Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

529 Accounts allow a family to set aside funds for the education of their children or grandchildren without having to pay income tax on the earnings of the plan. These accounts work well for the great majority of families. However, I often discourage my clients from establishing 529 accounts.

In order to avoid paying income tax on the earnings of the 529 account, the funds in the account must be used to pay for expenses of attending college. Tuition accounts for the largest portion of these expenses.

Federal and state gift tax laws allow individuals to pay tuition for another individual without such payment being considered a taxable gift. Tuition payments allow parents and grandparents to reduce the amount of their estate that will be subject to estate taxes upon their death.

Assume that a wealthy grandparent makes gifts to a 529 account for the benefit of a grandchild. Gifts by the grandparent to the 529 account are considered taxable gifts. Generally, the grandparent uses the $13,000 per year annual gift tax exclusion when making gifts to a 529 account.

When the grandchild attends college, the 529 account will be used to pay for the grandchild’s college expenses. The net result of the above example is that the grandparent “lost” the opportunity to make tax-free gifts of the grandchild’s tuition.

If the annual exclusion gifts to the 529 account had instead been made to a traditional brokerage account for the grandchild, the grandparent could have paid tuition without utilizing the funds in the brokerage account. The grandparent’s taxable estate would be reduced and the grandchild would have funds that could be used to make a down payment on a house or to supplement the child’s cash flow when entering the work force.

It is true that income taxes would have been paid on the earnings of the traditional brokerage account. However, this income tax cost does not offset the estate tax savings from being able to make a tax-free gift of tuition expenses. Furthermore, 529 accounts have internal fees and are restricted as to investment choices. These fees and investment limitations somewhat dilute the income tax savings associated with 529 accounts.

Affluent families should evaluate the overall tax ramifications before funding a 529 account to fund a child or grandchild’s college education.

For more information on 529 accounts, you can visit this link.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

UBS has agreed to provide the IRS with information regarding 4,450 United States investors with secret Swiss bank accounts (pdf).

The IRS originally found out about these accounts from a former UBS employee named Bradley Birkenfeld. Birkenfeld had been a member of a team of UBS private bankers who assisted wealthy Americans with the establishment of foreign bank accounts that were disguised through offshore corporations.

After resigning from UBS, Birkenfeld filed a claim for a whistleblower reward and then contacted the IRS, the Justice Department, the Securities and Exchange Commission, and a Senate Investigative panel. The whistleblower law provides generous rewards to persons who help the IRS catch tax cheaters.

Birkenfeld has been convicted for aiding and abetting tax evasion and will serve 40 months in prison. If he survives his prison stay, he may be a very wealthy man. An article titled, For American Who Blew Whistle, Only Reward May Be a Jail Sentence, by David Hilzenrath in the Washington Post, cites a man who helped write the whistleblower laws.  This man believes that Birkenfield is entitled to a reward totaling tens of millions of dollars.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Coping with the death of a family member or friend is one of the most difficult emotional challenges we ever face. The challenge is magnified for those who must make end-of-life medical decisions for their loved one.

The attached article, His Own Private Death Panel: We Pull the Plug on Dad, by Ira Rosofsky in Psychology Today, gives a realistic view of the decisions that must be made on behalf a person who is nearing the end of his or her life. In the article, two children eliminated a slim chance of recovery for their father by deciding not to give him a feeding tube.

I was recently told by the son of one of my clients that his father’s Living Will and Health Care Power of Attorney made matters much easier with the hospital as his father was dying. His father had told his children that he wanted to die quickly when his time came. Accordingly, the children told the doctors not to use heroic measures to keep their father alive for a few more days.

A Living Will and Health Care Power of Attorney can certainly help, but there is no substitute for having frank conversations with those who will be faced with making decisions for you. You need to have these conversations while you have your full faculties. If you avoid these conversations, the decision may not be what you would have wanted. Furthermore, the decision makers are more likely to feel guilty about their decisions for a long time.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

My clients often want to make changes to an irrevocable life insurance trust (“ILIT”). Fortunately, there are at least 6 methods for making changes to an ILIT.

I recently worked with a business owner who used 4 different techniques to restructure a series of ILITs that he established over a 25 year period. Two of the ILITs owned insurance on his life. Two other ILITs owned last-to-die policies insuring the business owner and his wife.

The first step was to create two new ILITs. The wife is a beneficiary of the new Family Trust which now owns the single life policies. The other new ILIT was designed as a Dynasty Trust and now owns the last-to-die policies, as well as one single life policy.

Next, the wife exercised a power to appoint the assets of one ILIT to the Dynasty Trust. The trustee of another ILIT used the leapfrog power of TCA Section 35-15-816(27) to distribute its policy to the Family Trust.

The trustee of a third ILIT merged that trust into the Dynasty Trust pursuant to TCA Section 35-15-417. Finally, the trustee of the fourth ILIT sold its policy to the Dynasty Trust, which was structured as a grantor trust in order to avoid potential income tax issues associated with this sale.

I would have preferred to use the same technique for moving all 4 of the old ILITs into the Family Trust and the Dynasty Trust. However, different techniques were required due to the specific wording of the trusts, and other factors including tax consequences. Even though it was complicated, the business owner accomplished his goals and several generations of his family will benefit from these changes.

Incidentally, the two techniques that we did not use were: (i) amending the trust pursuant to TCA Section 35-15-411; and (ii) buying a new policy, which was not a viable alternative due to the age of the policies involved and health changes that have occurred.

See the enclosed article (PDF) for more detail on these techniques.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are planning to buy a new home, you might want to know about Joint Purchase Trusts. These trusts can provide significant estate tax savings.

One of my clients named John asked me whether he or his children should buy a vacation home that will cost $900,000. I recommended that John and his children establish a Joint Purchase Trust.

John will contribute $630,000 (70%) to the Trust and his children will contribute the remaining $270,000 (30%). John’s children have the ability to fund this investment due to prior gifts they have received from John and his parents.

John will have the use of the home for his lifetime and will pay all taxes, insurance and maintenance costs. With John’s permission, his children will also be able to use the home.

John can sell the home if he chooses. If the home is sold, the Trust would either purchase another home or other investments.

Upon John’s death, the trust will terminate, and the home will belong to his children. Nothing will be included in John’s estate for estate tax purposes.

Neither the $630,000 paid by John nor the appreciation of the home will ever be subject to estate or gift tax. This will be a substantial estate tax savings as compared to John buying the home in his name.

A Joint Purchase Trust can also be established by married couples. The husband and wife would retain the right to live in the home until the death of the survivor.

I do not recommend these trusts if you plan to borrow money to buy the home or to use the home as collateral for a home equity line of credit.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Several of my clients are concerned about passing on too much money to their children. They fear that a large inheritance will inhibit their children from reaching their full potential.

One of my clients noticed a positive change in her children after informing them that her Will leaves all of her considerable fortune to charity. Her children now understand the need to become productive citizens if they intend to enjoy a comfortable lifestyle.

A handful of my clients have taken this approach of giving everything to charity, and nothing to their children. Others put a cap on the amount of the inheritance, for example $4 million per child.

Another approach is to leave the child’s inheritance in a trust that makes matching distributions to the beneficiary based upon a percentage of the beneficiary’s earned income. This type of trust is sometimes referred to as an Incentive Trust.

You will have to decide for yourself whether you might be doing harm to your child by leaving them a large inheritance. In my experience, a person’s “work ethic” has been fairly well determined by the time he or she attains age 30. If they already have a good work ethic when they receive their inheritance, they do not become lazy or irresponsible.

On the other hand, attempts to motivate lazy children through a meager inheritance or a restrictive trust have generally been unsuccessful. I have concluded that a person’s work ethic is more heavily influenced by their upbringing, especially the example set by their parents, than it is by the amount or structure of their inheritance.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link