Category Archives: trusts

This Cobbler’s Kids Have Nice Shoes (Nike Kyrie 4s, to be exact)

Kids shoesI’m sending my children away this summer – one to overnight camp for the first time and the other for an extended stay with her grandparents thousands of miles away.  For me, it will mean (albeit temporarily) a return to a kid-free lifestyle – a busy parent’s “dream come true”.  I can’t deny my excitement, but I also find myself worried.  What if something were to happen to them while they are away – a medical emergency, for instance?  Who will make the medical decisions for them?  Could delays in medical decisionmaking have bad consequences?

To ease my worries, at least in part, I’m sending my daughter to her grandparents’ house with a legal document in hand that authorizes them to make medical decisions for her.  The document is an Appointment of Temporary Agent for the Care of a Minor.  In the Appointment, my husband and I will authorize her grandparents to make medical decisions in an emergency.  This may include taking her to an emergency room or authorizing needed diagnostic or surgical procedures.  In addition, it will authorize them to take her to a pediatrician or urgent care center for more routine care to treat minor illnesses, such as an ear or respiratory infection.

To be effective under Massachusetts law, the Appointment must be signed by both my husband and me.  It must state that we temporarily delegate to the grandparents our parental powers, including the authority to consent to medical treatment.  It must be signed by them and witnessed by two adults.  It may remain effective for up to sixty days.

If you too are sending your kids away this summer or in the future, be a responsible parent and consider executing an Appointment of Temporary Agent for the Care of a Minor.

Charitable Remainder Trusts – Case Studies

steps lightIn my previous post, I discussed the structure and tax benefits of Charitable Remainder Trusts, and the ways in which CRTs can be used to meet various estate planning goals.  The following case studies from our practice illustrate how our clients have used CRTs to meet their goals.

 

Case Study #1

Client Goal – To sell highly appreciated stock without paying substantial capital gains taxes  

Howard owned stock in a highly appreciated life sciences corporation.  The stock was valued at over $1 million and had a very low tax basis.  Howard wished to sell the stock to take advantage of market growth, but the capital gains tax due following the sale would be substantial.  Instead of selling the stock himself, Howard established a Charitable Remainder Unitrust (CRUT).  He transferred the stock to the CRUT, and the CRUT sold the stock.  Howard received an income tax deduction when the CRUT was established and deferred capital gains taxes.  He and his wife will receive from the CRUT annual payments of 30% of the trust assets for their lifetimes.

Case Study #2

Client Goal – To generate income for retirement

Bob and Nancy owned a Massachusetts vacation home valued at over $5 million.  Bob had inherited the house many decades ago and it had a low tax basis.   The couple’s other assets – including retirement accounts, investment accounts, and a primary residence – were modest and therefore insufficient for retirement.  Bob and Nancy, now in their mid 60s, wished to sell the house so they would have sufficient income for their retirements.  Rather than sell the house and incur capital gains taxes, Bob and Nancy established a Flip CRUT to which they deeded the house.  They received an income tax deduction and deferred capital gains taxes.  Following the sale of the house, and for the remainder of their lifetimes, Bob and Nancy will receive quarterly payments of 6% of the trust assets.  These payments will allow them to retire comfortably.

Case Study #3

Client Goal – To be charitable

Samuel was unmarried and never had any children.  His total assets were valued at approximately $6 million.  Samuel was philanthropic by nature and specifically wished to benefit charities that provided educational opportunities for gifted children.  Therefore, Samuel established a CRUT to which he transferred ownership of approximately $1 million of appreciated real estate and investments.  He received an income tax deduction and, if the house were sold, would be able to defer capital gains taxes.  For the remainder of his lifetime, Samuel received annual payments of 5% of the total trust assets to supplement his retirement income.  On his death, the remaining trust assets passed to a charitable foundation whose purpose was to fund educational opportunities for gifted children.

Case Study #4

Client Goal – To provide future income to a child

Eleanor was in her late 80s with declining health.  Her husband had predeceased her by many years and she had one daughter, Janice.  Eleanor was seeking ways in which to pass a portion of her $8 million dollar estate to Janice prior to her death.  Eleanor made substantial taxable gifts,.  She also established a CRUT that would pay to Janice a unitrust percentage of 5% for a term of twenty (20) years.  The CRUT was funded with marketable securities with a low tax basis.  Eleanor received an immediate income tax deduction.  Janice will receive supplementary income for twenty (20) years.  At the end of the term, Janice will select public charities to which the trust remainder will pass.

Charitable Remainder Trusts – A Versatile Estate Planning Tool

SwissA Charitable Remainder Trust (CRT) is an irrevocable trust that provides for periodic payments to be paid to individual beneficiaries with a remainder paid to a charity.  CRTs are versatile estate planning tools that can be used to meet various goals – to reduce income taxes, to defer capital gains taxes, to generate lifetime income for the donor or others, and to benefit charities.

A CRT may be funded by a donor with cash, securities, real estate or tangible personal property (such as artwork).  The CRT terms must provide that the donor (and/or his or her spouse or other family member) receive periodic payments for life or a term of years.  The payments may be a percentage of the trust assets (a “unitrust” percentage between 5% and 50% of the total trust assets) or a fixed annuity amount.  The payments may be made annually or more frequently.  The CRT terms may vary in other ways.

At the end of the term or on the death of the surviving beneficiary, the remaining assets in the CRT are paid to a charity or charities selected by the donor.  The donor may select the charities when the CRT is established, but may change the charities at a later time.  To qualify under tax laws, the remainder passing to charity must be at least 10% of the total fair market value of the trust assets.

CRTs offer significant tax benefits.  When the CRT is established, the donor receives an income tax deduction for the value of the remainder that passes to charities.  In addition, capital gains taxes are deferred until distributions are made.

CRTs are a versatile estate planning tool.  We have used them in our practice to meet a variety of client goals.  Stay tuned for an upcoming post on case studies from our practice.

Image from flickr/Jinho Jung

Will your Executor have access to your emails?

cellphoneAre you wondering what will happen to your Facebook account, emails, online photos and other digital assets after your death?  If so, you may soon have a clearer answer under Massachusetts law.  Norfolk Probate Court will soon decide whether a Personal Representative appointed in Massachusetts may access the emails of a deceased person in the case of Ajemian v. Yahoo!.  The case has worked its way through the Massachusetts courts for the last several years.

Ajemian is an interesting case with potentially significant implications.  John Ajemian died in August 2006.  He died intestate (without a Will) and at the time of his death owned a Yahoo email account.  His siblings were appointed as Personal Representatives (PRs) of his estate by Norfolk Probate Court.  After their appointment they asked Yahoo for access to John’s email account.  Yahoo denied their request.  So the PRs brought an action in Norfolk Probate Court to obtain access, but the court denied their petition.  The court held that Yahoo was prohibited from disclosing the emails under the Stored Communications Act (SCA), a federal law designed to maintain the privacy of electronic communications held by internet service providers.

On appeal, the Massachusetts Supreme Judicial Court held in October 2017 that Yahoo was not prohibited from releasing the emails to the PRs under the SCA.  The reason was two fold.   First, the emails were property of John’s estate over which the PRs could exercise control and ownership.  Second, the PRs could “lawfully consent” to the release of the emails, an exception to the disclosure prohibition of the SCA.

While the SJC decision was a victory for the PRs, the court declined to determine whether Yahoo was required to disclose the emails under Yahoo’s terms of service agreement (TOS) with John.  Yahoo argued that the TOS gives it the authority to terminate the account at any time which allows it to deny the PR’s access.  The SJC remanded to the Probate Court to determine whether Yahoo could withhold the emails under the TOS.

Yahoo petitioned to the Supreme Court, but the Supreme Court declined to hear the case in late March 2018.   This means the case is now in the hands of Norfolk Probate Court again to determine whether Yahoo can deny the PRs access to the emails based on the provisions of the TOS.

I am eagerly awaiting the decision of Norfolk Probate.  It will have widespread implications in determining whether and how PRs may access the digital assets of a decedent in Massachusetts.  Even after Norfolk Probate decides, questions will likely remain.  Will a PR be able to access a digital asset if the TOS explicitly prohibits access by a PR or states that the account terminates at death?  Will the PR’s authority over the decedent’s assets trump the provisions of the TOS?  What if access to the digital assets is not addressed in the decedent’s estate plan?

Stay tuned for additional updates about the Ajemian case and estate planning for digital assets.  This is an interesting and developing area of the law.

IRS offering same sex couples restored exclusion amount

HumptyIt’s tax season again, which means that it’s time to file your gift tax return if you made taxable gifts in 2017.   This year’s gift tax return instructions contain an interesting change for taxpayers who made taxable gifts to a same sex spouse prior to the Supreme Court’s decision in United States v. Windsor.  (If you, like me, have been thinking that our federal government did nothing kind in 2017, you’ll like this one.)

First, some background.  The Defense of Marriage Act (DOMA) was the federal law that prohibited same sex marriage.  Under DOMA, a taxpayer who made gifts to his same sex spouse in excess of the annual exclusion was required to use some of his applicable exclusion amount because the gifts were not eligible for the marital deduction.   In addition, a taxpayer who established a trust for the benefit of a much younger same sex spouse (who qualified as a “skip” person under generation skipping transfer (GST) tax law) was required to allocate a portion of his GST tax exemption to the trust if he wanted the trust to be GST exempt.

Heterosexual married couples were required to do neither.  A heterosexual married taxpayer could make unlimited gifts to a spouse without allocating application exclusion.  In addition, a heterosexual spouse would never be considered a “skip” person for GST purposes, no matter the age difference.

In 2013, in Windsor, the Supreme Court held that DOMA was unconstitutional. Shortly after Windsor, the IRS issued new rules that stated that same sex marriages would be treated the same as heterosexual marriages under federal tax law.  Gifts between same sex couples would be treated the same as gifts between heterosexual couples.  The gifts would be eligible for the unlimited marital deduction, no applicable exclusion would have to be used, and the spouse would not be considered a “skip” person for GST purposes.

But the injustice imposed by DOMA prior to 2013 was not remedied until 2017 when the IRS released Notice 2017-15.   In 2017, the IRS now offers the following two (2) remedies for same sex taxpayers:

  • Restoration of Applicable Exclusion Amount. A taxpayer who used his applicable exclusion when reporting gifts to a same sex spouse can now file a gift tax return and request that his exclusion be “restored”.  The taxpayer can get back his previously used exclusion by filing a gift tax return with a calculation of what he used in prior tax years.  This can be done even if the limitations period has run, which means the exclusion can be restored back to the beginning of the marriage, as long as the marriage was recognized under state law.  If the taxpayer would have to make a QTIP or QDOT election to qualify the gift for the unlimited marital deduction, he will also have to file a request for 9100 relief.
  • Recalculation of the Available GST Exemption. The IRS will treat as void certain allocations of GST exemption to transfers to a same sex spouse and/or his or her descendants.  This allows the taxpayer to recalculate his remaining GST exemption and get back GST exemption allocated on prior returns.  As above, to obtain relief, the taxpayer must file a gift tax return and explain the recalculation of his or her GST exemption.

In both cases, the IRS states its preference that the restoration and recalculation be done on the first gift tax return required to be filed after issuance.  This means the requests for recalculation should be made on the 2017 return, if 2017 gifts were made.

Image of Denslow’s Humpty Dumpty 1904 from Wikipedia.

Themes and Highlights from the 2018 Heckerling Institute on Estate Planning

Letter HDale and I recently attended the 52nd annual Heckerling Institute on Estate Planning in Orlando, Florida.  The passage of the Tax Cuts and Jobs Act in 2017 meant that there was even more to learn and discuss this year.  The following are some of the themes and highlights that we found most interesting.

The federal estate tax exemption has substantially increased.  The new tax law raised the federal estate tax exemption substantially, but did not repeal the federal estate tax.  The new higher exemption (with the chained CPI adjustment) is expected to be $11.18 million per person in 2018.

Gifting may still make sense.  For those with federally taxable estates, gifting up to the increased federal exemption amount may make sense.  The experts predict that the IRS is unlikely to impose “clawback” if the exemption returns to its 2017 level after 2025 when the increased exemption is scheduled to sunset.  Upcoming regulations will likely formally address “clawback”.

Keep your eyes on the sunset.  Some portions of the new tax law sunset in 2025.  Some do not.  The increased federal exemption sunsets at the end of 2025.  This illustration from the Tax Policy Center explains the sunset provisions.

Family entities may be targeted by the IRS.  In Estate of Powell v. Commissioner, the Tax Court agreed with the IRS and held that all assets in a family limited partnership (FLP) were includible in a decedent’s estate under Section 2036(a)(2) of the Internal Revenue Code even though the decedent owned only a limited partnership interest because the decedent retained the right to dissolve the FLP in conjunction with other family members.  The court also addressed the possibility of “double inclusion” of the assets under Section 2043.  Because the IRS may use Powell to attack other family entities in the future, it may be wise to rethink the structure and terms of those entities.

Managing tax basis and federal income tax planning are essential.  The increased federal exemption means federal income tax planning is even more important.  Clients and advisors must focus on estate planning strategies to maximize tax basis and reduce capital gains taxes by passing high basis assets to future generations.

Attitudes about charitable giving are changing.  The new tax law, as well as new attitudes about charitable giving and philanthropy, are changing the landscape of charitable planning.  Many younger clients are focused more on charitable impact and less on tax savings.   Crowdfunding websites like Kickstarter and Go Fund Me offer new giving opportunities that may appeal to young philanthropic clients more than traditional strategies.

Look at Roth conversions in a new light.  Natalie Choate discussed some interesting opportunities for planning with retirement accounts, including an in depth discussion of the rules regarding Roth conversions and opportunities for income and estate tax planning with Roth conversions.  Importantly, the new tax law eliminated the opportunity to “recharacterize” (or undo) a Roth conversion.

 

Hugh Hefner and Inter Vivos QTIP Trusts

HefnerThe iconic Hugh Hefner, founder of Playboy magazine, died last week.  Hefner was married three times and had four children, two from each of his first two marriages.  He was also survived by his current wife, 31 year old Crystal Harris, whom he married in 2012, at the age of 86.

There is no doubt that Hefner’s estate is large, and likely includes interests in Playboy Enterprises, Inc., the privately held company he founded.  How will his estate be divided?  That depends on his Estate Plan.

If Hefner planned properly, we’ll never know the details of his Estate Plan.  Rumor has it Crystal Harris will not receive any assets from the Estate, but that Hefner nonetheless provided for her.  But how?  My theory is that before his death Hefner established and funded a Trust for Crystal’s benefit that would provide for her after his death.  This kind of trust is known as an irrevocable inter vivos QTIP Trust.  (My husband tells me in this context it sounds like something dirty.  It’s not.)  QTIP stands for Qualified Terminable Interest Property.   Inter vivos means it was established during the donor’s lifetime.  Irrevocable means it cannot be revoked or amended.

There are several features of the inter vivos QTIP Trust that make it a good estate planning strategy for Hefner (and perhaps others like him).

First, a QTIP Trust is eligible for the unlimited marital deduction, and thus is not subject to estate taxes at Hefner’s death.  In addition, Hefner’s gifts to the trust during his lifetime were not taxable gifts and thus did not deplete his gift/estate tax exemption.   What is left in the trust at Crystal’s death will be included in her estate, but may be fully protected by her own estate tax exemption so that no estate taxes will be due.

Second, for the trust to qualify for the marital deduction, Crystal must be the sole beneficiary.  In addition, she must receive all the net income from the trust, and may receive principal.  These Internal Revenue Code requirements are likely consistent with Hefner’s goals in providing for Crystal.

Third, when the trust was established, Hefner set its terms.  This means Crystal does not control the assets.  In addition, Hefner directed how the assets remaining in the trust at Crystal’s death will pass.  Thus, he could ensure that they pass to his children or grandchildren.  If he had left assets outright to her, they could pass to her future husband or children.  For this reason, QTIP Trusts are a great planning strategy for couples in second or third marriages.

Fourth, the QTIP Trust may be a grantor trust, so that Hefner – the donor – paid the income taxes on the trust income during his lifetime.   This ensures that the income taxes do not deplete what is available for Crystal after his death.

Fifth, the QTIP Trust is separate from Hefner’s other estate plan documents.  This creates less risk of a Will contest or other conflict during estate administration.

Inter vivos QTIP Trusts are not for everyone, but they can offer some clients significant benefits and estate tax savings.

Image from flickr, Alan Light. https://www.flickr.com/photos/alan-light/255835461.

Don’t Take Your Testamentary Freedom for Granted

river-frontage-233041_960_720Despite recent events, the United States is still the land of the free.  And one of the (less discussed) freedoms we enjoy in the U.S. is the freedom of testation – the freedom to dispose of our assets at our death however we wish.  With few exceptions, we in the U.S. are free to disinherit children, leave insufficient assets to a spouse, and benefit pets rather than family members, to list a few examples.  The one notable exception is that most states (including Massachusetts) have an elective share statute which ensures that a spouse cannot be totally disinherited.

While this “testamentary freedom” may seem like common sense to us, it is unusual and does not exist in most countries around the world.  In much of Latin America, contintental Europe, the Middle East, and Asia, “mandatory inheritance” or “forced heirship” laws require that spouses and descendants (and sometimes even parents or siblings) inherit, regardless of what a decedent’s Will states.  These laws are especially common in civil law jurisdictions.  The rationale of these laws is the legal theory that family members have an automatic right to inherit property and that decedents have an obligation to adequately provide for them.  In most countries, the forced heirship law applies to a portion of the estate (e.g., 1/3), although it may be a large portion.  The decedent may dispose of the rest as he or she wishes.

In the United States, Louisiana is the only state with a forced heirship law.  But even Louisiana’s law is limited in that it only prohibits the disinheritance of children who are under age 24 or who are disabled or incapacitated.  Puerto Rico also gives a decedent’s children the right to inherit a portion of the Puerto Rico estate, provided that a surviving spouse retains a usufruct (or a life estate) in the property.

For U.S. clients who own real property abroad, it is important to consider forced heirship laws of the country where the property is located as part of your estate planning.  Otherwise that property may pass under that country’s forced heirship law, and not as designated in your estate plan.

Here is an example that came up recently in my practice:

Sarah died as a Massachusetts resident owning a valuable vacation home in Puerto Rico.  She was survived by her husband, Jack, and three grown children.  Her Massachusetts estate plan left all of her assets to Jack.  Nonetheless, Puerto Rico’s forced heirship laws required that a portion of the Puerto Rico home pass to the three children.  Jack retained only a usufruct, or life estate.  The property was sold, but only a part of the proceeds passed to Jack.  The rest passed to the children.  It was not the result Jack wanted, or Sarah would have wanted.

If you own real property in a forced heirship jurisdiction, you should discuss with your estate planning attorney how that property will pass after your death under that jurisdiction’s laws.  In some cases, there may be an opportunity, with advance planning, to circumvent the laws and obtain the result you want.  For example, you may want to form an entity to own the property.

Estate Planning in History: Boston’s “Lotta Fountain”

Lotta_Fountain_-_IMG_3787Looking to do some local sightseeing this summer that combines your love of Boston history and charitable trust administration?  Look no further!  Visit the (recently renovated) Lotta Fountain, a drinking and play fountain for dogs, located on Boston’s Charles River Esplanade.

The Lotta Fountain was a charitable gift from a Trust established under the Will of Lotta Crabtree.  Lotta Crabtree was a very successful 19th century vaudeville star.  At the height of her career she was the highest paid actress in the U.S. and became one of the wealthiest entertainers of her day.  At the time of her death in Boston in 1924, she had amassed an estate of over $4 million (worth over $50 million today).  She never married or had children.  In her Will, she established and funded eight charitable trusts for various purposes, including animal welfare.  One of those charitable trusts was used to establish a $300,000 fund to benefit animals.  That fund led to the design and building of the Lotta Fountain in 1939.

The Fountain later fell into significant disrepair in large part because the Trustees mismanaged the trust and charged excessive fees which depleted the fund’s assets.  In 2004, a Massachusetts court held that the Trustees breached their fiduciary duties.  They were removed and reprimanded, and a surcharge for the excessive fees was imposed.

The Esplanade Association and Boston’s Department of Conservation and Recreation raised money to repair and renovate the Fountain.  It opened June 15.  It will now fulfill Crabtree’s charitable intention by serving as a drinking and play space for Boston’s four legged residents.  If you wish to visit, the fountain is located on the Esplanade between Berkeley and Clarendon Streets, near the Arthur Fiedler Bridge.  I have not yet been there, but I think it is worth a visit this summer.

Image of fountain from wikipedia commons.

Estate Planning in Pop Culture – HBO’s Wizard of Lies

MadoffI recently watched “Wizard of Lies”, the HBO movie about Bernie Madoff.  The movie is based on the book of the same title by Diana Henriques.  Unlike the book, the movie focuses on the Madoff family, not on Bernie’s crime.  It’s about Bernie, Ruth, Mark and Andrew Madoff, their relationships, and the impact of Bernie’s betrayal on those relationships.  To be honest, I found the movie a bit slow, uninformative, and disappointing.  It’s nonetheless worth watching (if only because Robert De Niro’s Bernie is fantastic).

There are obvious lessons for all to learn from the Madoff story.  Know where and how your money is invested.  Don’t trust a financial advisor simply because of his reputation or charisma.  Investments with impressive returns may be too good to be true.

There was one scene in the movie I found particularly interesting because it offers an additional, less obvious, lesson about estate and family business succession planning.  The scene starts 41 minutes in.  It takes place in July 2008.  The market is crashing and time is running out for Bernie and his ponzi scheme.  The Madoffs throw a large party on the lawn at their Montauk beach house.  At the end of the party, after the guests have left, sons Mark and Andrew approach Bernie to talk.  They know nothing of his ponzi scheme at this point.  They are concerned about Bernie’s estate and business succession plan, of which they’ve been told nothing.  Their basic question for Bernie – “What if something happens to you?”  We sense that they’ve asked this before.

The conversation does not go well.  Bernie gets immediately angry.  He assures them that Frank DiPascali, Bernie’s “assistant” and accomplice, will take care of everything.  He says there are instructions in his safe deposit box.  He advises them to call his attorneys.  Bernie offers no answers or plans.  Ruth plays no role in the conversation.  Mark and Andrew walk away disappointed and angry.  A lot about this conversation went wrong.

Although the circumstances for the Madoffs are highly unusual, what went wrong in this scene offers a universal lesson for all.  It’s not only important to have a good estate plan in place, but to be honest and forthcoming with your spouse and adult children about the plan.  This is especially true for those who own a family business. Discussions about estate planning should happen in most families, but often never do.  And while the conversation may be wrought with issues and emotions, they should not derail it.  In addition to preparing estate plan documents, a good estate planning attorney can act as an advisor or informal mediator to help to facilitate these discussions within a family.  By relying on an estate planning attorney in this way, you may be able to avoid bigger estate problems, including litigation, later.

Image of Robert De Niro as Madoff from vimeo.