Tag Archives: tax

Summertime Estate Planning … with Low Interest Rates

When interest rates are low – as they are this summer – some estate tax planning strategies become particularly advantageous.  In my last post I wrote about the benefits of intra-family loans with a low applicable federal rate (AFR).  It is also a good time to consider the following other estate tax planning strategies – Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs).

Grantor Retained Annuity Trusts (GRATs)

A GRAT is an irrevocable trust funded by a grantor for the ultimate benefit of children, grandchildren, or other beneficiaries.  During the trust term, the grantor retains the right to an annual annuity.  In a “zeroed-out” GRAT, the value of the annuity is equal to the value of the original gift to the trust plus interest at the Section 7520 rate set by the IRS each month.  Any appreciation above the annuity amount passes to the beneficiaries gift tax-free.  It is a tax-advantaged way to pass assets to children or grandchildren. 

GRATs work especially well when interest rates are low.  The 7520 rate has been falling since the beginning of 2019.  The August 2019 rate is 2.2%, which is low.  For that reason, it may be a good time for you to established and fund a GRAT.  You will retain the right to an annuity for the GRAT term and your children or grandchildren will benefit from a tax-free gift at the end of the term. 

Charitable Lead Annuity Trusts (CLATs)

A CLAT is another type of irrevocable trust that is effective when interest rates are low.  During the CLAT term, an annuity of a set amount is paid to a charity.  At the end of the term, whatever is left in the trust passes to the trust beneficiaries – typically children and grandchildren – gift and estate tax-free. 

The present value of the charitable annuity must be equal to the initial gift to the trust, but the present value is discounted by the 7520 rate.  A low 7520 rate means that more will pass to children and grandchildren.  CLATs are a great tax-advantaged way to support a charity as well as benefit your family.  A low 7520 rate makes CLATs an even more appealing estate tax planning strategy.

Summertime is the Time to Make Intra-Family Loans

Interest rates have hit a low point this summer.  Low interest rates set each month by the IRS (the applicable federal rate (AFR) and the 7520 rate) make some estate tax planning strategies particularly effective.  For this reason, it may be a good time to take a break from the heat and sun this August to do some estate tax planning.  It will save your family some money, and perhaps pay for next year’s summer vacation. 

One estate tax planning strategy that is very effective when interest rates are low are intra-family loans.  Intra-family loans are loans to family members.  They can be made outright to a family member or to a trust for his or her benefit.  Often parents or grandparents wish to loan money to children or grandchildren to buy a new home, renovate an existing home, or make a business investment.    The loans can be forgiven over time to take advantage of the lender’s gift tax annual exclusion and to maximize wealth transfer planning. 

The IRS requires that the lender charge interest on an intra-family loan at the applicable federal rate (AFR).  This rate is set each month by the IRS, and has been trending downward since early 2019.  The August 2019 AFR for a mid-term loan (with up to a 9 year term) is very low – 1.85%.  In fact, quite surprisingly, the mid-term AFR (1.85%) is lower than the short-term AFR (1.89%) which means the loan can be for a longer term with a lower rate. 

A low interest rate makes intra-family loans an appealing estate tax planning strategy.  If you are considering a loan to your children or grandchildren, this may be a good time to make one.  In addition, if you have an existing outstanding loan, this may be a good time to refinance it. But be careful, and get good advice.  The loan must be documented by a Promissory Note and the lender must charge interest at the AFR.  Otherwise the IRS may view it as a taxable gift. 

The Estate of David Rockefeller and the “Rockefeller Beetles”

David Rockefeller, former chairman of Chase Manhattan Bank and patriarch of the Rockefeller family, died in 2017.  He was the grandson of Standard Oil founder John D. Rockefeller and at the time of his death his estate was estimated to be valued at over $3 billion.  His wealth consisted of interests in family trusts, real estate, a massive art collection, and more. 

In addition, Rockefeller had a unique hobby.  He collected beetles – the bugs, not the cars.  He’d been doing so since he was a young boy and had amassed a collection of over 150,000 beetles, more than 10,000 different species.  The collection was one of the largest of its kind and included big, colorful, iridescent beetles as well as lots of the small, brown, creepy kinds.  It was housed in a special room in Rockefeller’s Manhattan townhouse during his lifetime.

At his death, in his estate plan, Rockefeller gave the beetles to Harvard’s Museum of Comparative Zoology.   He also gave $250,000 to install and maintain the collection.  The “Rockefeller Beetles” exhibit at the museum opened in late 2018 and currently displays a portion of the collection.  I had the pleasure of visiting the museum recently and stumbling across this unexpected new exhibit.

My visit got me thinking about Rockefeller’s estate plan and the implications of his unique charitable gift.  If Rockefeller included the gift of the beetles to Harvard in his estate plan, the beetles would be includible in his sizeable estate for estate tax purposes, but the estate would take a charitable deduction on his estate tax return for the charitable gift.  If Rockefeller had not included the gift of the beetles to Harvard in his estate plan, but his heirs chose to donate them to the museum after his death, the beetles would have been includible in his estate, passed to his heirs, and generated estate tax, but his heirs would be able to take a charitable deduction on their income tax returns. 

Either way, the beetles had to be valued.  The Executor of Rockefeller’s estate would have had to report the value of the beetles on his estate tax return.  So, I wonder, how do you value beetles?  Hire a beetle appraiser?  Research recent sales of other beetle or bug collections?  Put them on the market and see what museums or personal collectors offer to pay?  Would Harvard value them?  I don’t know and I don’t think there is a lot of precedent.  I would love to find out what the estate attorney did and how the beetles were valued and reported on Rockefeller’s estate tax return. 

If you find yourself in Harvard Square this spring or summer, consider a quick stop to view the Rockefeller Beetles.  If nothing else, you will learn something quite unique about one of America’s wealthiest men.  And if you are squeamish, consider my 8 year old daughter’s advice and go before lunch.

Your Living Will, Organ Donation, and Jewish Law

bean necklaceA Living Will is a legal document in which you express your wishes about your health care, including end of life care.   In your Living Will, you may also express your wish that your organs be donated after your death.  Although organ donation can and does save lives, many clients ask me to eliminate organ donation language from their Living Wills.  One common reason they cite is the prohibition against organ donation under Jewish law.  “Jews don’t do that”, they tell me.

I am often surprised and disappointed that these clients choose not to be organ donors.  It seems a waste of a potentially life saving opportunity.  So when a recent client – who is an observant Jew – educated me about the real Jewish beliefs about organ donation, I was intrigued.

Here is what I have learned:

Jewish (i.e., halachic) law permits organ donation.  It imposes rules and restrictions on the definition of death, burial, and body desecration that may limit organ donations.  But there is no blanket prohibition.   In fact, there is a Jewish principle (pikuach nefesh) that the preservation or saving of a human life overrides all other religious rules.   Giving an organ to save a life is a mitzvah (i.e., a commandment or a good deed) more important than all others.

If you are a Jew, I strongly encourage you to include the direction to donate organs in your Living Will.  Doing so may save up to 8 people’s lives.  If you are concerned about violating Jewish law, I can prepare for you a Living Will that meets your wishes and your religion.   Your Living Will can include a direction to donate your organs with limitations or contingences consistent with Jewish laws and beliefs.  I recommend one or more of the following limitations or contingencies:

  1. Limit the donation to certain life saving organs.
  2. State expressly that organ donation is to be done only to save another’s life.
  3. Require your Health Care Agent to consult with a rabbi before deciding to donate organs. (You may identify a specific rabbi who you trust.)
  4. Require organ donation to be made only as permitted under Jewish law.

A well drafted Living Will will allow you to remain an organ donor without compromising your values.  I am not rabbi or an expert in Jewish law.  You may wish to consult one in making this decision.  For more information on this and related topics, I also recommend you consult the Halachic Organ Donor Society website.

*The Kaiser Law Group’s Megan Lenzi wears this Tiffany & Co. silver bean pendant, a gift she received after donating a kidney to her brother.

Highlights from the 2019 Heckerling Institute on Estate Planning

Heckerling 2019Our annual trip to the Heckerling Institute on Estate Planning in Orlando, Florida was informative and educational.  The Heckerling Institute is a nationally renowned educational conference for estate planning attorneys and other professionals from around the country.  The following are some of the estate planning tips and advice we found most interesting this year.

  1. Plan for increased tax basis. The increased federal exemption has shifted much of the focus of estate planning toward income tax planning.  For this reason, it is important to integrate estate planning strategies that maximize the tax basis of your assets.  There are number of strategies that we use in our practice.  For example, Trustees may distribute assets out of a trust to a beneficiary so those assets are includible in the beneficiary’s estate and eligible for a basis step-up.  In addition, your trust may allow the Trustee to grant a beneficiary a general power of appointment so that assets may remain in trust but receive a basis step up at the beneficiary’s death.
  1. Make charitable contributions from IRAs. If you wish to make donations to charities, it may make sense to make those donations directly from your IRAs.  Doing so may result in income tax savings for you or your estate.  Charitable contributions can be made directly to public charities from IRAs during your lifetime if you are over the age of 70½.   They can also be made directly from IRAs after your death by naming as the IRA beneficiary a charity, Donor Advised Fund, or a Trust that includes charitable distributions and allocates trust income (i.e., “income in respect of a decedent”) to the charitable distributions.
  1. Questions remain about state income taxation of trusts. Can a state impose tax on trust income of an out-of-state trust because the beneficiary is a state resident?   As of now, there is a split of authority in courts’ answers to this question.  Some courts have said “yes” – if a beneficiary is a state resident, that state can tax the trust’s income.  Some courts have said “no”.   The Supreme Court will soon answer the question in the case of North Carolina Department of Revenue v. Kaestner.   It is an important case that will have significant implications for taxing trusts.
  1. Your estate plan should include proper planning for foreign assets. S. citizens and residents who own assets abroad need to plan properly for those assets.   There are special income tax rules and reporting obligations to comply with during your lifetime.  Because foreign laws affecting the disposition of assets after death are different from U.S. laws, you may need to include special provisions in your estate plan to be sure these assets pass properly.  For assets in some countries, it may make sense to have a separate estate plan prepared by an attorney in that country.
  1. Plan for proper disposition of your cryptocurrency. Once considered the wave of the future, ownership of cryptocurrencies – like Bitcoin and Ethereum – is becoming more popular and more conventional.  These non-traditional assets may require special income tax reporting and estate planning.  It is important to discuss these assets with your advisors to be sure they can be identified, located and distributed properly after your death.
  1. Disclaimers after death can be used for effective post-mortem estate, tax, and charitable planning. A disclaimer is a renunciation of assets by a beneficiary of a Will or Trust.  Disclaimers can be used during the process of estate administration to accomplish many goals, including redirecting assets to different beneficiaries or charities and minimizing taxes.  Although we do not recommend relying on disclaimers for your estate planning, they are an important post-mortem estate planning tool that can help families.

Kaiser Law Group Annual Newsletter 2019

Kaiser.icon.RGBDear Friends and Colleagues:

Happy New Year!  We hope 2018 was a good year for you.  We are writing to update you about changes in tax law and additional estate planning news for 2019.

Update on Gift and Estate Tax Laws in 2019

There were significant changes to the federal gift and estate tax laws in the beginning of 2018 after the Tax Cuts and Jobs Act of 2017 was passed.  In 2019, the gift, estate, and generation-skipping transfer (GST) tax laws remain largely unchanged.

Federal – The Federal estate and gift tax exemption increased (for inflation only) to $11.4 million per individual (or $22.8 million for married couples).  The Federal gift and estate tax rates remain 40%.  The Federal gift tax annual exclusion remains $15,000 per donee for individuals (or $30,000 per donee for married couples).

Portability of the federal exemption remains in effect so that a surviving spouse can use his or her predeceased spouse’s unused federal exemption.  To do so, a portability election must be made on a federal estate tax return filed after the first spouse’s death.  For some clients, portability of the federal exemption may offer a planning opportunity to reduce estate and income taxes.

The federal exemption is slated to return to $5 million (adjusted for inflation) at the end of 2025 when the 2017 tax cuts expire.

Massachusetts – There are no changes to the Massachusetts estate tax.  The Massachusetts estate tax rate is graduated with a top tax rate of 16%.  The Massachusetts exemption is $1 million per individual.  Unlike federal law, Massachusetts has not adopted portability and does not impose a gift tax.

Estate Planning Myths… Busted!

Myth #1 – “I no longer need an estate plan with estate tax planning.” 

The increased federal estate tax exemption has led some to conclude (incorrectly) that they no longer need an estate plan with estate tax planning.  We strongly disagree.  The most important reason we disagree is that Massachusetts still imposes a state estate tax.  Massachusetts estate tax is imposed on the entire estate if the total estate (plus lifetime gifts) exceeds $1 million.  We do not expect Massachusetts estate tax law to change in the near future.  Thus, many Massachusetts residents need to plan for Massachusetts estate taxes.  Even those with less than $1 million ought to have in place a high quality estate plan to ensure that all family members are provided for properly.

Myth #2 – “Gifting will not save estate taxes.”

Lifetime gifting of assets to children and grandchildren remains an important strategy to minimize federal and Massachusetts estate taxes.  By making lifetime gifts, many of our clients – even those without federally taxable estates – have saved their families Massachusetts estate taxes.  Because Massachusetts does not have a state gift tax, annual exclusion gifts and lifetime gifts in excess of $1 million fully escape Massachusetts estate taxes.  In addition, taxable gifts of less than $1 million may reduce Massachusetts estate taxes.

Myth #3 – “Trusts are only for the ultra wealthy.”

A trust is a legal structure in which a Trustee manages and controls assets for beneficiaries.  Trusts can be flexible and serve various purposes.  They are not only for the ultra wealthy.   Trusts can protect assets from creditors, predators, and beneficiary mismanagement.  In addition, leaving assets to your family members in a trust (rather than outright) can save estate taxes for future generations, simplify the disposition of your assets, and ensure that your assets pass to future generations as you wish.  A trust is often the best way to leave assets to minor children, disabled adults, second spouses, adult children who may divorce, adult children with unique needs or lifestyles, and spendthrifts, as well as other beneficiaries.

Myth #4 – “I have POD or TOD designations on my accounts so I do not need an estate plan.”

POD (Pay on Death) or TOD (Transfer on Death) account designations are not a substitute for an estate plan.  While POD and TOD accounts pass outside of probate and are easy to establish, they also have many disadvantages and limitations.  They may even undo a good estate plan resulting in assets passing to the wrong beneficiaries in the wrong proportions.

It is typically better to title assets in the name of a Revocable Trust.  Assets held in a Revocable Trust can be managed by others during a period of incapacity.  Assets in a Revocable Trust are also available to fund a credit shelter trust for a surviving spouse.  Finally, a Revocable Trust can ensure that assets are held properly for beneficiaries with special or unique needs.

Kaiser Law Group News

We have been very busy this year!  In addition to our client work, we have been busy in the estate planning community.

  • Davina, our newest attorney who joined us in 2017, is now fully integrated into our practice and significantly involved in most estate planning and administration matters.
  • Dale and Rachel offered a three part program to the Massachusetts Association of Accountants in November on “Estate Tax Planning in Massachusetts – 2018 and Beyond”.
  • Dale spoke at a live webinar event on “Estate Planning in an Online World” as part of Interactive Legal’s roundtable series.
  • Dale will finish her three year term on the Board of Directors of the Boston Estate Planning Council in 2019.
  • Rachel finished her two year term as coordinator of lunchtime educational events for the Trusts and Estates Consortium.
  • Rachel and Davina are members of the Boston Estate Planning Council’s committee to plan this year’s annual gala event.
  • Dale and Rachel will attend the 2019 Heckerling Institute on Estate Planning in January.

We wish you a happy and healthy 2019!

All our best,

Dale Ann Kaiser                     Rachel Ziegler                         Davina Lewis

Estate Tax Planning in Massachusetts – 2018 and Beyond

Innovation Jam_IdeasDale Kaiser and Rachel Ziegler of the Kaiser Law Group are speaking this month at the 2018 New England Institute on Taxation of the Massachusetts Association of Accountants.  The topic of our talk is “Estate Tax Planning in Massachusetts – 2018 and Beyond” and focuses on estate planning and estate tax planning strategies in Massachusetts following the passage of the federal Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act made significant changes to the federal estate tax law.  It increased the federal estate tax exemption to $11.18 million for individuals or $22.36 million for married couples.  The result of this change is that very few individuals and couples need to plan for federal estate taxes.

Yet, the Massachusetts estate tax exemption remains $1 million.  This means many of us will pay Massachusetts estate taxes.  It continues to be important – even essential – to do proper estate planning, with estate tax planning, in Massachusetts.

Our talk focuses on four (4) strategies to minimize estate taxes that remain important in Massachusetts.  These strategies include the following:

  1. Revocable trusts with Massachusetts estate tax planning provisions for married couples.
  2. Lifetime gifting, including annual exclusion and taxable gifts.
  3. Strategic planning with portability.
  4. Planning for out of state real estate after the 2016 case, Commissioner of Revenue v. Dassori.

We highlight many interesting examples of these strategies from our practice.

If you want to learn more, please contact us.

What you need to know about Isabella Stewart Gardner’s Will (before listening to WBUR’s “Last Seen”)

300px-Rembrandt_Christ_in_the_Storm_on_the_Lake_of_GalileeWBUR’s new podcast series – Last Seen – provides a new look at the 1990 Isabella Stewart Gardner Museum art heist.  If you grew up in Boston or have lived here since the 90s, you’ve no doubt heard a lot about the St. Patrick’s eve theft of thirteen works of art – valued today at half a billion dollars – that remains unsolved.  But “Last Seen” provides investigative journalism way beyond what you’ve already heard.  I have been listening each Monday morning on the edge of my car seat, wishing my commute were longer.  It is truly that good.

If you have visited the Gardner Museum, you cannot help but be struck by the empty frames that remain on the walls where the stolen paintings used to hang.   The frames and spaces remain empty – like a crime scene – to remind visitors that the paintings remain at large.  Gardner museum director of security (and candidate for Secretary of State) Anthony Amore has committed his work and life to finding the stolen artwork, and wants the FBI and the community to have the same commitment.

But there is another reason the frames remain empty – the terms of Mrs. Gardner’s Will require it.   In her Will, Mrs. Gardner left the museum, her artwork, and an endowment to be held for public enjoyment, but the Will also included very stringent restrictions.  The museum was to remain unchanged from the time of her death, and any change would cause the museum and its artwork would pass to Harvard College.  The terms of the Will mean that artwork is not to be moved, with no exceptions.

There is however a precedent for change to the museum.  In the years after the heist, the Trustees believed the museum needed an update and expansion so the Trustees sought court approval for a restoration and expansion project – a deviation from the terms of the Will.  In 2009, a Massachusetts court approved the project, holding that the deviation was reasonable and consistent with Mrs. Gardner’s primary purpose.   The new wing, designed by Renzo Piano, is beautiful and modern, and totally different from the rest.

The museum Trustees have never sought to obtain court approval to deviate again from the Will’s terms to fill or cover up the spaces left by the thieves.  I suspect they never will.  To do so would be to give up on their quest to retrieve the artwork.

Image of Rembrandt, The Storm on the Sea of Galilee, from Wikipedia.

Aretha died intestate. What happens if you do?

ArethaYou may have heard the news that Aretha Franklin died on August 16, 2018 without a Will or Trust.  This means she died “intestate”.   With an estimated net worth of $80 million, her failure to prepare an estate plan was clearly a mistake.  Many are left wondering what will happen to her estate.

The recent news may leave you wondering – what will happen to your estate if you die intestate?

What happens if you die intestate?

If you die intestate, a state court will appoint someone as the Personal Representative or Administrator of your estate.  That person’s job will be to distribute your assets among your family members as state law requires.  He or she will not have discretion to determine how assets are distributed or held, but will be bound by state law and the court’s authority and instruction.

If you reside in Massachusetts at your death, your assets will be divided among your family members pursuant to Massachusetts Probate Code.   Essentially, Massachusetts law imposes a plan for division of your assets because you did not make a plan yourself.

Is intestacy a bad thing? 

Many people die intestate – celebrities like Aretha, Prince, and Picasso, and many ordinary people.  There are a lot of downsides to dying without an estate plan.  Here are a few of the most important:

  1. You may have wanted a disposition of your assets among your family members that is different from what state law requires.
  2. The process of disposing of your assets will be more costly and time consuming.
  3. Your creditors will be able to reach all of your assets to satisfy any debts or claims.
  4. Your family may be more likely to fight or disagree with one another, resulting in hurt feelings and fractured relationships.
  5. The court will choose who will serve as Personal Representative or Administrator from among your family members based on relationship, not ability. The person appointed may not be the best choice or do the best job.
  6. Outright distributions of cash and other assets may be made to minors, disabled persons or spendthrifts, resulting in bad consequences.
  7. More federal and/or state estate taxes may be due.

State intestacy laws are merely default rules.  I do not recommend relying upon them to accomplish your goals or protect your family.

Image by Brett Jordan from flickr.

Tuition bill got you down? These new 529 Plan rules may help.

college move inThe IRS recently released new guidance for Section 529 plans.  529 plans are tax-advantaged investment accounts established to fund a child’s or grandchild’s education.  New laws – including the 2017 Tax Cuts and Jobs Act – changed Section 529 laws.  In July, IRS issued Notice 2018-58 as temporary guidance about the changed laws.  This temporary guidance will ultimately become part of more permanent regulations.

There are three changes addressed in the Notice.

Elementary or Secondary School Tuition. The new guidance allows distributions from 529 plans to be used to pay for tuition only at elementary and secondary private and religious schools up to $10,000 per year.  Previously, 529 plan distributions could only be used for higher education.   Parents and grandparents now have more flexibility to fund a child’s complete education in a tax-advantaged manner.

How can this help you?  You wish to fund your grandchild’s complete education, including her tuition at a private elementary and secondary school as well as a college education.  You make contributions to a 529 account for her.  Each year she attends private school, distributions of up to $10,000 can be used to pay the private school tuition.

Tuition Refunds May be Recontributed to the 529 Account. If a distribution from a 529 is made to an educational institution and is subsequently refunded for any reason, the refunded money can be recontributed to the 529 plan.   Previously, the refund would have been subject to tax and potentially a penalty.   The IRS requires that the refund be recontributed to the account within 60 days of receipt.

How can this help you?  You took a distribution from your child’s 529 account and paid the full year’s tuition to the university.  Your child leaves school after first semester and the university refunds the second semester’s tuition.  The refund may be recontributed to the 529 account.

Rollovers to ABLE Accounts. ABLE accounts are tax-advantaged savings plans for disabled individuals that can be used to pay for qualified disability expenses.  The IRS now allows funds in a 529 plan account to be rolled over to an ABLE account without taxes or penalties, subject to contribution limitations.  This allows the parents or grandparents of a disabled minor or young adult who is unlikely to go to college to move 529 assets to a more appropriate ABLE account.

How can this help you?  You funded a 529 account when your child was young to fund his college education.  The child is now college age, but due to his or her disability, is unable to attend college.  You can rollover the 529 to an ABLE account and use the funds to pay for certain expenses arising from the child’s disability.

The benefits of funding 529 plans are numerous.  Most importantly, 529 contributions by parents and grandparents result in income and estate tax savings.  In addition, 529 plans are simple to set up and inexpensive to administer.  For a more in depth discussion of the benefits of 529 plans, see my prior post.