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.

 

Think you no longer need a good Estate Plan? You’re probably wrong.

Long roadThink you no longer need a high quality Estate Plan now that the Tax Cuts and Jobs Act has taken effect?  Think again!  You do, and here’s why.

The Tax Cuts and Jobs Act of 2017 increased the Federal estate and gift tax exemption to $11.2 million.  This means that individuals with $11.2 million and married couples with $22.4 million will not be subject to Federal estate taxes at their death.   Nonetheless, even for those of us who will likely never have such substantial wealth, it is still essential to have in place a high quality Estate Plan.  The following are three important reasons.

  • State estate tax laws remain in place. Massachusetts (and thirteen other states plus the District of Columbia) still impose a state estate tax.  In 2018, the Massachusetts estate tax exemption is $1 million and the top estate tax rate is 16%.   The Massachusetts estate tax is unlikely to change substantially in the near future.  Massachusetts estate taxes can be substantial and failing to plan for them is a mistake.
  • The Federal tax laws may change. A future Democratic Congress may amend the new tax law and reduce the Federal exemption back to the 2017 level ($5.49 million per individual) or even lower.   For this reason, it is important to have in place a flexible estate plan with estate tax planning provisions that are designed to minimize or eliminate both state and Federal estate taxes, regardless of the specifics of the existing law.
  • Estate taxes are not the only reason to have a good Estate Plan. There are lots of reasons – other than estate tax planning – to have in place a high quality estate plan.   Estate planning is essential to ensure that all family members are provided for properly.  This includes minor children, disabled adults, second spouses, adult children likely to divorce, adult children with unique needs or lifestyles, spendthrifts, and more.  More complex planning is also required for those who own family businesses or unique assets.  In addition, a good estate plan simplifies the process of estate administration and may avoid unnecessary delays, costs, and family conflict.  Finally, an estate plan can ensure that your assets can be managed properly for your benefit during you lifetime if you become incapacitated.

The change in the Federal tax laws may change the nature of estate planning and may even create new opportunities for planning.   But it does not eliminate the need for planning.  We intend to offer more advice on this in future months.  Stay tuned!

Estate Tax Savings – Donating Personal Papers and Effects

IfillSimmons College in Boston recently announced that it will name one of its new colleges after Gwen Ifill, the Peabody Award winning journalist and PBS NewsHour co-host who died last year.  Ifill’s impressive journalistic career started soon after she graduated from Simmons College in 1977.  The Gwen Ifill College of Media, Arts, and Humanities will formally launch in the Fall of 2018.  Simmons also announced that some of Ifill’s personal papers and effects (including some of the signature blazers she wore when moderating debates) were donated to the College, and will be on display.

After prominent individuals die, their personal papers, archives and effects are often donated to an educational or other charitable institution.  The reasons are two-fold.

First, the donation allows the items to be publicly accessible.  They can be studied and the contributions of the prominent individual can be celebrated and remembered.  It can preserve his or her legacy.  Second, the donor may be eligible for a charitable contribution tax deduction which may result in estate or income tax savings.

Here is how the tax deduction may work.  If a prominent individual irrevocably pledges during his or her lifetime to donate papers or other tangible items to an educational or charitable organization, the Executor of his or her estate may deduct the value of the papers and items on the individual’s estate tax return which is filed after his or her death.  If the individual did not make a pledge during his or her lifetime, but the Executor, heirs or beneficiaries decide to donate, he, she or it may be eligible for an income tax deduction.  In either case, tax savings may result.  I do not know whether Ifill pledged to donate to Simmons before her death or whether her heirs decided to donate since then.

The tax reporting of the donation may be complicated.  In all cases, to be eligible for a tax deduction, the taxpayer must report the value of the donated items on an estate or income tax return.  But valuing personal papers and items can be challenging.  An appraiser must value the items, but the IRS may question the reported appraised value, or the deduction.

There may be non-tax complications too.  The donor may wish to impose restrictions on the institution’s use of the items – for example, the manner in which they are displayed, the timing of their release, or other contingencies on use.  Imposing restrictions on the use of the items can reduce their value to the institution, and can also be difficult to negotiate and enforce.

Those wishing to donate personal papers, archives, and tangible items after the death of a prominent individual should seek professional advice.

Image of Gwen Ifill from Wikipedia Commons.

Charitable Gifts in Your Estate Plan: To Restrict or Not to Restrict?

Explosion_138,_Force_0Imagine you are preparing your Estate Plan.  You wish to make a gift to a certain charity –  the hospital that cured your cancer or your alma mater, for example.  You have a particular cause in mind – to support a certain physician’s research or to fund scholarships for needy students, for example.  Do you restrict the charitable gift to that particular cause?  Or do you give an unrestricted gift and allow the charity to use it for any charitable purpose?

Many clients are tempted to restrict their charitable gift.  I suspect they believe this will ensure that their gift is used in a manner that reflects their specific wishes.  But my advice is often to do the opposite – to give an unrestricted gift that allows the charity to decide how best to use it when the time comes.

There are several reasons why.  First, times change.  The passage of time or the changing of circumstances can cause restricted gifts to become outdated, impracticable, or sometimes even illegal, making the gift unusable or of less value to the charity.  Unrestricted gifts give the charity the flexibility and control to use the gift in the manner that best suits its purpose or mission.  Second, restricted gifts may generate higher administrative costs for the charity making less of your gift available to further the charity’s purpose.  Third, restricted gifts may ultimately require a court legal action by the charity – a petition for cy pres or equitable deviation – that can be a costly and time consuming distraction.

And while I strongly believe this is sound legal advice, that I stand by, it raises the risk that a donor’s gift ends up being used for a purpose wildly different from what the donor may have wanted.  And that risks upsetting a donor’s heirs or creating tension between them and the charity.

Here is an interesting case study.  The University of New Hampshire has recently taken a lot of heat for its use of a large, unrestricted charitable gift from the Estate of Robert Morin.  Morin spent his career working as a UNH librarian.  I doubt he was highly paid, but he was secretly a “millionaire next door” and left his $4 million fortune to UNH without restrictions.

As it was legally entitled to do, UNH used the gift as it saw fit.  $100,000 went to the library, $2.5 million went to upgrade the UNH career center, and $1 million went to purchase a new high-definition video scoreboard for the UNH Wildcats’ stadium.  The rest is still unallocated.  UNH had spent the last several years upgrading its football program and stadium, and the purchase of the scoreboard was I assume an expense that UNH believed was important for raising the school’s stature.

Many have objected to the purchase of the scoreboard as antithetical to the way Morin lived his life.  But this is not the legal standard.  What UNH did was not illegal or even unethical.  Also, there is no real evidence that Morin would have disagreed.  He could have restricted his gift, but chose not to.

When making charitable gifts in your Estate Plan, consider carefully whether to restrict them.  And if restrictions are important to you, there may be a way to work closely with the charitable institution to accomplish your goals, without limiting its opportunities.

Image from wikipedia, Erie Explosion v. Fayetteville Force.

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.

Never Trust a Yalie: The Estate of Elihu Yale

yale-university-1604158_960_720Elihu Yale was a colonial era merchant who amassed considerable wealth at the end of the 17th century as President of the East India Company’s post in Madras, India.  He was one of the earliest benefactors of the Collegiate College in New Haven, Connecticut, now Yale University and named for him.  The story behind the naming of the University involves an interesting quirk in the administration of Yale’s estate.

In 1717, the founders of Collegiate College sought a gift from Yale to establish a college in Connecticut.   The founders approached Yale not only because of his fortune, but also because he had no descendants to inherit his wealth and he had familial ties to Connecticut.  Yale agreed, and soon thereafter, he donated to the College a box of books, a picture of King George, and English goods valued at 200 British pounds sterling, all valued at 800 colonial pounds.  It was a large gift, although not enough to establish an endowment.  Yale also promised the College “a succession of solid and lasting benefits”, including a gift at his death.  As a result, in 1718, Collegiate College became Yale College.

Yale sent one more gift to the College in June 1721, one month before his death.  But the big gift the College expected from Yale’s estate never came.  The reason?  At the time of his death Yale’s Will – which left a gift to the College – remained unsigned.   Yale’s widow was named Executor of his estate, and the entirety of his estate – less debts – passed to her.  Yale College objected in probate court but was unsuccessful.  The College’s founders advocated for receipt of a portion of the estate for over two years following Yale’s death, but his widow, the daughters from her first marriage, and their husbands – all wealthy as well – refused to settle or agree to make any gifts.  In the end, no part of the estate passed to the College.

Take it from this Harvardian – don’t make the same mistake as Elihu Yale.  Have in place a quality estate plan that sets forth your wishes before your death.  And be sure to sign it.

(I give credit for this interesting history to my friend and colleague, Megan Lenzi, who learned a “cleaned up” version of this story while touring Yale with her son this summer.  Apparently, in traditional Ivy League fashion, the school has chosen to gloss over this history.)

The facts in this post came from Hiram Bingham’s article “Elihu Yale” published by the American Antiquarian Society in 1937. 

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.