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 firstname.lastname@example.org.
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.
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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.