fund a FLP or LLC with appreciating assets, make gifts and secure discounts. If the assets are not inside the entity long enough the IRS will argue that the gifts were of the underlying assets – no discount.

• Point 7:  Operate the Plan and Trusts Right. Administer the plan and trust properly, and monitor it by meeting not less than annually with all your advisers to make sure all formalities are adhered to. Be sure the CPA is in the loop to monitor the gift and income tax returns so they all properly reflect the reality of the transfers. Revise asset allocations to coordinate asset location decisions.

Bottom Line:  Just Do It! Time is fleeting. Everyone should review planning options for themselves and their family/loved ones to ascertain what might be beneficial and how to expedite the process so planning is completed in advance of year end, preferably before the election.

To download the complete newsletter and prior newsletters, click here.

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ABOUT THE AUTHOR: Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.

Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

Thursday, March 08, 2012

Tax Expert Marty Shenkman: Two Tax Mistakes to Avoid With Clients in 2012

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Marty Shenkman is a speaker for several teleconferences for The Ultimate Estate Planner, Inc., including 2 programs coming up this month.  The first is on Wednesday, March 14th at 9am Pacific Time on the topic of, "Gift Tax Returns: Traps & Tips for Practitioners Heading Into Filing Season".  The second is on Tuesday, March 27th at 9am Pacific Time and is on the topic, "Recent Developments in Estate Planning: Special Traps and Tips to Avoid Them".

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.

Wednesday, February 08, 2012

Practical Planner: Checklist: More Heckerling Nuggets (Volume 7, Issue 1)

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant who authors a number of publications each month, including his monthly e-mail newsletter, "Practical Planner".  Below is the second installment from Marty's January/February 2012 newsletter.  To be added to Marty's monthly e-mail distribution list, e-mail newsletter@shenkmanlaw.com.

√ Your Tax Reimbursement Clauses Might be Dangerous: Some grantor trusts (income taxed to you) include a provision that permit the trustee of a trust you create to reimburse you for taxes you pay on trust income.  If reimbursement is mandatory, Go To Tax Jail, Do Not Pass Go. It causes inclusion in your estate. So does that mean a discretionary reimbursement is guaranteed not to cause inclusion of trust assets in your estate? Not so fast Charlie. If your creditors cannot reach the trust assets under state law the trust assets should not be included in your estate. But (all tax rules have a “but”) so long as there was no implied understanding between you and trustee. An actual pattern of distributions (e.g., taking all income, having all taxes reimbursed over a number of years) would probably sink your tax ship. But what if you and the trust sell stock in closely held business that you had used to fund the trust and you immediately get a tax reimbursement? Was there an understanding from the get go that you’d get the tax paid by the trust? Most folks probably don’t want these clauses anyhow since the tax payments reduce your estate. There are other options. Don't let the trust reimburse you and thereby give the IRS the right to raise the “implied understanding argument.” Instead, the trustee can loan you money to pay the tax. See PLR 200944002; Rev. Rul. 2004-64.

√ Zapped by a Gift Tax: So here’s the law. A donee is personally liable for the tax, even if it is not their gift subject to tax. Ouch! Example: You made a large gift to your new spouse which qualifies for marital deduction – no tax. You make a separate large taxable gift to another donee, your kid from a prior marriage. You’re a bum and don’t pay the gift tax. Your kid should be liable. But, even your new spouse is on the gift tax hook if tax on other gifts is not paid! This is so even though the gift to her did not trigger any gift tax. IRC Sec. 6324. Here’s the reality TV version: Son is named agent under Dad’s power of attorney. Dad used up his $5 million gift exemption, then fell ill. Any new gifts will be taxable. Son makes gifts to his siblings of $2 million and to Dad’s New Wife of $1 million but doesn’t pay the gift tax from Dad’s funds as agent or from his funds. New Wife can be held liable for the gift tax of $700,000 on the $2 million gifts to Dad’s kids from a prior marriage.

√ Sunrise Sunset: If Tevye was setting up a dynastic trust today he might want to consider one trust for $1,390,000, the $1M inflation adjusted GST amount, and a second trust for the excess of the current 2012 $5,120,000 GST exemption amount over the $1,390,000 in a second trust. If the GST rules sunset in 2013 this might provide greater certainty.  Use separate trusts to address potential risk of GST rules sun-setting.  Don't create trusts simultaneously in case there is an ordering rule. You could contribute the balance of your GST exemption to a direct skip trust (no non-skip beneficiaries like the kids are included), and do it in 2012 while the law is clear. What is affectionately called the “move down rule” should lock in your GST move. IRC Sec. 2653. Even if the GST rules sunset after 2012, the GST event that closed the year before. Importantly, if sunset happens, the grandchildren beneficiaries of that trust are not skip people for future years because of application of the move down rule.

√ No Backsies: Not All Roth’s Are Created Equal: If you do an in-plan rollover of your 401(k) into a Roth account in that plan, it could be a tax homerun. But, just as with a conversion of your traditional IRA into a Roth, you have to pay income tax on the value of the plan in excess of your basis. But with an in-plan rollover, you can’t change your mind like you can with a conversion of a regular IRA to a Roth. If plan assets decline in value you lose!

√ Just Say No Doesn’t Always Work with the Tax Man: If a loved one is diagnosed with Alzheimer’s disease plan and act quickly. Address elder care issues quickly while he still has testamentary capacity.  If you have sufficient capacity (competence) sign a medical proxy, will, power, etc. Your spouse’s will should set up a trust for your benefit in case he or she predeceases you. This trust should be a special needs trust. Don't rely on portability. Many people assume the spouse with Alzheimer’s will die first and if not he or she can disclaim assets bequeathed from the other. In New York a disclaimer is not treated as a fraudulent transfer by disclaiming beneficiary, except for Medicaid. This is the minority rule, so it might work elsewhere.

To download the complete newsletter and prior newsletters, click here.

_______________________

ABOUT THE AUTHOR: Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.

Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

Friday, February 03, 2012

Practical Planner: Nuggets from Heckerling (Volume 7, Issue 1)

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant who authors a number of publications each month, including his monthly e-mail newsletter, "Practical Planner".  Below is an article from Marty's January/February 2012 newsletter.  To be added to Marty's monthly e-mail distribution list, e-mail newsletter@shenkmanlaw.com.

Summary: The Heckerling Institute on Estate Planning is the estate planning world’s equivalent of the Oscars. Can you imagine anything more spellbinding then nearly 3,000 tax attorneys discussing estate tax planning for an entire week? Well, if you missed all the excitement, we’ve culled some hot tips from the week long extravaganza! We’ve kinda violated our Newsletter’s usual format a bit. Please forgive us but there were so many pearls to share.

• Funky Gifts: Interests or rights you may hold may cause estate tax inclusion at death. These rights might include: a retained life estate, the retained power to vote stock in a closely held company, the power to remove and replace a trustee, incidence of ownership in life insurance, etc. Now is an ideal time to review existing estate planning documents, especially those dusty old trusts that have not been given any love by your estate planner in years. Gift or terminate these rights now.
• Family Harmony: Equalizing family lines. If clients have made annual exclusion gifts to children, spouses, and grandchildren, etc. over time the different family lines may have become quite unequal. Some clients would like to equalize. The $5 million exemption affords a great opportunity to do this.
• Liquid Diet: Everyone loves to stretch an IRA and lots of planning is done to accomplish this tax wonder. But does it work? An AXA study concluded that 87% of children liquidate an inherited IRA within one year of death. All the great planning is really pretty much for naught! Glucosamine might help those joints stretch further.
• Surviving Spouse and IRA: Surviving spouses can rollover an IRA (and rely on portability to preserve the estate tax exclusion of the deceased spouse).  While rollovers are the cat’s meow for most estates, there are times when it’s not advisable. Say the surviving spouse is young, say 49, and she will need money from the IRA for living expenses. If she withdraws money from a rollover IRA she’ll get nailed with a penalty. So, when a surviving spouse plans to roll over her deceased spouse's IRA and she’s under 59 ½, it may be prudent to leave enough money in the deceased spouse’s IRA account to cover the withdrawal’s she’ll need until she reaches age 59 ½ to avoid penalties. So a partial rollover may be the wiser move.
• Appreciate Portability: If you die and didn’t plan properly (title to assets, appropriate trust under your will) then your surviving spouse (wife) could lose out on your estate tax exclusion. But under the 2010 portability rules, your wife might be able to benefit anyway since your exclusion may be available to her through portability. Most tax attorneys pooh-pooh portability because appreciation in assets after your death are not removed from your wife’s estate, whereas it would be if your assets instead are transferred to a bypass trust to benefit your wife. Assets in a bypass trust can appreciate yet remain outside of your wife’s estate. But if a big chunk of your assets are in IRAs and those fund your bypass trust, the mandatory distributions your wife will have to take out if the trust is structured as a conduit bypass trust, significant dollars may flow out of the bypass to your surviving wife’s estate even using a bypass trust. So portability ain’t so bad. The moral of this tale is that generalizations on planning are dangerous. You need to consider the specific assets, the realistic likelihood of appreciation, spending patterns and more. If that kinda sounds like the wealth manager needs to be involved in tax decisions advance to Go and take $200.
• Estate Planning for the Producers: Why limit the percentage interest you sell in a play to a mere 100%? Too often, even the smartest benefactor’s estate plan seemingly tries to give Mel Brooks a run for the money. Estate contests often involve conflicting agreements. Contracts often trump trusts or wills. The most common is the title to assets. So your will created a great trust for Junior, but the specific assets you intended to bequeath to Junior’s trust were owned jointly with your yoga instructor. She wins, Junior loses. But this can be even more fun. Perhaps your separation agreement with a former spouse obligated you to bequeath that particular asset to her or your children. What if there is a buy sell agreement that obligates your estate to sell the business interests involved to a partner for a set price. Could you have inadvertently contracted for 400% of the asset involved? Mel Brooks got laughs when he did it, but you probably won’t. Ancillary documents shouldn’t be treated like Rodney Dangerfield.
• Transformer Trusts: Often you can transform a trust under the terms in the trust document. If you and your spouse each set up a trust for the other that are so similar, the IRS might argue they should be unraveled and you should be treated as having set up your trust and your wife as if she had set up hers. The theory the IRS would use to ruin your trust plan is the “reciprocal trust doctrine.” If both you and your spouse were trustees of the other’s trust, you can both resign and if both live three years that might solve part of the problem. Trustees might change trust asset, Some states, like New York permit the amendment of an irrevocable trust. If the grantor is alive, and all the parties to the trust contract agree, they can change the terms.
• Settle Estate Fights with Uncle Sam's Help: Estate wars can be costly and bloody. But sometimes your Uncle can help. The income tax considerations can be significant and may help save the day. Property received by gift or bequest is not subject to income tax. But if the estate is in a high income tax bracket, and beneficiary is in a low bracket, playing the spreads can add dollars to the pot used to settle estate challenges. What if you can structure the settlement as damages or payment for services. The estate may obtain a deduction at a relatively high tax bracket, and the beneficiary may received the payment and report it as income at a much lower bracket.
• DSUEA – Gesundheit! DSUEA is “Deceased Spouse Unused Exemption Amount.” This is the amount you can get to use of your deceased spouse’s exclusion. The portability rules include the concept of privity. If H-1 dies, W-1 can use his exclusion, but if W-1 remarries to H-2, H-2 can “inherit” W-1’s exclusion but not the exclusion H-1 “gave” to W-1. Or can he? W-1 can use H-1s exclusion if she makes lifetime gifts. If W-1 remarries to H-2, can H-2  join W-1 in gift splitting? Gift splitting enables one spouse to make a large gift and have the other non-donor spouse treat the gift as if were ½ theirs. Can H-2 make a gift and split gifts wth W-1 thereby using some of H-1s exclusion to cover a gift by H-2?
• Big Brother is Watching: So you gave your vacation home to the kids. Shhhhh. Don’t tell the IRS or your CPA. Surprise! IRS has recently looked at property transfer records in 15 states. More perhaps to come. The IRS has found 60-90% of gratuitous non-spousal real estate transfers were not reported on gift tax returns. If you made a gift transfer of real estate, say to your kids, and …. Oooops forgot to tell your CPA to file a gift tax return, fess up before big brother catches you! File the missing gift tax return. For most donors there is not likely to be a gift tax because of current $5 million exemption. And don’t think that your bad deed ends with that one return.  If you make future taxable gifts and have to file gift tax returns, those future returns have to disclose your prior gifts. This means all future gift tax returns would also be incorrect. If your executor becomes aware of an unreported gift and fails to report them on the estate tax return, that too would be incorrect. This is a snow ball running down hill. 

To download the complete newsletter and prior newsletters, click here.

_______________________

ABOUT THE AUTHOR: Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.

Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

Thursday, January 12, 2012

Sophisticated Trusts in English: DAPTs, BDITs, IDITs and More

By Martin M. Shenkman, CPA, PFS, AEP, MBA, JD

Planning with sophisticated trusts has burgeoned as taxpayers become fearful of the uncertainty about the future of the tax system (e.g., the drop in the gift and estate exemption in 2013 to $1 million and an increase in the rate to 55%).  In the current estate tax environment, more people then ever may benefit from using a Domestic Asset Protection Trust or “DAPT”, but to understand this technique, and whether it, or a different approach would be viable for you, an understandable overview of DAPT and related planning options is needed.  The following questions and answers are organized from a non-estate planner’s perspective to make them more accessible. Hopefully, this approach will help you better understand some of the great planning options that now exist, and that might be advantageous for you to consider, before the opportunities are legislated away.

1. What are the Key Features/Types of Trusts Typically Considered?
   1. Types of Trusts.
      1. APT = Asset Protection Trust.  An APT is not done for estate tax minimization.  Assets transferred are done to remove the assets from the reach of creditors, but you as the grantor/transferor retains powers, which causes the assets to remain included in your estate.
      2. DAPT = Domestic Asset Protection Trust.  A DAPT is an APT formed in the United States, rather than overseas.
      3. CGDAPT = Completed Gift DAPT.  A CGDAPT an asset protection trust that is structured so that the transfers to it are completed gifts for gift tax purposes.  Thus, the growth in value of assets occurs outside of your estate (in contrast to the APT, above).
      4. Dynasty Trust.  Dynasty trusts are primarily established for estate tax planning purposes.  They can be used for asset protection benefits, but the key distinction between a dynasty trust and a CGDAPT is that the grantor/transferor does not remain a beneficiary of the dynasty trust.  Dynasty trusts are always set up as completed gift trusts and, ideally, are all set up to maximize the generation skipping transfer (GST) tax benefits.  If you might need access to your assets, a DAPT or CGDAPT, not a dynasty trust, might be preferable.
      5. BDIT = Beneficiary Defective Irrevocable Trust.  A BDIT is similar to a CGDAPT, but the grantor/transferor forming the trust and transferring $5,000 of assets into it is typically a parent or other benefactor of yours.  You would be given a right to withdraw (called a Crummey power) the $5,000, which you may choose not to exercise.  This mechanism makes the trust a grantor trust as to you, which  means that the income of the trust is taxed to you, even though you did not form or fund the trust.  You can then sell assets to a trust for a note, and the growth in those assets should occur within the trust, while you pay the income tax on the earnings and gains of the trust. This payment of income taxes, while at first impression seems odd, is a power planning tool to further reduce your taxable estate (see discussion below).
   2. Trust Characteristics.
      1. Directed Trust.  With a directed trust, instead of the trustee making investment decisions, which has been the historic norm, a person, perhaps called a “trust investment adviser” or “investment trustee”, determines which assets the trust shall hold as investments.  If an independent or institutional trustee serves, if state law permits, they will not face liability for investment performance.  This mechanism makes it feasible for a trust with an institutional trustee to hold interests in a closely held business and, therefore, charge lower fees commensurate with this reduced risk.
      2. Grantor Trust. The income and gains of a grantor trust are reported by the grantor (except for the BDIT, discussed further below).  Importantly, you, as the grantor, may also sell highly appreciated assets to the trust without recognizing gain if the trust is characterized, for income tax purposes, as a grantor trust.
      3. Reciprocal Trusts – If two people, typically a husband and wife, create identical trusts for each other, the IRS may “uncross” the trusts and treat them as if each person created a trust for themselves.  This would undermine any hoped for tax benefits, and could potentially jeopardize asset protection benefits as well. When multiple trusts are planned, steps can be taken to minimize this risk.
   3. Combinations.  It is common to use a combination of the above in creating an estate plan.  For example, the husband might set up a dynasty trust that benefits the wife and descendants, and the wife might set up a CGDAPT that benefits herself, the husband and all descendants.  This approach has become more common as clients seek to take advantage of the current $5 million gift exemption before Congress reduces its largess.  The reason different types of trusts are used is that if a husband sets up a trust for the benefit of wife (and descendants) and the wife in turn sets up a mirror image trust for the husband, the IRS could “uncross” the two trusts and treat it as if each had set up a trust for themselves, thereby undermining any intended benefits.  This is referred to as the “reciprocal trust doctrine.”

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