Estate Planning Fixes

Posted on November 29, 2010 by Bryan Howard

James Gooch and I recently made a presentation to the Tennessee Federal Tax Conference. The title of our presentation was “Estate Planning Fixes.” We discussed solutions to problems that can arise with respect to Life Insurance Trusts, Family Limited Partnerships (“FLPs”), Grantor Retained Annuity Trusts (“GRATs”), Qualified Personal Residence Trusts (“QPRTs”), Charitable Remainder Trusts (“CRTs”) and Uniform Transfers to Minors accounts.

Planning for the presentation caused me to realize how much time I spend helping clients to improve prior estate planning arrangements. The good news is that there are lots of tools available to fix problems. Furthermore, more transactions are being structured with “escape hatches” that allow modifications to accommodate changed circumstances. 

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IRS Charges 350000 For A Same Sex Spouse

Posted on November 17, 2010 by Bryan Howard

The IRS does not assess federal estate taxes on bequests to a spouse. However, when the wife of Edith Windsor died, Edith had to pay $350,000 of federal estate taxes. If Edith’s spouse had been a man instead of a woman, the estate taxes would have been zero. I do not know Ms. Windsor, but suspect that she would consider $350,000 to be an acceptable toll charge for being married to a woman rather than a man.

Edith had to pay estate taxes because the Defense of Marriage Act (“DOMA”) defines marriage as a union between one man and one woman. Edith and her wife lived in New York, whose laws considered them as spouses because they had been legally married under Canadian law.

The ACLU has filed suit on behalf of Edith against the U.S. government claiming that charging Edith $350,000 because her spouse was a woman rather than a man violates the U.S. Constitution. Edith claims that DOMA interferes with the rights of states to define marriage and violates the Constitution’s equal protection clause.

Some federal courts have already ruled that DOMA is unconstitutional. Other courts have upheld DOMA’s constitutionality. Eventually, the U.S. Supreme Court will decide this issue.
 

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Payment of Health Care Expenses for Your Son-in-Law's Next Wife

Posted on November 10, 2010 by Bryan Howard

One of my clients recently told me a story about a waylaid inheritance. In the 1980s, my client’s grandparents left an inheritance of $500,000 to my client’s mother. The grandparents loved their son-in-law and were not concerned that their daughter might die before their son-in-law and leave her inheritance to the son-in-law. In fact, the daughter died in 1993 and left her entire inheritance to her husband.

The daughter’s husband remarried in 1997. His second wife was stricken with cancer. He used all of his assets, including those that he had inherited from his first wife, to pay for medical expenses associated with his second wife’s cancer. When the son-in-law later died, he was virtually penniless. The bottom line is that the inheritance from the grandparents was used to pay for health care expenses of a woman whom the grandparents never met.  I doubt this is what the grandparents would have wanted.

Should this be written off as a case of bad luck, or was it a case of poor planning? There were two opportunities to create a different result that would have worked out better for the grandchildren. First, the grandparents could have established a trust for the daughter’s inheritance. Since they liked their son-in-law, the trust could have provided that the son-in-law would continue to receive income if he survived the daughter. Alternatively, the trust could have given the daughter the power to specify that her husband would receive all or part of the trust income following her death. The ultimate beneficiaries of the trust would be the grandchildren.
 

After the grandparents failed to establish a trust, their daughter could have established a trust for the primary benefit of her husband, with the remainder passing to her children. In either case, the principal of the trust would not have been available to pay for health care expenses of the second wife, and the grandchildren would have eventually received the principal of the trust.

Neither the grandparents nor the daughter anticipated that the son-in-law would get remarried and use the funds for the benefit of his second wife. Trusts should be used for significant inheritances to guard against unanticipated circumstances.
 

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Dying in 2010 to Avoid Estate Taxes

Posted on November 8, 2010 by Bryan Howard

A member of the House of Representatives from Wyoming has been told by some of her constituents that they are taking steps to die in 2010. Apparently, these individuals are willing to die early to make sure that their children will not pay estate taxes.These individuals are planning to discontinue taking dialysis and other life-extending medical treatments to increase the chance that their deaths will occur in 2010.

When the 2010 estate tax repeal was passed in 2001, it was dubbed by some as the “Throw Momma from the Train Act” due to the huge estate tax increase that will be incurred by the estates of wealthy individuals who die after 2010. There is still hope that the tax increase will be delayed or moderated. Unless and until the law is fixed, you should decline any invitations to take a year-end train ride or cruise with your children.
 

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Are You Feeling Poor Today?

Posted on November 1, 2010 by Bryan Howard

I have noticed that a lot of my wealthy clients are uneasy about their financial situation. The values of their marketable securities are lower. The value of their real estate is lower. Their income is lower.

The attached article by Robert L. Moshman published in the Wealth Strategies Journal explores the plight of a hypothetical family that had a $20 million net worth prior to the recent recession. The article gave me a better understanding of why my clients with a net worth of $10 million or more are feeling so uneasy.

Clients with an 8 figure net worth have a significant estate tax liability. Low values, coupled with low interest rates, are a fantastic opportunity for various gifting strategies that can significantly reduce the future estate tax liabilities. However, because my clients are uneasy about “turning loose” their assets, I am recommending different gifting strategies.

The most popular strategies that I have used recently involve Spousal Access Trusts, Installments Sales to Grantor Trusts, and GRATS. All of these techniques allow the client (and/or the client’s spouse) to benefit from the property utilized in the gifting strategy, while reducing the value of the client’s estate for estate tax purposes. I am not planning on this shift being temporary. The emotional scars from the 2008 recession will profoundly affect the attitudes of wealthy Americans for years to come.

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