Marty Shenkman

Review Your Will, Living Trust and Plan in 2013. Congress has just concluded tax legislation as part of its effort to avert the fiscal cliff. While the Senate called it the “American Taxpayer Relief Act of 2012,’’ likely it will have a 2013 moniker. While the 157 pages have not been analyzed yet, a number of key points may be made about the impact on estate planning, bearing in mind that final legislation, interpretations, and more are to follow. For those who think estate planning no longer is relevant because they are safely under the $5 million inflation adjusted exemption amount, think again. Estate planning never was only about federal estate taxes. Asset protection, succession planning, insurance and retirement planning, and much more, remain relevant. For those taxpayers, the good news is that the focus of planning can now more securely be on those issues. For wealthier taxpayers thinking they’ve finished planning in 2012, think again. There are three more “fiscal cliffs” coming up and Congress will have to deal with other aspects of deficit reduction, which may further impact estate planning for the ultra-wealthy. True, you’ve been given a bit of breathing room on planning, but don’t squander it. The bottom line for everyone is that now is the time to act, but how you should do so has be decisively and perhaps permanently affected but the recent tax legislation.

All Taxpayers. Many taxpayers’ initial reaction to the 2013 tax law is that nothing needs to be done. Moderately wealthy taxpayers may believe, since the federal estate tax will not apply to them, that no planning is necessary. Wealthy taxpayers may think they completed all of their planning in 2012. But, just like those late night TV infomercials, “There’s more!”

• FLPs and LLCs. Family LLCs or partnerships (“FLPs”) will continue to be vital to control assets, protect assets from creditors and irresponsible heirs. Even if the federal estate tax benefits wane, these entities should remain the cornerstone of many plans. But given the restrictions on itemized deductions, and that it is pegged at a lower income level then the maximum income tax rates, many high income taxpayers will find deductions disappearing. For these taxpayers, creative and careful use of LLCs and FLPs to shift income (subject to the family partnership rules) and shift qualifying deductions to their LLC or FLP, may provide valuable income tax benefits. Thus, LLCs and FLPs that had been intended for estate tax discounts may morph into income tax planning tools. The asset protection and control benefits will continue to be useful regardless of the tax changes. This will continue to make FLPs and LLCs, when properly planned for in the new tax environment, great tools for a broad cross-section of taxpayers.

• Itemized Deductions, Residency and Domicile. The restrictions on itemized deductions will push wealthy taxpayers who can shift their domicile and residency to a no or low tax state to do so with greater vigor. This will not only save state estate taxes and property taxes for which deductions may be fare more limited, but it will have a significant impact on where you should revise and sign new estate planning documents.

• Roth Conversions. Under prior law there are only a limited number times that you can roll a 401(k) or certain defined contribution plans into a Roth IRA. Specifically, unless you changed jobs, retired or reached age 59 ½, rolling into a Roth was not allowed. Now, however, conversion will be permitted for anyone. This will require you to pay current income taxes on the value of the plan rolled over, but perhaps that was the point. It may generate income tax to help the deficit. Why would any taxpayer undertake this type of planning? Simply because in the right circumstances it can be quite valuable. If you fear greater tax rates in the future (not so likely at this point) it would be advisable. If you do convert likely you will want income tax projections to try to minimize rate bracket creep from the additional income. A meaningful advantage for some taxpayers will be that a Roth has no required minimum distributions so that the money might stay protected from creditors and claimants. If your state law (check first) protects Roth funds this may prove an advantageous asset protection benefit from some. For ultra-high net worth clients rolling into a Roth and paying income tax may reduce your taxable estate.

Moderate Wealth Taxpayers. For those who are wealthy, but not super-wealthy, what might appear to be a permanent $5 million exemption makes the confiscatory estate tax possibly a worry of the past. The combination of the $5 million estate tax exemption, inflation indexing, and the ability of spouses to use their deceased spouse’s exemption under the portability rules, makes federal estate tax worries academic for the vast majority of Americans. Even more so, it appears that there is some permanence and confidence to the new $5 million exemption level so the worries that should have had moderate wealth taxpayers planning until now (but really had most stuck in the mud and not planning) are changed. But plenty of other worries remain. Estate planning is just as important for you, only it will be different.

• Review and Revise. The prudent step to take is to re-evaluate your estate plan and documents. Since the estate tax exemption remains at $5 million, to be indexed for inflation, most wealthy Americans will remain below the federal tax threshold. For most taxpayers who have deferred planning waiting for more estate tax certainty, wait no more. Review, revise and update your plan. However, don’t forget the lessons of the estate tax roller coaster ride of the past few years: draft and plan flexibly.

• Will Update. With the estate tax exemption fixed at $5 million, it may significantly affect how your assets are distributed under old wills and revocable trusts. Too many people have deferred updating their documents for years because of the uncertainty in the law. If you were one of those that ignored estate planning since the 2010 Tax Act first raised the exemption to $5 million thinking that estate planning didn’t apply to you, now that there seems to be some permanency, move forward on updating your planning. With the uncertainty apparently resolved, stop delaying. Protect your goals and loved ones. If a new estate tax law is passed, which is what most tax professionals anticipate, your will, living trust and overall plan will certainly need to be reviewed and possibly updated. Most wills and revocable trusts had plans that are formula based. Make sure the formulas work in the new tax environment. Many states still have estate taxes so you need to be sure that the formulas not only work in the current $5 million federal environment, but in the context of any state estate tax you might face.

• 2012 Remorse. If you’re having buyer’s remorse because the exemption will remain high, be mindful that the return of inflation, increasing longevity and other factors could all work to make your planning prove invaluable. So don’t unwind your plan. Further, no one knows which way the fickle political tax winds will blow in the future. It may not have been coincidence that on New Year’s Eve CNN coverage bounced from interviews of Honey Boo Boo to updates on Congressional fiscal cliff matters. It is also important to recognize that most sophisticated trust plans provide a range of valuable benefits, which are in addition to federal estate tax benefits. The odds are that your plan, even if the exemption stayed the same, is well worthwhile. See “Reconsidering Irrevocable 2012 Gifts,” below.

• Life Insurance. If you have owned life insurance for the purpose of paying an estate tax you will never face, don’t cancel the policy before having it evaluated. A good policy might make sense to retain as a ballast against other investments you hold, or to secure other purposes. If that policy is held in an irrevocable life insurance trust, after you have your insurance consultant review the policy, have your estate planner review the trust. Often there is tremendous flexibility in an insurance plan (both the policy and trust) that might facilitate your remaking a plan that was intended to pay estate tax into a new and more useful tool. If you held life insurance inside a pension plan, your advisers may have cautioned you to remove it because of adverse estate tax consequences. If your estate is safely below the new estate exemption, it may no longer matter. If you have an old insurance trust it undoubtedly has annual demand (so called “Crummey” powers) that make the gifts you make to the trust qualify for the annual gift tax exclusion. If your estate, inclusive of insurance and likely future appreciation, will remain below the threshold, you might not want to bother issuing these annual notices. Don’t simply ignore them. Your insurance trust provides valuable asset protection benefits as well and ignoring its terms may undermine that protection. See “Irrevocable Trusts,” below.

• Irrevocable Trusts. You should evaluate any existing irrevocable trusts. If you had a trust, for example for children or grandchildren to hold annual gifts, with the possible permanency of the $5 million exemption these may no longer be needed for estate tax purposes. However, before you simply cancel and distribute the funds, consider the impact of an outright distribution on divorce of your heirs/beneficiaries. The bottom line is that all irrevocable trusts, just like the insurance trusts discussed in the preceding section, should be reviewed in light of the new estate tax paradigm, and determine how they can be modified, or even eliminated, to provide you the best result in the current environment. Some irrevocable trusts may permit an independent trustee to distribute “so much or all of the principal….” This type of clause may suffice to distribute the trust to current beneficiaries and terminate the trust. Caution, however, is in order. What of contingent or other beneficiaries? Will terminating a trust that is no longer needed to address estate tax issues simply put those assets in harm’s way in the event of a recipient beneficiaries divorce? There may be other options to clean up an old trust and revitalize it. See “Reconsidering Irrevocable 2012 Gifts,” below.

Ultra-High Net Worth Taxpayers. The $5 million exemption is positive news, but relative to the size of your estate the $3.5 million exemption initially proposed by President Obama compared to the $5 million compromise is not significant to you. The 40% maximum tax rate is higher than 2012, but much lower than it could have been. That is great news, but a 40% rate can still decimate a closely held business, or undermine wealth accumulation goals.

• It Ain’t Over. With Congress having more bites at the tax apple in coming rounds of deficit reduction negotiations, those with ultra-high net worth that think they can breathe a sigh of relief, think again. Restrictions on grantor retained annuity trusts (“GRATs”), valuation discounts, and perhaps even on excluding grantor trusts from your estates, may all be up for grabs in future legislation. The fact that these matters appear not to have been addressed in the current legislation may only be due to time constraints. These could all show revenue additions to the federal budget part of future deficit reduction activities. Given that the estate tax exemption is now an inflation indexed $5 million, doubled for married couples because of portability, there may be little resistance to these changes as they will only affect a tiny fraction of the wealthiest Americans.

• Finish a Good Thing. Consider “topping” off gifts to GST exempt grantor trusts that you started in 2012. Many of these trust plans fell short of the $5 million gift goal because time was too limited to complete all desired transfers. Use the recent legislation as a reprieve to complete the transfers of as much as you can to your trusts.

• Plan Before the Next Adverse Tax Change. Take advantage of this current window of opportunity to consummate note sale transactions and other steps to shift greater future values into protective trusts, and freeze the value of your remaining estate while you can. The bad news is that a 40% tax rate is very high, and if your estate is, or will be, well in excess of the $5 million inflation adjusted exemption, you should take maximum advantage of sophisticated estate freeze techniques before Washington deficit cutters attack them. If you completed sophisticated 2012 trust planning you may have the estate planning infrastructure in place to complete more planning with modest cost and effort. If your irrevocable trusts were created as grantor trusts in states with favorable trust laws, they may be just what is needed to complete a sale transaction (or perhaps an additional sales transaction) now. If you had costly appraisals done in 2012 if you make additional transfers of the same assets (e.g., selling interests in a business that you made a $5 million gift of in 2012) you may be able to use the same appraisal report.

Asset Protection Planning. Whatever happens in Washington, it will have no impact on the litigious nature of our society. Use the $5 million exemption to implement (or if you started in 2012, to continue to implement) asset protection planning. Don’t dismantle existing family partnerships or LLCs, use them as asset protection tools, even if the discounts no longer affect your planning. Use the newly liberalized rules on Roth conversions to convert retirement assets into Roth IRAs. Roth IRAs, in contrast to regular IRAs, have no required minimum distributions, so assets can remain in the protective Roth envelope for as long as you wish. So long as your state law provides creditor protection for Roth IRAs, this can be a simple asset protection homerun.

Divorce Protection Planning. Whatever changes affect the tax law, the reality of a high divorce rate will not change. Too many moderate wealth taxpayers will fall into the “gee I can get a simple will,” attitude because “I won’t face an estate tax.” But the 50% purported oft quoted divorce rate can decimate an estate to a more significant degree than a 40% estate tax rate. And, unlike the estate tax, the divorce courts won’t give your heir the first $5 million free of claims. All assets might be at risk. So, regardless of whether estate taxes will ever be a concern, you should almost assuredly use similar trust planning for heirs to protect their assets from the ravages of divorce.

Income Tax Planning for Most Income Taxpayers. For most Americans the new tax law effectively eliminates the worries most Americans will ever have about becoming ensnared by the Alternative Minimum Tax (“AMT”). It also makes permanent the tax cuts enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). This means, for most Americans, the prior tax rate brackets of 10%, 15%, 25%, 28%, 33% and 35% remain.

Income Tax Planning for High Income Taxpayers. Income tax planning will become the new estate planning for many moderate wealth taxpayers. For those who had previously been more worried about estate tax, income tax worries may become paramount. While most Americans are breathing a sigh of relief that the Bush era tax cuts did not end for them (although they are struggling with a not insignificant payroll tax increase), for high income taxpayers a combination of higher rates and phase out of itemized exemptions will create significantly more tax cost. When this is combined with the 3.8% tax on passive investment income, the overall income tax costs are pretty substantial.

• Higher Income Tax Rate. A new 39.6% tax bracket has been added. This higher rate will apply to those earning over $400,000 for single taxpayers, $425,000 for head of household taxpayers, and $450,000 for married taxpayers.

• Capital Gains. A new higher 20% capital gains rate will apply to capital gains and dividends at the same threshold the higher 39.6% rate above will apply. For middle income taxpayers the 15% rate is retained and for taxpayers in the lowest 10% and 15% brackets a 0% rate will apply. See the discussion about using FLPs and LLCs to shift income.

• Medicare Tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income. Wages are subject to a 2.9% Medicare payroll tax. Workers and employers each pay half, or 1.45%. The Medicare tax is assessed on all earnings or wages without a cap. Starting in 2013, a 0.9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples. IRC Sec. 3101(b)(2). That will make the marginal tax rate 2.35%. Under 2012 law only wages/earnings were subject to the Medicare tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income if adjusted gross income ("AGI") is over $200,000 for single taxpayers or $250,000 on a joint tax return. IRC Sec. 1411. The lesser of net investment income or the excess of modified adjusted gross income (“MAGI”) over the threshold, will be subject to this new tax. Investment income derived as part of a trade or business is not subject to the new Medicare tax on investment income unless it results from investment of working capital.

• Itemized Deductions. Personal exemptions and itemized deductions will be phased out at new thresholds: $250,000 for single taxpayers, $275,000 for heads of household and $300,000 for married taxpayers filing jointly. Note that every tax rule has different income thresholds. This was certainly intentional in that the Republicans can claim partial victory by having kept “tax increases” to taxpayers making over $400,000 single and $450,000 married, when the reality is that, as the itemized deduction phase out proves, the tax increases occur at lower levels. From a planning perspective, having different thresholds for almost every tax benefit/reduction makes planning very complicated. Having rules of thumb as to what level of income triggers tax implications won’t be practical.

• Medical Expenses. Deductions for certain medical expenses will be reduced, and for many eliminated. Under prior law you could only deduct medical expenses to the extent exceed 7.5% of adjusted gross income (AGI). This restriction is in addition to the others that limit the tax benefits of itemized deductions, above. Starting with 2013 you’ll only be able to deduct medical expenses as an itemized deduction if they exceed 10% of your AGI. IRC Sec. 213.

• FLPs and LLCs. The use of family partnerships and LLCs to shift income will take on new importance for some families.

• Minimizing Higher Capital Gains Taxes. Charitable remainder trusts (“CRTs”) had fallen into disuse because of the low capital gains rates. The new tax rate structure should increase the use of CRTs to minimize or defer capital gains taxes for those selling businesses or valuable assets, such as a large concentrated stock position. Better coordinating the harvesting of gains and losses to minimize the now higher income tax rates will have increased importance. Since many wealthy taxpayers created one or more complex grantor trusts (trusts on which they remain liable for the income even though the earnings remain in the trust) the “pots” over which the harvesting will have to be coordinated will be broader.

Trust Income Tax Planning. Planning for trusts and estates to address the higher rates and compressed brackets, and timing distributions to beneficiaries to minimize overall trust/beneficiary tax burdens, will take on new importance and complexity. It may even change historical distribution patterns for some trusts.

Understanding Your 2012 Planning. Given the incredible sophistication and highly technical nature of much of the better 2012 planning, it is advisable to review the planning and documentation you implemented in 2012 and be certain you and the various individuals named in your plan (trust protector, individual trustee, loan director, investment trustee, etc.) all understand their respective roles. Ideally, a meeting with all these people present to review the trust document terms that relate to operations should take place.

2012 Follow Up. 2012 planning will require follow up and review of critical steps if it is to succeed. Consider the following:

• Loose Ends. No plan completed under the pressure of 2012 deadlines and the veritable tidal wave of work every adviser is facing will be free of loose ends, typographical errors or the need for other “housekeeping.” The way to address these potential loose ends is to review all the documents, calculations and organize them for future follow up.

• Additional Legal Documents. Most plans will require additional legal work that was deferred until after the 2012 crush as not being essential to complete by year end. For example, it was common when interests in an entity, such as a corporation or limited liability company were given or sold to a trust that the legal work completed in 2012 was limited to the assignment of the interest involved. The shareholders’ agreement or operating agreement and other ancillary documents may remain to be completed. Stock certificates may not have been issued. Since the focus for many transactions was completing the essentials of a gift or sale before year end, in many cases most other documents and steps were left for follow up after year end. You should, with your advisers, endeavor to identify any such missing documents or incomplete steps and set up meetings or milestone dates to assure that they will be addressed and not overlooked.

• Gift Tax Returns. Importantly, for any significant 2012 planning a gift tax return will have to be filed in 2013 reporting the 2012 gifts. There are disclosures and steps which must be taken on gift tax returns that are critical to the success of your plan. Generation skipping transfer (“GST”) tax exemption, perhaps, should be affirmatively allocated to protect your 2012 gifts. In order to run the period of time during which the IRS can audit a gift tax return (“toll the statute of limitations”) your gift tax return will have to fully disclose all relevant information concerning a gift. This is referred to as “adequate disclosure.” This will require that your CPA will have to be provided with copies of legal documents your attorney created (or as discussed above, will still have to create), financial documentation corroborating values and transfers from your wealth manager, and complete appraisal reports (see below). Given the massive number of gift tax returns and the complexity involved your CPA might well advise that you extend the date of filing your 2012 gift tax return so decisions can be made once the law is known (e.g., late allocation of GST exemption). If you sold assets to a trust, even thought it was not intended to be a gift, such “non-gift” transactions are commonly reported on gift tax returns to run the period of time during which the IRS can audit the transaction. There are also a number of technical issues that your CPA may have to address when filing your gift tax return. If you are married can your spouse elect to “split-gifts” with you by treating your gifts as if ½ were made by him or her? Will this be advantageous if it is permitted? Etc.

• Income Tax Returns. Income tax returns will have to be filed in a manner that reflects the planning that was done. For example, if on November 1 you transferred 50% of your interests in what had been a single member (you were the only owner/member) limited liability company (“LLC”) to an irrevocable trust, the LLC would no longer be a single member disregarded entity but rather, in most instances, a partnership for income tax purposes. If you gave 25% of your 45% interest in a family S corporation to your trust on November 1, the income from the S corporation for the 2012 year will have to be allocated between you and the trust for the portion of the year you each owned that 25% transferred interest. There are a host of other steps your CPA may have to consider in light of 2012 planning.

• Grantor Trust Status. Many, perhaps most, trusts set up in 2012 were “grantor trusts.” The income of such trusts is reported on your return even though the earnings may be held in the trust. You should endeavor to have your CPA and wealth manager project the tax consequences in advance so that you can appropriately plan for the tax payments and future impact.

• 2013 Sale Transactions. Many people who started planning later in 2012 would have benefited from selling assets to their grantor trust, however, due to time constraints, many of these transactions were not completed. When evaluating possibly completing such transactions in 2013, watch the dates on appraisals. If too much time elapses the appraisals will be stale and new or updated ones will be required. Also, carefully monitor with your tax advisers how new law changes may affect the planning for such a sale.

• Reconsidering Irrevocable 2012 Gifts. If you have second thoughts or new concerns about the planning you finished in 2012, perhaps as a result of the contents of any new tax law, the flexibility of many trusts, the use of disclaimers (refusing to accept interests in a gift), some of the options on gift tax return decisions, decanting (pouring one trust into a new and typically better crafted trust), may all afford opportunities to adjust planning that you are not as comfortable with as you initially thought. This should be addressed with your advisers as early as possible in 2013. Make appointments now to meet with your CPA, estate planner, wealth manager, trust officer, insurance consultant and other critical advisers so you can address these points quickly. For example, if you accept the benefit of an asset, you may no longer be able to disclaim your interests in it.

• Appraisals. If you had an appraisal started in 2012 for your 2012 gifts or sales to trusts, be certain to follow up and obtain a final complete appraisal. Many appraisals were issued only as numbers with the full reports to be completed after year end. Your CPA will require a complete appraisal to file a gift tax return and you certainly want the detailed report for your records as well.

• Approvals. Third party contractual approvals were essential for many transactions. If you have not received them, you need to make a judgment call. Should you follow up now and get the approvals you should have had risking opening up a proverbial Pandora’s Box? You should also bear in mind that if approvals were required and not received, the IRS might argue that the lack of required approvals made the transfer incomplete.

• Defined Value Clauses. Many gifts and sales completed in 2012 were planned using a mechanism to reduce the risk of a tax being triggered if the IRS increases the value of the assets given (e.g., stock in a hard to value closely held business). Review with all of your advisers how these mechanisms should be handled post-transfer. For example, what should be reported on a Form K-1 for an S corporation if the actual percentage (number of shares) of stock cannot be known until an audit is finalized? Who votes the equity interests during the period before an audit occurs? Reasonably addressing these practical implications may be important to the ultimate success of the mechanism used.

• Distributions. Distributions from entities have to reflect the new ownership interests. Distributions from trusts must reflect the intent of the trusts. If a goal of a trust is to assure that the assets are removed from your estate, regular distributions might be used by the IRS to argue that you had an understanding with the trustee to receive distributions and serve as a basis of including the trust assets in your estate.

• Developing Case Law. It is not only major tax bills that are important to consider. Other laws can change that affect your planning. For example, some of the recent developments that affect self-settled asset protection trusts (trust you give assets to but remain a beneficiary of) might have you reconsider how certain aspects of such a trust might be handled. It might be feasible to disclaim certain interests in such a trust to enhance the likelihood of the trust being respected.

More Information. We have emailed to our data base a regular stream of planning materials. We have mailed numerous articles in hard copy to all clients that we can identify that engaged in 2012 planning. Our newsletter has for several issues addressed specific planning steps. In 2013, articles will address post-2012 planning and new developments in the estate tax laws. If you have not, or do not, receive these materials, or would like materials on a particular issue please email me shenkman@shenkmanlaw.com and I’ll send whatever materials we have that might help you.

Contact Us if We Can Help. We are here to help during throughout the uncertainty and changing estate planning environment. Let us know how we can assist you and your other advisers with reviewing or revising your will and planning, and in follow up on completing and implementing your 2012 planning. Please call or email at your convenience.

Also, you may be interested in our special 60-minute teleconference entitled, "Fiscal Cliff Legislation and What It Means for Your Clients" on January 4th or January 9th with Robert S. Keebler, CPA, MST, AEP (Distinguished).

ABOUT THE AUTHOR
Martin M. Shenkman, J.D., CPA, MBA

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.

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.

November 6, 2012 may prove to be one of the most important election days in U.S. history, at least from a tax perspective. Regardless of who wins the Presidency and who controls the Senate and House, we are likely to see the first major changes to the U.S. Tax Code in over ten years.

Accordingly, there is no better time than immediately after the election to advise your clients and prospects on what important steps to take before the tax law changes in 2013.

That's why we're bringing together on November 7th - - the day after the election - - two of the sharpest minds in income and estate tax planning - - Robert S. Keebler, CPA, MST, AEP (Distinguished) and Martin M. Shenkman, J.D., CPA, MBA - - to evaluate the likely impact of the election on current and future tax laws and identify exactly what you should immediately advise your clients and prospects to do.

On this timely 90-minute teleconference, Bob and Marty will specifically address with you the following:

• Likely changes to the current Income Tax Laws:
  • Ordinary income tax rates
  • Capital gains tax rates
  • The tax benefit of certain deductions
  • The impact of the Alternative Minimum Tax (AMT)

• Likely changes to the current Estate & Gift Tax Laws:
  • The estate and gift tax exemption
  • The generation-skipping transfer (GST) tax exemption
  • The estate, gift and GST rate
  • Portability of the estate tax exemption
  • Valuation discounts
  • Restrictions to multi-generational dynasty trusts
  • Other restrictions to intra-family transfers

• Income Tax Actions to take before year-end:
  • Analyzing when to take deductions and losses
  • When to take income and harvest capital gains
  • Roth IRA conversions
  • Income shifting to junior generations

• Estate Planning Actions to take before year-end:
  • Annual exclusion gifts
  • Lifetime gift exemption gifts
  • Taxable gifts
  • Grantor Retained Annuity Trusts (GRATs)
  • Dynasty Trusts
  • Installment Sales to Dynasty Trusts
  • Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)
  • Spousal Lifetime Access Trusts (SLATs)
  • Front-end loading Irrevocable Life Insurance Trusts (ILITs)
  • Forgiving intra-family installment notes

• And much, much more!

Whether you're a CPA, financial advisor, life insurance agent or estate planning attorney, you should be among the first estate planning professionals "in the know".

Join us on Wednesday, November 7th at 9am Pacific Time (12pm Eastern Time) for this very special 90-minute teleconference entitled, "November 7, 2012: The Day After - - A Tax Planning Guide to Surviving 2012, 2013 & Beyond".

Your registration includes: Participation on the teleconference (including a live Q&A session) that comes with handout materials, an audio recording of the teleconference and a Certificate of Completion.  You get all this for everyone in your office for one low price of just $149.

For more information and to register...

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.

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.

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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.

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.

_______________________

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.

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.

_______________________

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.

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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.

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.

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.

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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