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Gift Taxes 101

Gift Taxes 101

GIFT TAXES 101

Federal gift taxes are extremely confusing.  While it may seem odd to most people that even giving away your property can result in tax consequences, as we all know, with the IRS, rules are rules and they must be followed (or else).

As a wills and trust attorney O’Fallon, MO I often discuss gift taxes with my clients during our meetings to discuss estate planning.  Taxpayers have two exclusions or exemptions available to them, either on an annual basis or spread out over their lifetime.

The first is the annual gift tax exclusion.  This is a set amount of money you can give away tax free to an unlimited number of people.  A series of gifts made to the same person in a calendar year are not subject to gift if they don’t exceed the annual gift tax exclusion.  For 2017, this number was $14,000.  For 2018, there’s a bump to $15,000.

Here’s an example:  Say in January 2018, you give your son $5,000, then another $5,000 in April 2018 and then a final $5,000 in December 2018.  You’ve reached the cap for your son in 2018, but in January 2019 you could give them another $5,000, subject to the 2019 annual gift tax exclusion (not currently known).

Gifts can also be in kind.  You can give stock, jewelry, or artwork for example tax-free as long as they don’t exceed $15,000.

If you’re married, you and your spouse each get an annual gift tax exclusion, so in the example above, your son could receive $30,000 in 2018.

The lifetime gift tax exemption is the total amount you can give away over your lifetime.  These gifts are also free from tax.  However, the total amount gifted over your lifetime will reduce the amount of exemption to protect your estate from estate tax at your death.

The good news is the estate tax exemption has been indexed to inflation as of 2013, which means it increases each year.  Additionally, the Tax Cuts and Jobs Act, passed at the end of 2017, raises the exemption per spouse to $11.18 million in 2018.  This is indeed a good problem to have.

Gifting is part of the estate planning process for certain individuals who are either concerned about taxes on their estate or want to help family members financially without incurring tax.  Provisions in a living trust and powers of attorney often discuss taxes and the ability of trustees and/or powers of attorney to reduce taxes owed.

If you’re interested in gifting always remember that these opportunities require compliance with IRS regulations, including special filings.  You should always obtain professional advice from a CPA or a tax attorney before considering gifting.

Oscar Nominated Film Highlights Guardianship Issue…

Oscar Nominated Film Highlights Guardianship Issue…

OSCAR NOMINATED FILM HIGHLIGHTS ISSUES FOR GUARDIANS AND TRUSTEES

            The movie “Manchester By the Sea” recently garnered an Oscar award for Casey Affleck, who won “Best Actor”.  In the movie, he plays a man dealing with the loss of his older brother who soon discovers he is the backup guardian and trustee for his nephew.  The guardianship in the issue mainly plays in the background but it highlights what I consider to be a common issue for people who’ve lost a loved one and are suddenly thrust into the role of taking care of legal affairs for the deceased.

The struggles of Affleck in the movie are familiar ones for people who’ve been in that position.  His character is shocked to be in charge, never actually expecting to serve as guardian and trustee.  He struggles immediately to straddle the line between the unfamiliar role of assertive father to his nephew while also trying to find middle ground between the needs of the nephew and his own life.  In particular, Affleck struggles with the prospect of relocating his life back to a place that he left for good reason, all in service of his brother’s wishes.

He struggles with the emotional details of arranging the funeral of his departed brother, including having to delay the burial because it’s the middle of winter.  He has to delay his own grieving process to assist the nephew with his.

It’s actually these struggles that make the movie so moving and well done.

I rarely find myself impressed with how Hollywood portrays legal issues on screen.  From the imaginary fiction that the death of every person require a dramatic reading of their will at a cramped law office to the ridiculously dingy and dim lighting of New York city courts in “Law and Order”, Hollywood mostly fails to find a middle ground between reality and fantasy in its portrayal of legal matters.

This movie is different in that respect.  It captures the essence of the pain of dealing with death, from the obvious standpoint of emotion but also with the pesky details that have to be covered when it happens.

In my own practice, the reality of how my clients choose people to be in charge of their estate plan often takes quite a bit of time with clients.  Part of that reality is a suggestion from me that my clients actually talk to the people that they name as guardians, powers of attorney, trustees and executors.  Seems like common sense but it’s surprising that often people don’t discuss these matters.

Is that a role the chosen person will actually fill if necessary?  Do they have a life now that would allow for time to be effective if they were suddenly the legal guardians of your children?  Are they being chosen just because they’re a relative and nearby?  Are they too old already to serve if the time to serve was a decade away?  Do your children have a close relationship with the person you chose or is it just you that is close to that person?

I will give away one secret about the movie:  Casey is a better actor than his brother.

 

 

The Future Of Retirement and The Importance Of The Revocable Trust

The Future Of Retirement and The Importance Of The Revocable Trust

The Future Of Retirement and The Importance Of The Revocable Trust

As an estate planning attorney, I have had an interesting viewpoint of how the Great Recession affected my estate planning clients. Over the last two or three years, I have noticed a consistent worry of clients during initial conferences. They seem to be more worried in some cases about their children’s ability to retire than their own.

It makes sense. The Great Recession had far reaching effects on our country’s economy and some of those effect are still being felt today. But those with investments, they have not only recovered their nest egg but since increased the size of it handsomely as the stock market has reached all time highs. Retirement age parents, however, are concerned about their children’s student loan debt, costs of housing, delayed family creation and just generally about their well being when they are gone.

I met with a client couple recently who told me that each of their children had graduate degrees from prestigious schools and were now out in the world. One found a job pretty quick since he is in software engineering, but is getting crushed by a $1,500 per month condo rental, plus $1,500 per month in student loans (for the next 30 years). The other child had graduated last year, could not find a job in our area in her chosen field (computer science) and had taken a job as an office assistant at a company in St. Louis. She lives with them.

Each of them told me that they had started watching their spending habits so that they could leave as much of an inheritance to their children as possible, despite their terrific educations and work habits. This is a sea change in estate planning for those with a decent amount of assets to leave to their children.  So what I recommended at the end of our initial conference was a living trust whereby they would each act as the trustees and then when the second spouse had passed away, a successor trustee would take over. In their case, that successor trustee was not their children but a younger brother of the husband.

When the second spouse dies, unlike is often the case in traditional revocable trust planning, the children will not inherit everything. The younger brother will manage the trust for a set number of years at which time the 50/50 split inheritance of each child would be distributed outright. That will be a considerable some based on the couple’s current assets. But the beauty of this delayed distribution is that since the inheritance of each child will not immediately be received it can be invested and grow.

In other words, we are creating a retirement plan for the children via their inheritance. Bills of the children can still be paid as a supplement by the trustee, but the principal remains invested. So upon the death of the second spouse, the balance of any student loans could be paid off but the significant money left can continue to grow. Meanwhile, since the kids have careers starting, they can continue to save for retirement themselves as well. If the inheritance was given to them right away, that may not be the case. The plan we created ensures the kids will have the best of both worlds: A retirement source via inheritance, which will grow from the delay of distribution and the retirement they create for themselves, which should be easier through the assistance of at least some of their bills being paid as needed by the trustee of the revocable trust.

As an aside, I am not a financial advisor but one significant way retirement planning has changed and will continue to change is the loss of guaranteed income. Pensions are largely a thing of the past and workers have to invest more into building a larger nest egg so that they can replace that lost pension check, if necessary, with a draw from the nest egg itself. Many of my clients still enjoy significantly high incomes from combined pensions and Social Security. This can leave their nest egg largely intact. However, their risk tolerance is much lower than someone like their children. This again reinforces the beauty of the plan I outlined above.

Prince Has Died: What About His Estate?

Prince Has Died: What About His Estate?

Purple Rain

PRINCE HAS DIED:  WHAT ABOUT HIS ESTATE?

As we all know by now, legendary musician Prince unexpectedly passed away recently at 58.  While the circumstances of his death are unclear, what is also unclear is who will get his estate, whether he had a will or a trust set up and the particulars of who will be in charge of what has been estimated to be a $300 million estate.

Most celebrities are surrounded by a team of professionals looking out for their best interests.  In the case of legal matters, Prince undoubtedly had a trusted lawyer to assist him with legal matters.  Part of the advice I would have given Prince some time ago would be to get his affairs in order, to get an estate plan.  That would have been an easy recommendation considering his age, wealth and the fact that he was not married.

Since he died living in Minnesota, the laws of that state will largely govern the administration of his estate.  If he died without a will, that could be a big deal, because the intestacy laws of the state would control and Minnesota allows half-relatives to inherit.  He was married and divorced but, as in most states, ex-spouses do not inherit in a situation where there is a will and only inherit if a will specifically states that they do.

Most people close to Prince knew him as a smart man who was very aware of his circumstances and that weighs in favor of him having created an estate plan.

If Prince created a trust, then the trust would name a trustee in charge of all the assets held by it.  It would also name beneficiaries to receive property and that could be right away or over time.   Prince was also known to be a philanthropic person, so it’s possible he left funds for the creation of a foundation or several foundations for issues close to his heart.  When people create a will they can also leave money directly to a charity or to a church either as a specific bequest (the “Little Red Corvette” for example) or as a general bequest (a set amount of money).

If Prince did create a trust or several trusts, were they funded with his assets?  This is yet another issue.  Funding a trust requires that titled assets like accounts, homes, vehicles, stocks and life insurance be set up so that the trust either becomes the owner right away or becomes the owner at death through payable on death and transfer on death beneficiary designations.

Another issue for his estate would be estate taxes.   Unfortunately, Minnesota (unlike Missouri – hooray!) has an estate tax which appears to kick in after an asset exemption of nearly $2 million dollars at a top rate of 16%.  Since I am not a Minnesota licensed attorney, I can’t talk too much about that, but needless to say, the state will likely pick up a large check from Prince’s estate.

On a federal level, the estate tax exclusion for an individual dying in 2016 is $5.45 million (up $20,000 over 2015).  The tax owed will depend on what estate tax planning if any he put in place, but the estate tax rate is 40% based on the expected size of his estate.  That means 40% over the exempt amount of $5.45 million could go to Uncle Sam.  Wow.

Don’t feel too bad for Prince’s heirs and beneficiaries.  That still leaves several hundred million dollars for their benefit.  That amount doesn’t include the future value of his music which potentially could double or even triple the value of his estate.   How the federal government and the state of Minnesota value these assets for estate and inheritance tax purposes might be the subject of litigation and more complexity.

As an estate planning practitioner (and admitted fan of Prince’s early work) it should be interesting to see what happens on this subject in the next several months.  Hopefully, Prince, like anyone reading this, planned ahead.

Serving As Trustee of A Trust? Not As Easy As It Looks!

Serving As Trustee of A Trust? Not As Easy As It Looks!

SERVING AS A TRUSTEE OF A TRUST:  NOT AS EASY AS IT LOOKS

One of the services provided by Legacy Law Center is trust administration.  When a person passes away with a living trust (or other type of trust) in place, the assets in the trust must be administered, i.e. managed and/or distributed according to the terms of the trust document.

Serving as a trustee sounds like a glamorous position.  You’re in charge of money and you have a lot of power over that money, right?  Well, it’s not that simple.  For starters, a trustee is a fiduciary.  A fiduciary is a person who has the power and duty to act on behalf of another person (usually referred to as a “beneficiary”) under circumstances that require total trust, good faith and honesty.   A fiduciary must avoid self-dealing (buying trust property themselves at a discount for example) and must avoid conflict on interests.

Here’s where things get tough for most trustees.  They are in charge of a trust in which they are likely a beneficiary and other family members are beneficiaries as well.  Even in the best of families, one person in charge of significant assets is going to create circumstances in which the trustee’s moves and motives are questioned at every turn.

“Why was Mom and Dad’s home sold and not kept?”

“That accountant the trustee hired is too expensive, they should have used my accountant. “

“The trustee is using trust assets for himself.”

“What happened to Uncle Dave’s fabulous gun collection?  Everything just disappeared.”

Rest assured, in most family trusts, once the assets are in control of the trustee, the worst assumptions and second guessing will begin.  In some families it starts on the day of the funeral.  If the trustee lets things fester, trust litigation can develop.

I’ve seen circumstances where the trustee could not take the emotional toll that the role put on them.  They were desperate for my firm to help.   Hiring a trust attorney to assist in the administration of the trust can create a firewall between the trustee and beneficiary while ensuring the trustee carries out their duties effectively.  For example, in the situation where the beneficiaries are already doubting the moves of the trustee even before they have the assets in their control, the trust attorney can send out a letter stating that the beneficiaries are welcome to contact the firm for updates but that updates will come via letter once they are necessary.  A letter from the attorney outlining the timeline for resolution of the trust is often a good way to set expectations.  When that letter comes from the trustee, second guessing can only worsen.

Our firm does not draft trusts without a no-contest provision which states that any beneficiary who files a lawsuit contesting the trust potentially loses their inheritance for doing so.  Now, there are exceptions to these provisions, but courts will uphold them on the belief that if the grantor of the trust (the creator of it) wanted that provision, they meant for it to be enforced.

Remember this as well:  The trustee in most trust situations does not have to rush through the process of identifying assets and distributing them.  That’s a competing problem for a trustee because working too fast can lead to mistakes and a fiduciary that makes mistakes can be personally liable. 

Ultimately, the best move a trustee can often make is to utilize the provision in the trust allowing them to hire professionals to handle the investing of trust assets (financial advisor), to account for them (CPA) and to deal with the legal issues of the trust (attorney).  Once these professionals are hired, a trustee will often find that the mob puts down their pitchforks, that a path with an end in sight develops and that they handle their duties more effectively and efficiently.

One more thing:  We always remind our trustees that they were chosen for a reason and their crazy brother and angry sister were passed over as trustee for a reason.   You were the one chosen because you were the most dependable.