Category Archives: Estate Planning

Old Problems, New Solutions: Estate Planning for Non-Traditional Families. Part 1-An Introduction to Estate Planning for Non-Traditional Families

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Over the past forty years, the number of traditional “nuclear families” (defined as a mother, father and children) has declined from approximately 40% of the total households in 1970 to 20% in 2010.  Changing lifestyles, economic conditions and growing acceptance of non-traditional family arrangements factor into this change which has dramatically shifted how adults cohabitate and how children are raised.

This change also requires a different approach to estate planning from the typical planning used by a nuclear family.  Over the next week, we will discuss a variety of planning issues faced by non-traditional families including specific issues related to blended families (families created from one or more previous marriages).  In addition, we will discuss how non-traditional families can utilize a wide variety of tools to deal with the complications related to their estate planning.

“Non-traditional families” encompass a group of family arrangements that vary in one way or another from the traditional family.  They include:

1)   Single Parents-This includes parents who have divorced their former spouse and are raising children on their own, parents who have adopted children or parents who do not have or never had a relationship with the child’s other biological parent.

2)   Co-parenting Arrangements-Traditionally, these arrangements have been used by divorced couples to ensure that their children received support from both parents.  More recently, individuals wishing to become parents without cohabitation, marriage or a romantic relationship have begun using this type of arrangement.  Co-parents may be friends or may be introduced through professional matching services.

3)   Blended Families-As mentioned above, a blended family is created when one or more divorced individuals remarry and incorporate their existing children into one family unit.  Complications can arise if there are children born outside this relationship and children born of both new spouses.

4)   Non-married families-Some individuals begins families with their partners without marrying.  For some, such as LGBT individuals, it may not be legally possible to marry.  For others, it may be a conscious choice to remain unmarried even though their relationship may be long-term and the partners may have children together.

5)   Same-sex married couples-New York, the District of Columbia and seven other states currently allow same-sex couples to marry.  Despite the rights granted to these families at the state level, the Federal Defense of Marriage Act (DOMA) complicates and limits the rights granted to these individuals and their families.

While progress has been made towards providing the same or similar rights to non-traditional families, the traditional estate planning benefits granted to a traditional nuclear family do not extend to a non-traditional family.  Consequently, non-traditional families must be aware of the following issues related to their estate plans:

1)   Guardianship of minor children-Ensuring that a child is cared for by the right people after a parent dies is one of main reasons individuals create an estate plan.  For single parents, the lack of a second parent makes this issue of the utmost importance.  For non-biological parents or co-parents, it is also essential that proper documentation be in place to allow a surviving parent to remain the legal guardian of a minor child.

2)   Inheritance rights-The New York intestacy statute governs the order in which property passes if an individual has no will.  Families that include non-biological relatives, non-married partners and, depending on the state, same-sex spouses are not ensured any inheritance rights under this statute.  A last will and testament or a comparable testamentary instrument (such as a revocable trust) is necessary if you wish to pass property to these relatives, partners and spouses.

3)   Taxes-Married individuals receive numerous tax benefits that non-married individuals and same-sex spouses do not receive.  For gift tax purposes, a married heterosexual couple can transfer unlimited assets between spouses during their lifetime.  Due to DOMA, this benefit is not available to same-sex married couples.

 The estate tax benefits for heterosexual married couples are similarly skewed.  In addition to their own personal estate tax exemption, married couples may pass unlimited assets to each other at death using a marital deduction.  This is unavailable to non-married partners and co-parents.  Same-sex married couples may utilize the marital deduction for New York estate tax purposes, but it is unavailable for federal estate tax, again due to DOMA.

4)   Medical and financial decisions during incapacity or disability-Married couples in New York (both opposite sex and same-sex) have the ability to make medical and financial decisions for their spouses if they become incapacitated or disabled.  For non-married families, these rights are granted to the disabled or incapacitated individual’s biological family rather than any partner.

The complications in planning an estate for a non-traditional family are numerous, but they are not insurmountable.  In the next post, I will discuss some specific issues and solutions that related to blended families.

For more information on estate planning for non-traditional families, please contact info@levyestatelaw.com.

Real and Adequate Considerations: Estate Planning for Real Estate

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Real estate is one of the most common types of property disposed of by an estate plan.  For many individuals and families, a house or other real property will be one of the most valuable assets that they will transfer during their lifetimes or at their death.  In order to achieve the best results, certain aspects of the transfer must be considered from the initial planning stages through the completion of the transfer.

The following are the most important factors to consider when planning a transfer of real property:

1. Consider How The Property Is Titled-Property owned by more than one person can be titled in several ways, either with a right of survivorship or without one.  Property titled as “tenancy by the entirety” (which is available only to married couples) or “joint tenancy” have a rights of survivorship and will pass outside of probate to the surviving owner.  Property owned as “tenancy in common” property have no rights of survivorship and passes through the probate process.  Ensuring that jointly owned property can pass outside of the probate process is an easy way to avoid the delay and cost related to property passing through probate.

2. Consider How the Property Is Owned-The simplest form of property ownership is outright ownership.  However, under some circumstances, it may be advantageous to consider the use of a trust or business entity such as an LLC or family limited partnership to own real estate.

Property owned by a trust or business entity can be shielded from certain forms of creditor claims or limit the liability of its owners.  In addition, the use of a trust or business entity may allow the property to be discounted for gift and estate tax purposes.  Finally, for larger families, a trust or business entity may allow for a centralized management and administration of family property.

Owners of condominiums and coops should consult with their respective board of directors before transferring property to a trust or a business entity.  Some boards prohibit the use of one or both of these ownership forms.

3. Consider When A Transfer Should Be Made-The decision of when a real estate transfer will take place requires considering several things.  The age of the transferor, the type of real estate being transferred and whether the transferor wishes to retain an interest in the property for a term of years should all be factored into the decision making process.

Additionally, the cost basis of the property should be determined.  A Gift of real estate during the transferor’s lifetime will result in the transferee assuming the transferor’s basis.   If the property has appreciated significantly since the transferor acquired the property, the transferee will be assuming a large capital gain when the property is ultimately sold.  If the property is transferred upon the transferor’s death, the cost basis receives a step up to the value of the property at the transferor’s date of death or an alternative valuation date six months after the date of death, whichever value is lower.

4. Consider Transfer Taxes-In addition to a potential capital gains tax, the transfer of real estate may subject the transferor or his or her estate to gift or estate tax liability.  Before making a transfer or planning a transfer, owners of real estate should review their financial records with an accountant, estate planning attorney or other financial professional to determine how much of their lifetime gift tax /estate tax exemption has been used.  If the proposed transfer would result in a tax liability, the use of  estate planning instrument such as a qualified personal residence trust (QPRT), an LLC or a family limited partnership should be considered to reduce the value of the transfer for gift or estate tax purposes.

5. Consider Where the Property is Located-Unlike intangible assets such as cash, stocks and bonds, the physical location of real estate will dictate which state’s probate laws will apply.  If an individual owns real estate in one or more states or countries outside of New York, they may be required to file a secondary probate proceeding known as ancillary probate.  This may create an additional burden on the family of a deceased individual at a time when they will already be stretched thin.

Proper titling of the property can protect joint property if a right of survivorship is included.  In other instances, it may be beneficial to transfer the property to a revocable trust or another trust or entity to ensure that the property(ies) will not be subject to ancillary probate.

As with other forms of property, proper planning with real estate can be the difference between a successful transfer and one that is plagued with delay, additional taxes and other complications.  It is essential to take the above-mentioned factors into consideration before preparing an estate plan for your real estate.

Please contact info@levyestatelaw.com for more information about estate planning for real estate.

A Spring Cleaning Checklist For Your Estate Plan

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Spring has begun to blossom and although we had a very mild winter, the improved weather is a welcome change.  And while we are only a few weeks into the new season, thoughts of summer and various travel plans have begun to enter many of our minds.

This time of year is a very common time for reviewing, adjusting and creating estate plans.  With tax season nearly over, getting your estate plan in order is a good next step to ensure all your planning is properly in place for the remainder of the year.

Below is a to-do list for your estate plan.  Some of the items may not be applicable to your specific situation, but all are worth considering.

1. Review your current estate planning documents with your attorney-For a typical individual or family, an estate plan should be reviewed every 3-4 years.  If you have had major life changes or your planning is complicated by health, money or interpersonal issue, you should review your plan even more frequently.

2. Complete your beneficiary designations for “transfer on death” accounts-One of the easiest and cheapest ways to improve your estate plan is to ensure that the beneficiary designations for all “transfer on death” accounts are properly completed.  Certain bank accounts, retirements accounts and life insurance all pass outside of a probate estate as long as the beneficiary designations are executed.  If you fail to designate beneficiaries, these accounts and assets will pass to your estate through the probate process, delaying their transfer.

3. Review all deeds and real estate documents-Real estate that is owned with a right of survivorship will pass outside the probate process.  To ensure a smooth transition, it is important make sure all jointly owned real estate is titled as a tenancy by the entirety property (for married couples) or as joint tenancy property (for non-married couples).

People who own multiple pieces of real estate may wish to consider consolidating their properties in a trust or an entity such as an LLC.  This is especially important if you real estate in multiple states or if you own real estate outside of New York.

4. Meet with your financial planner or insurance agent to discuss your insurance coverage-Like an estate plan, it is crucial that your insurance policies (life, disability and long-term care) are periodically reviewed alongside your trusted advisor.  This allows the advisor to determine if you have sufficient coverage for your current situation and allows the client to determine if they are satisfied with their current policies.

5. Speak with your current or named fiduciaries-In time between a person is named a fiduciary under a will and trust and the time when they actually are asked to serve, the named fiduciary’s relationship with you and their personal circumstances may change.  While most named fiduciaries are close friends or relatives, it is helpful to frequently confirm their willingness and ability to serve.

For those with existing fiduciary relationships, frequent communication about the fiduciary’s administration of an estate or trust is a good way to avoid conflict at a later date.  It also gives the fiduciary the ability to communicate any suggestions or concerns they may have with their current role.

6. File Gift Tax and Fiduciary Income Tax Returns-If you and your spouse have made any large-scale gifts during 2011, it will be necessary to file a gift tax return.  Similarly, nongrantor trusts and estates are required to file fiduciary income tax returns since the income of each will be taxed as a separate entity.

The April 17th filing deadline for personal income tax returns also applies to gift and fiduciary income tax returns.  So while it may be too late to have a return filed before then, it is not too late to file for an extension.

7. Plan your 2012 gifts-With 2012 almost a third over, there remains nine months in which large scale gifts may be made that take advantage of the current $5.12 million gift tax exemption.  On January 1, 2013, absent an intervening action, the exemption drops to $1 million.

For those looking to make more modest gifts, utilizing your annual gift tax exclusion is a great way to benefit your children and reduce the size of your taxable estate.  Individuals may gift $13,000 to as many beneficiaries as they like while married couples can gift up to $26,000 per beneficiary.

8. Plan 2012 charitable gifts-Philanthropically minded individuals should consider the different ways of benefiting charities while also creating tax benefits for themselves.  Individual gifts, charitable annuities, the use of charitable trusts and the creation of a private foundation are all great ways to benefit the causes or organizations that matter most to you.

9. Consider Lifetime Trust Planning-Whether planning for your child’s education, removing your life insurance from your taxable estate or making gifts to your children, lifetime trust planning provides a great mechanism for protecting assets while also providing your children and other relatives with a significant financial benefit.  This is especially true this year while the lifetime gift tax exemption is at an all time high and interest rates are at a historic low.

10. Update your business succession/organization plan-Business owners should be aware of the potential negative consequences of not having a succession plan in place.  Failure to plan for your business, much like failing to create an estate plan, could create unexpected and undesired consequences for your family, business and associates.

A good estate plan requires consistent review and updates to ensure yourwishes are properly enacted.  Before you make your summer plans, make sure that your estate plan is up to date.  It will be one less thing that will keep you from having a great summer.

Please contact info@levyestatelaw.com for more information about estate planning.

Using Testamentary Trusts: Part Two-Protection Trusts

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In my last post, I discussed the use of trusts under a Will (known as “testamentary trusts”) to delay, minimize or eliminate federal and state estate taxes.  Marital, credit-shelter and disclaimer trusts provide sufficient protection from excess taxation for many individuals and families.  In addition, these trusts can also protect the assets contributed to them from claims of creditors.

Another type of testamentary trust frequently used are trusts that are designed to protect and preserve the assets from waste or other concerns other than taxes.  These “protection trusts” may exist for a short period of time or may last the lifetime of beneficiary depending on why they are established.

When discussing “protection trusts,” I am referring to two specific types of testamentary trusts, namely:

1)   Descendants’ Trusts-In a typical estate plan, the children (and grandchildren) of a Testator are often primary or secondary beneficiaries of an estate.  If these beneficiaries are not old enough or mature enough to handle inheriting a large amount of wealth directly, a descendants’ trust can be used to preserve the assets while also providing the beneficiaries with access to the trust’s income and principal.

Descendants’ trusts can either be structured as one trust for all the children (and grandchildren) or as individual trusts for each respective beneficiary.  Income and principal distributions are made based on a standard of the Testator’s choosing.  A common standard is to allow distributions for a beneficiary’s health, education, maintenance or support.  The Trustee of the Descendants’ trusts would have discretion to determine when distributions would be made and how much should be paid or applied for the benefit of a specific beneficiary.

A Descendants’ Trust can continue for the lifetime of a beneficiary or may terminate at earlier age as chosen by the Testator.  In addition, the beneficiary of a Descendants’ Trust may given the ability to withdraw a portion of the Trust principal before the Trust terminates.  The Testator is given significant flexibility in determining when and if to terminate these trusts and whether to allow for partial terminations.

2)   Supplemental Needs Trusts-For families with children or other relatives on government assistance programs like SSI or Medicaid, the ability to leave an inheritance to their special needs relative requires additional care.  Because of the strict income and asset limits on the beneficiaries of these programs, leaving an outright bequest is not possible.  Instead, a special needs relative may receive a bequest through a supplemental needs trust.

The beneficiary of supplemental needs trust can receive distributions during their lifetime to supplement the services paid for by the government.  Examples include travel, entertainment and other products or services normally not paid for by the beneficiary’s benefits.  The beneficiary cannot have any direct or indirect control over when and how the distributions are made.

A supplemental needs trust continues until the death of its beneficiary.  A named remainder beneficiary will receive whatever remains in the trust.   The beneficiary has no say in determining who receives the remainder of the trust principal and undistributed income.

Like the tax based trusts, these trusts can protect the assets in them from the claims of the creditors.  Unlike those trusts, descendants’ trusts and supplemental needs trusts also protect the assets from waste by a beneficiary and protect a beneficiary’s benefits in the case of supplemental needs trusts.

Please contact info@levyestatelaw.com for more information about testamentary trusts.

 

 

Using Testamentary Trusts: Part One-Tax Based Trusts

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Property that passes under a Last Will and Testament is distributed in two distinct manners.  For those with minimal assets and concerns regarding taxes, asset protection and waste, an outright transfer of property is simplest and most efficient way to pass property.  But, in most situations, concerns about protecting the testamentary assets leads to the use of trusts established under the Will known as testamentary trusts.

Testamentary trusts come in two forms: trusts that are structured to delay, minimize or eliminate estate taxes and trusts used to protect the underlying assets from waste by a minor or disabled beneficiary.  Next week, I will discuss the latter type of testamentary trust.  Today, we look at the three main types of tax based testamentary trusts used by estate planners.

Marital Trust-The most common form of tax-based trust is established to take advantage of the federal and New York state marital deduction for estate tax purposes.  Under the laws of both the state and federal estate tax system, unlimited assets may be passed to a surviving spouse without incurring an estate tax.  Upon the death of the surviving spouse, the assets in a marital trust are treated as part of the surviving spouse’s taxable estate.

Marital trusts can be structured to provide the surviving spouse with a lifetime income interest as well as the ability to receive principal distributions.  Beyond tax savings, a marital trust can ensure that the assets in the Trust will be transferred to your children and not to any subsequent spouse if your spouse remarries.

Unlike the other testamentary trusts mentioned in this post, same-sex couples for New York estate tax purposes can now utilize a marital trust.  However, it should be noted that assets in a marital trust for a same-sex couple would be subject to federal estate tax under current federal law.

Credit-Shelter Trust-A distinct disadvantage of a marital trust is that the assets in a marital trust are subject to estate taxes after a surviving spouse passes.  For individuals and couples with assets in excess of the current estate tax exemption, it is possible to preserve a portion of their assets from estate tax even after the surviving spouse passes.  This is accomplished by using a credit-shelter trust.

A credit-shelter trust is funded with a portion of a decedent’s estate up to the federal or New York state estate tax exemption.  The surviving spouse receives the income generated by the trust property for their lifetime and can also receive principal distributions for their health, education, maintenance and support.  A decedent’s children may also be beneficiaries of the trust.

Upon the death of the surviving spouse, the remaining assets in the trust pass federal estate tax-free.  However, if the federal exemption were used, New York state estate tax would be due.  A secondary disadvantage is that utilizing a credit-shelter trust removes a certain amount of flexibility and therefore, it is not always the ideal strategy for individuals who have estates below the federal estate tax exemption.

Disclaimer Trust-For individuals and couples with assets below the federal estate tax exemption, it is likely that their estate planning will focus on funding a marital trust.  In some circumstances, assets can grow between the time an estate plan is enacted and the date the first spouse passes.  Even if a credit-shelter trust is not mandated under a will, using a disclaimer trust can allow a surviving spouse to receive similar benefits.

A disclaimer is a post-mortem (after death) planning technique by which a surviving spouse renounces some or all of their inheritance.  If a disclaimer trust were included in a will, the disclaimed assets would pass as if the surviving spouse had predeceased and the disclaimed assets would fund the disclaimer trust.

Assets held inside a disclaimer trust will pass estate tax-free upon the death of a surviving spouse.  The benefit of using a disclaimer trust over a credit shelter trust is that it allows the surviving spouse flexibility in deciding whether to preserve certain assets and shelter them from estate taxes after they die.   The disadvantage is that funding a disclaimer trust requires an affirmative step by the surviving spouse and additional paperwork will be required.

The use of tax-based trusts under a will allows a surviving spouse the benefit of their spouse’s assets while also preserving the maximum amount of those assets from excess taxation.  This benefit, coupled with the traditional benefit of using a testamentary trust, makes having one or more of these trusts included in your Will a very smart idea.

Please contact info@levyestatelaw.com for more information about testamentary trusts.

When Estate Planning Goes Bad: An Introduction to Estate and Fiduciary Litigation

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The vast majority of estate plans work exactly as they are intended to-assets are administered and distributed in the manner outlined by the creator of the estate plan to benefit their chosen beneficiaries.  But, for the estate plans that fail to achieve their creators’ goals, the plan’s failure may not be the only negative consequence.  Depending on the reasons and severity of the failure, an estate or fiduciary litigation matter may be commenced.

Estate and fiduciary litigation is a broad category that includes all litigation matters related to estates and trusts brought in the New York Surrogate’s Court.  Each county of New York (including each of the five boroughs) has a Surrogate’s Court that handles the administration of its residents’ estates and trusts as well as any litigation related thereto.  Unlike traditional civil litigation, litigation in the Surrogate’s Court is guided by two estate and trust specific statutes, the Estates Powers and Trust Law (E.P.T.L.) and the Surrogate’s Court Procedure Act (SCPA).

Among the common forms of estate litigation are the following:

Will Contests-If an interested party does not believe that a will submitted for probate accurately reflects a Decedent’s wishes and intentions, he or she may contest the will’s validity.  The two most common objections to a will’s validity are that the Decedent lacked testamentary capacity or that the Decedent was unduly influenced by another party.

Testamentary capacity is presumed unless a challenging party can establish that the Decedent, at the time the Will was executed, was unaware of certain information.  This includes the extent and value of his or her property; who the natural beneficiaries of his or her estate were; what the disposition under the Will being offered was; and how these elements combine to form a plan for distribution. If the challenging party can show that the Decedent lacked one or more of these elements, the offering party will be forced to rebut the presumption of incapacity.

Establishing that a party was unduly influenced requires that the challenging party show that the Decedent was controlled or dominated by a relative or advisor to the specific benefit of that relative or advisor.  It is also necessary to show that the Decedent would not have made the dispositions he or she made without the influence of that advisor or relative.  If the advisor or relative uses their influence to benefit another rather than themselves, a claim for fraud may also be made.

Construction Proceedings-If a will or trust is drafted in a manner that makes the disposition of property unclear, the court may be asked to interpret the document and decide how property will pass.  This type of proceeding may be sought when the assets of an estate are insufficient to make all the required bequests and the fiduciaries and beneficiaries cannot agree on how to distribute the remaining property.

In making its determination, the Court will look to the document first and determine if the Testator or Grantor’s intention can be determined.  If it cannot be determined by the document alone, the parties seeking a specific construction will be required to submit evidence that establishes what the Testator or Grantor’s intent was when executing the document in question.

Contested Accountings-All fiduciaries are required to periodically account for their actions as a fiduciary and provide a statement of what assets were collected and disbursed from an estate or trust.  An accounting is often filed with the Surrogate’s Court as a way to obtain approval over a fiduciary’s actions.

If the beneficiaries of an estate or trust are unsatisfied with the fiduciaries’ actions, they may contest the accounting and seek sanction or removal of that fiduciary.   Objections include a failure of a fiduciary to prudently invest; a failure to properly marshal the assets; a failure to make adequate distributions; a fiduciary engaging in self-dealing; and other claims of misconduct.

Removal Proceedings-The information gathered during an accounting procedure may be used as a basis to seek the removal of a fiduciary.  In New York, the removal of a fiduciary is difficult to achieve and a clear showing of misconduct must be made.  Examples of conduct that may lead to removal include fraud; self-dealing (unless directly authorized by the will or trust instrument); gross mismanagement of the estate or trust funds; and failing to abide by court orders.

As with any form of litigation, estate and fiduciary litigation can be extremely costly.  But, unlike most civil litigation, the subject matters of these forms of litigation are exceedingly personal and achieving a “happy ending” for individuals and families becomes incredibly difficult.  The best solution is to ensure your estate planning is executed properly, your fiduciaries are selected with care and that your wishes are expressed as clearly as possible.  This may not guarantee that your family can avoid litigation, but it can dramatically reduce the chances that it will become a possibility.

Please contact info@levyestatelaw.com for more information.

The President’s Budget and the Future of Estate Planning

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Earlier this month, President Obama released his 2013 budget. Almost immediately following its release, it was declared “dead on arrival” by Republicans and pundits alike. In many ways, the President expected this and presented the budget to express his ideal approach to government spending and taxation. If the President is reelected in November, it is possible that he will push one or more of these proposals during his second term. It is especially worth noting with regard to how the estate, gift and GST tax systems may be structured in his second term.

While many of the proposals are repeats of the President’s previous proposals, the release of the budget was met with both hyperbole and apathy. To some, it expressed ”a war on the wealthy” while to others, it was ”same thing, different year”. Regardless of your opinion on the proposals, it’s important to recognize the possible changes to estate planning included in the budget. This includes:

Returning the Estate, Gift and GST Tax Exemptions and Rates to 2009 levels-Absent action before the end of the year, the Estate, Gift and GST Tax exemptions will reduce to $1 million and the top rate will increase to 55%. In the President’s budget, he has proposed returning the Estate and GST Tax exemptions to $3.5 million and the top rate to 45%. For the Gift Tax exemption, it would still be $1 million, but top rate would increase from the current 35% to 45%.

Reducing the use of valuation discount on family entities-Wealthy families often use family limited partnerships and family LLCs to pool their assets and allow for centralized management. An additional benefit has been the use of valuation discounts on individual interests in the family entity due to the partner or member lacking control over the underlying assets and being unable to sell their interests on the open market. The IRS has long contested these discounts and the President’s budget indicates his desire to continue pressuring planners to reduce or discontinue the use of these discounts.

Increasing the minimum term of Grantor Retained Annuity Trusts (GRATs) and the elimination of “zeroed out” GRATs-Estate Planners often utilize GRATs to transfer property that is expected to appreciate significantly from a senior family member to a junior family member without paying gift tax (known as a “zeroed out” GRAT). Using shorter term GRATs (a minimum term of two years must be used) have allowed their creators to avoid the risk of the transferred property ending up in their taxable estates. The proposals in the President’s budget would require a minimum term of a GRAT to ten years and would require the creator of the GRAT to make some form of a taxable gift at the time of the GRAT’s creation.

Limiting the term of a Dynasty Trust to 90 years-With many states amending or eliminating their Rules Against Perpetuities, a trust that continues over multiple generations known as a Dynasty Trust have become more popular. Because the assets of a Dynasty Trust remain in trust for multiple generations, the payment of estate taxes can be delayed potentially forever if the grantor the trust continues to have descendants. Under the President’s budget, a dynasty trust would terminate after 90 years and an estate tax would then be due on the assets of the trust.

Eliminate the Gift and Estate Tax benefits of a Grantor Trust-One of the newer proposals included in the budget involved altering the estate and gift tax treatment of grantor trusts. As I previously discussed in an an earlier post, a grantor trust’s income is taxed to the grantor of the trust rather than to the trust itself. Under the proposed changes, this favorable tax treatment for income tax purposes would cause the distributions from the trust and transfers to the trust to be considered taxable gifts. Additionally, when a grantor trust terminates due to the death of a grantor, the assets in the trust would be included in the grantor’s taxable estate.

Will any of these proposals eventually become law? That will depend in large part on the results of this year’s national election. Nevertheless, these proposals are a look into how the estate tax system may change next year if the President wins a second term.

Please contact info@levyestatelaw.com for more information about Estate and Gift Tax Planning.

A “Crummey” Way To Pay For College

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The cost of a college education continues to increase at a dramatic rate.  A child born this year and who plans on attending a traditional four-year residential college can expect to pay $48,000 for a public university and $96,000 for a private university every year.  With such high costs to consider, many parents begin their college savings plans as soon as a child is born.

One of the most common types of college payments plans is a Section 529 Plan.  529 plans come in two forms, a savings plan and a prepaid tuition plan.  In New York, the state runs a savings plan, which allows each plan beneficiary to save up to $375,000 for college.  529 plans come with distinct advantages and disadvantages to both the donors and beneficiaries.

529 plans allow funds to grow on a tax-deferred basis and if the funds are used for qualified expenditures, they can be withdrawn tax-free.  In addition, because the donor controls the funds, a beneficiary cannot directly access the funds inside a 529 plan.  And while each individual beneficiary must have his or her own account, if one child fails use the entire account for qualified expenditures, it can be transferred to another child.

For those looking to fund education expenses, a 529 plan is not a suitable investment vehicle.  Expenditures that do not qualify as college expenses are subject to a penalty upon withdrawal.  Furthermore, 529 plans offer a limited selection of investment options to choose from.  And while a beneficiary cannot access the funds in a 529 plan, a donor’s control over the plan’s investment strategy is limited as well.

As an alternative to a 529 plan, parents and grandparents looking to save for their children and grandchildren’s education may wish to consider a Crummey Trust for Education.  Named after a case in which a parent created a trust for the benefit of his children, this type of trust is established to take advantage of the annual gift tax exclusion.  Each year, property is contributed to the trust up to the annual exclusion amount ($13,000 for an individual; $26,000 for a married couple).  For a short period of time, the beneficiaries are given the right to access the funds.  This allows the property to qualify as a present interest gift and be excluded from any gift tax.

When compared to a 529 plan, a Crummey Trust has several key advantages.  First, a Crummey Trust may invest in any type of investments allowed by its trust instrument.  This is helpful for donors looking to fund education expenses using nontraditional investments such as real estate.  Second, unlike a 529 plan, a Crummey Trust may distribute funds for education expenses prior to college.  Third, a Crummey Trust can have multiple beneficiaries and use the collective assets more effectively than multiple 529 plans.

Crummey Trusts have certain disadvantages as compared to a 529 plan.  First, a beneficiary may access the funds after the reach eighteen years of age.  Second, a Crummey Trust does not receive the favorable capital gains treatment that assets in a 529 plan receive.  Finally, as with any trust, there is an additional expense to setting up and administering the trust.

Finding the right vehicle to pay for your child’s education is as important as finding the right school for them to attend.  But regardless of what type of planning you choose, starting your planning when your children are young will reap significant benefits to them when they are ready to attend college.

Please contact info@levyestatelaw.com for more information about education planning.

The Governor and His Grantor Trusts

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Last week, former Massachusetts Governor Mitt Romney released his 2010 tax returns after pressure from his opponents in the race for the Republican presidential nomination.  In addition to his and his wife’s joint tax return, Romney released the tax returns for three trusts created for the benefit of his family.  On each tax return, it was noted that the trusts were structured as “grantor trusts” and any income earned by the trusts was reported on the Romneys’ joint return.

Grantor trusts differ from typical trusts in the way they are structured and how their income is taxed.   In a traditional trust, the creator of trust (the Grantor) does not retain any power or control over the transferred property.  Conversely, a grantor trust is structured to allow the Grantor to retain certain powers over the trust property.  These powers include the ability of the Grantor receive a loan from the trust without adequate consideration or interest; the ability to substitute the trust property for property of equal value; and the Grantor retaining a power of appointment over the trust property without the consent of any adverse party.

The decision to structure a trust as a grantor trust comes with certain clear benefits.  First, by having the income of the trust taxed to an individual rather than a trust, the tax rate on the income is typically lower.  Second, by paying the income on trust property, the Grantor can reduce the size of his taxable estate while not diminishing the value of the transferred property.  Finally, by transferring assets into a grantor trust, a Grantor can utilize a portion of his or her lifetime gift tax exemption and freeze the value of the gifted property for gift and estate tax purposes.  This is an especially valuable tool when the transferred property is expected to appreciate greatly in the future.

Grantor trusts are often used to transfer assets without paying any gift tax through the sale of the property to the trust.  The property is transferred to the trust in exchange for a promissory note.  Over the course of the note term, the trust uses the income of the property to pay the interest on the note.  At the end of the note term, the trust makes a balloon payment of the original principal back to the Grantor.  This type of transaction is especially effective when the transferred property can be discounted for valuation purposes and when interest rates are low.

Despite the release of his tax returns, much of Governor Romney’s financial background and planning remains a mystery.  His use of grantor trusts indicates that he has likely done a significant amount of estate planning and has positioned his family to retain larges amounts of his family wealth for generations to come.

Please contact info@levyestatelaw.com for more information about grantor trusts.

Establishing a Charitable Legacy

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When preparing an estate plan, many individuals wish to include a charitable component in their planning.  From a personal perspective, a charitable bequest allows an individual to benefit a group, institution or cause important to them and their families.  From a tax perspective, charitable planning can provide significant benefits to an individual and his estate.

The benefits of charitable or philanthropic planning can range from the tangible to conceptual.  Charitable contributions can reduce the size of a taxable estate while also providing a 100% charitable deduction for the value of the contribution.  Certain charitable vehicles can also create a guaranteed stream of income for the donor Charitable giving is also personally rewarding to donor and his or her family.  By using their wealth to help others, the donor establishes a legacy of giving that can continue from generation to generation in the donor’s family.

Charitable giving in an estate-planning context can take several forms.  Among the most common:

1)    Specific and General Charitable Gifts-Under the terms of a donor’s Will or Trust, a donor may leave a specific amount or specific percentage of their estate to charity.  The donor may choose a specific charity or leave the choice up to their fiduciaries.  The donor’s estate will be able to deduct the value of the gift from the value of his or her taxable estate.

2)    Charitable Annuities-Many public charities have established charitable annuities to provide donors with a steady stream of income for the rest of their lives.  The donor contributes a gift to the charity and receives an income payment for the rest of their life.  The annuity amount is determined by using the donor’s age, the value of the gift and the annuity rates used by the charity.  Using charitable annuities reduces the value of the donor’s taxable estate while creating a tax deduction equal to the gift less the present value of the annuity payments.

3)    Charitable Trusts-These trusts come in two main forms, charitable remainder trusts and charitable lead trusts.  Each includes an interest for a term of years and a remainder interest.  Charitable remainder trusts provide a lifetime income stream to a specific individual and leaves the remaining assets to a charity.  Conversely, a charitable lead trust provides a lifetime benefit to a charity and the remainder interest to the donor’s heirs.  The charitable deduction for both trusts is based on the value of the interest that the charity receives.

4)    Private Foundations-A private foundation is a nonprofit organization administered and controlled by a private individual or family.  The foundation is required to pay 5% of its corpus every year to qualified charities that are chosen by the foundation’s directors or trustees.  Families looking to make a long-term charitable investment may prefer the flexibility that a foundation provides.  A foundation can also serve as a source of family pride for the continued philanthropic work that a family engages in.

5)    Donor-Advised Funds-Donor Advised Funds provide similar benefits to a private foundation without the corresponding complexities.  The funds are run through a public charity and allow the donors to determine how the funds are distributed and what purposes the contributions are used for. Using donor advised funds can maximize a donor’s charitable deduction without the cost of a direct gift or the regulation of a private foundation or trust.

The goals behind any charitable gifting strategy may be different for each donor, but the benefits are universal.  After ensuring that your family is cared for financially, it is a great way to further enhance the legacy you leave behind to your family, friends and community.

Please contact info@levyestatelaw.com for more information about charitable planning.