Charitable Easements Should Reflect the Charitable Intent of the Donor

I think that conservation and façade easements are a great idea, but only if you have a sincere desire to help protect your property from being changed. The cases over the last few years show that they are probably overrated as a freebie tax deduction.

Sometimes you can have your cake and eat it too. When it comes to conservation and façade easements, however, this is no easy task.  It is only the lucky few who can make such an easement work – cake, frosting, and healthy charitable deduction all in one.

Easements are often touted as the “two-birds with one stone approach,” and not without good reason. Unfortunately, that is not always the case as a few planners have discovered when trying to “force” an easement when it really is not appropriate. In fact, this has landed more than a few planners in a tight spot.

Consider the case of Lawrence and Lorna Graev and their agreement with the National Architectural Trust, as covered in a recent Forbes article titled “Side Agreement Voids Easement Charitable Deduction” (guess what they did wrong).

You see, easements are a gift to a charity in the form of forsaken economic potential. Basically, you give a property to charity for some charitable purpose – love of earth, love of architecture, love of history. Since you may have thereby sacrificed potential  economic gain (and frequently large potentially considerable) were you to have sold it on the market, you may be entitled to considerable charitable deductions in return. For example, the difference between what you would have sold prime real estate to McDonalds instead of giving it to charity?

To simplify a complex equation, the charitable deduction is the fair market value of an easement.  The fair market value of the easement is equal to the difference between the fair market value of the property before the granting of the easement and the fair market value of the property after the granting of the easement. Accordingly, this means there are always at least two very large but ambiguous values over which a taxpayer and the IRS have to quibble.

The quibbling does not always go well for taxpayers, especially those who thought they had their cake and were about to eat it, too.  Such was the case of the Graevs and the National Architectural Trust. The original article is instructive for anyone contemplating a charitable easement. Suffice it to say this is a complex area of tax law and appropriate legal advice should be sought before entering into such a giving program.

In summary, there truly are those easements that offer the best of both worlds (your cake and the ability to eat it too) because a wonderful gift to charity begets a wonderful charitable tax deduction. That said, it is not always the case and being “tricky” does not always go unnoticed.

Reference: Forbes (July 15, 2013) “Side Agreement Voids Easement Charitable Deduction

Baby Boomer Retirees’ Inheritance Requires Careful Thinking

For those retirees who had not planned on receiving an inheritance or are happily surprised at the amount they receive, it’s time to reassess your retirement goals and needs. Certainly this newfound money allows you to enhance your standard of living, but it also gives you the ability to accomplish other retirement goals.

Some people are just too young to be receiving inheritances. After all, a young person might not know what to do with it. Of course, young inheritors are not the only ones who cannot handle a sudden inheritance. Can you say “baby boomers”?

The baby boomer generation is set to receive unprecedented inheritances in the coming years. Do baby boomers and retirees know what to do with their inheritances? Not always, but there is time to learn.

The subject of inheritance in retirement was considered in a recent MarketWatch article titled “When retirees inherit; tips for newfound wealth.” The article provides some basic pointers to get you started.

For the most part, this issue is simply a case of social reversal. Historically, retirees and inheritors have historically held very separate roles. Retirees planned inheritances for their heirs, but they were not themselves heirs!

With age and population groups moving through time as they are today, baby boomers are about to receive the greatest generational wealth transfer in recent history.  Some estimate this transfer at $27 Trillion dollars.   The essential nugget of wisdom to glean from the original article, however, is, if you are the recipient of an inheritance, force yourself to a calm moment and careful planning.

Retirees have less time to make the best of an inheritance. Nevertheless, many retirees are facing some very difficult financial decisions themselves. Long-term care and future health care costs are good for starters.  The receipt of inheritance could effect your eligibility for Medicare and other government benefits.  Qualification for Medicaid in Utah is limited to those having $2,000 in assets and $2,000 per month in income.  Using the inheritance correctly and wisely is the key.

So, if you are only holding the inheritance for a short time yourself, what does that mean for your existing estate plans? This unprecedented wealth transfer has the potential to be a blessing or a curse. Are you ready?

Reference: MarketWatch (July 16, 2013) “When retirees inherit; tips for newfound wealth

The Soprano’s Estate in the Public Eye

Tony Soprano may have been an expert at hiding his money from the feds, but actor James Gandolfini, the recently deceased actor who portrayed the fictional New Jersey mob boss on TV, apparently was not. Moreover, advisors say that wealthy families can take some lessons from the mistakes the award-winning actor made in mapping out his estate plan.

As you may have heard, TV star and man of not inconsiderable wealth, James Gandolfini, recently and suddenly passed away. He left behind both shock at his passing and shock at the state of his estate.

Indeed, few estate plans in recent years, celebrity or otherwise, have received such biting criticism as that of Mr. Gandolfini. What happened? More to the point, what should have been done?

The reviews of Gandolfini’s estate planning have captured as much airtime as the unfortunate news of his passing. In turn, this has prompted more than a few editorials and guides arm-chair-quarterbacking his estate plan (or lack thereof). Consider, for example, practical articles like Learning From Gandolfini’s Estate Plan ‘Disaster’” from Financial Adviser or “6 Estate Planning Lessons From James Gandolfini’s Will” from Forbes.

Why all of the attention? Aside from the celebrity value, the fact that the Will of Mr. Gandolfini had to be probated opened the door for speculation about the estate tax issues that could have been avoided.  The speculation by pundits about what could and could not have been done, itself could have been avoided by careful planning.

Is that the full story? According to fleeting words from Gandolfini’s estate planner as reported in The New York Times article titled “A Public Debate Over the Wisdom of Gandolfini’s Will,” there may be more in play.

All the same, there are few estates that so vividly portray the values (and value) of estate planning, either in the form of taxes saved or in simple terms of privacy. A fact lost on no commentator is that when the Gandolfini estate entered probate, the estate was bared to the prying eyes and opinions of the world.  This could have been avoided by trusts implemented to handle the estate without the world publicity.

Reference: The New York Times (July 19, 2013) “A Public Debate Over the Wisdom of Gandolfini’s Will

Financial Adviser (July 19, 2013) “Learning From Gandolfini’s Estate Plan ‘Disaster’

Forbes (July 20, 2013) “6 Estate Planning Lessons From James Gandolfini’s Will

Long Term Care Financing Options Narrowing – Solution: Creativity

It is a cruel paradox:  As the cost of long term care rises and the number of people needing it grows, traditional options for paying for these support services are narrowing.

The statistics are clear.  We know that 70% of people over the age of 65 will need long-term care (LTC) services at some point in their lives.  The real question is how to pay for those services.  A recent RAND Corp. study found that 15 percent of those over age 70 have dementia.  Long-term care costs are now over $200 billion annually. Costs for caring for dementia patients are projected to reach over a trillion dollars annually by 2030.

Forbes outlined the problem recently in an article entitled “Costs of Long-term Care Rise While Payment Options Narrow.”

The traditional methods for payment of long-term care expenses have been long-term care insurance, personal financial resources, reverse mortgages, and Medicaid.  Long-term care insurers are declining, the premium cost is increasing, the benefits are being reduced, and there are shorter benefit periods.    Medicaid, the insurer of last resort in many cases, faces significant challenges from Congress and state legislators.

Personal net worth is not keeping up with the increasing costs of medical care.  The Census Bureau indicates that the median net worth of households 65 in 2011 was $170,000 while the cost of medical care for a couple 65 years of age over their lifetime could be $200,000.  Couples over 65 should put aside an average of at least $60,000 to pay long-term care needs.

Reverse mortgages have their own set of problems.  For example, many such mortgages are due and payable when the homeowner dies or leaves their home for an extended period of time (for example when they leave for a residential care facility).  Additionally, loan standards are tightening, upfront fees are increasing and the amounts of money available from the proceeds of such loans are shrinking.

Do not despair, however.  Creativity in planning is the answer to long-term care financial needs.  For example, life-insurance may provide not only peace of mind for your heirs on your death but a tool to finance to your long-term care needs during your lifetime. Your estate planning team should be able to work on the problem with you.  In addition to your financial advisor, and your insurance advisor, you need an attorney experienced in the issues of long-term care who can help you coordinate all of the alternative methods to finance your long term care.  Clearly, planning for your potential long-term care should be done early and carefully.  Crisis planning only limits your options and creativity.

Reference:  Forbes – (July 17, 2013)“Costs of Long-term Care Rise While Payment Options Narrow.”

Thinking Beyond Your Utah Last Will

If you also have an IRA, you probably named a beneficiary of that account on the custodian’s beneficiary form. The IRA beneficiary form decides who gets your IRA after your death; not your Will.

So, you prepared your Last Will and Testament. However, that does not mean your Will is the final word on the distribution of all of your assets. For instance, that common beneficiary form you may have completed without thinking through the consequences will govern your IRA likely.

Warning: do not designate your “estate” or “your revocable living trust” as the beneficiary of your IRA. This severely limits the distribution (and taxation) options available to your heirs. This matter was explored in a recent article in The Slott Report titled “IRAs and Wills Don’t Mix.

While your “estate” or your “revocable living trust” can be the beneficiary of your IRA and your Will or Trust thereafter determines the distribution of the retirement funds, this might not be best idea tax-wise. IRAs are very specific and peculiar assets with very specific inheritance rules. For example, you must begin distributions from your IRA in accordance with the Minimum Required Distribution Rules if you are older than 70 ½.  If your “estate” or your “revocable living trust” is the beneficiary of your IRA, then very “unfavorable” withdrawal rules may apply. Instead of the IRA being withdrawn over the life expectancy of the beneficiary (typically younger than the plan owner), the funds must be withdrawn within five years or perhaps over your remaining life expectancy. Yes, these rules can get very complex.

Make sure you consult with competent legal counsel when coordinating the distributions from your Last Will and from your IRA.

Reference: The Slott Report (July 29, 2013) “IRAs and Wills Don’t Mix

The Power Of Portability

One of the key provisions of ATRA is to make permanent the so-called portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Terms of art can be interesting, to say the least. You know, those arcane words with special meaning only to those in the daily business of using them. Take “portability,” for example. Outside of the American Tax Relief Act of 2012 (ATRA), this word may appropriately describe the movable nature of such things as jobsite restroom facilities or “boom boxes.”

While the concept of “portability” is not entirely new, it is a fairly important tax concept for all married couples.

In fact, a recent Forbes article titled “Estate Tax Portability – New Paradigm For Estate Planning” is a primer of sorts for couples still unfamiliar with the concept now become law. Simply put, with the advent of “portability,” most married persons do not need to worry about maximizing the estate/gift tax exemption of each spouse. Before ATRA, every one was given a one time unified credit against estate tax.  That credit would shelter varying amounts the individual’s estate from estate tax.  In the case of couples, however, a good estate plan had to craft special trusts and other estate planning devices to ensure the opportunity for the couple to take advantage of their combined unified credits.  Portability now allows a couple to pass the unused portion of the unified credit of the first spouse to die to the surviving spouse without the necessity of complex trusts or other devices.

Under ATRA the estate/gift tax exemption amount for each spouse is “portable” between spouses. Consequently, not only can the surviving spouse inherit all of the couple’s assets, but can inherit the exemption amount attributed to the deceased spouse. This “portability” benefit is not, however, automatic and what appears simple can become complex.

Utah still couples its estate tax to the Federal estate tax.  As a result, Utah has adopted the Federal “portable” unified credit. As a result, Utah estate tax has become irrelevant.

The surviving spouse is required to file the correct tax forms (i.e. IRS Form 706) to claim the unused estate/gift tax exemption of the deceased spouse. Fail to do the paperwork and you fail to get the benefit of portability.  Once again proper planning with an experienced estate planning attorney is critical.

Reference: Forbes (July 20, 2013) “Estate Tax Portability – New Paradigm For Estate Planning

Disinheritance in Utah- Considerations and Pitfalls

Inheritance disputes are as old as the Bible — see Jacob and Esau. But now a broad, deep wave of acrimony is hitting the U.S. as 76 million baby boomers, born after 1946, inherit estates or die. According to one study by MetLife, boomers stand to inherit upwards of $8.4 trillion.

Figuring out who should inherit what, and why, has been a difficult subject from generation to generation. However, the more difficult subject has been who ought not to inherit anything, and why. In fact, disinheritance is probably a far more difficult topic, both for those planning for their estates and for families living out the ramifications of an estate plan.

How is “disinheritance” difficult? What should you consider before disinheriting a family member? This subject was the focus of a recent article in Bloomberg titled “You Want to Cut Your Kid Out of Your Will. Or Do You?

For starters, there are some very good reasons to support a total disinheritance. Petty differences or outright malice aside, you may choose to disinherit heirs who are well off in their own right. Consequently, more of the inheritance can be left to those heirs who are less well off.

More commonly, however, disinheritance is used due to parental displeasure or lack of familial contact. Before you decide to disinherit, be sure you will not have a change of heart later.  If you subsequently change your mind about the disinheritance but you have suffered some disability that reduces your capacity to make a will, you may not be able to make those changes and the disinheritance will remain in effect.

Disinheritance of a family member in Utah requires that the disinheritance must appear from the will to be intentional.  If the testator has provided for the omitted family member by transfers outside of the will such transfers are evidence of the Testator’s intent to disinherit.

Beyond your own decisions are the consequences to each of your heirs. Will it change relationships between those who inherited and those who did not? It is important to evaluate the cause and effect of your decisions on all concerned.

As in most estate planning, flexibility in dealing with heirs is usually the best procedure.  An in-depth conversation about the issues of disinheritance will provide your attorney with information to provide suggestions for flexibility for your estate plan.

Reference: Bloomberg (July 23, 2013) “You Want to Cut Your Kid Out of Your Will. Or Do You?

How Does Your Utah Estate Plan Define “Family”?

Just as the courts are juggling with multiple definitions of family, so too are families today finding that theres no single “right answer.  Rather, they must ask the right questions and come up with answers that work for now and have enough flexibility for what the future might hold.

It’s funny: words have their ordinary, everyday usage but then when you commit them to writing – in a law, a contract, a will, a trust, and so on – words can become pretty tricky. While “marriage” as a legal term has been a hot topic as of late, by far the trickiest word in the estate planning lexicon is simply “family.”

The concept of “Family” in Utah is fundamental to its heritage.  We all have our own understanding of the concept of family.  The concept of “family” is usually essential to estate planning. The great majority of estate plans are all about family, so how could there be any ambiguity? WealthManagement tracks some of the practical problems in a recent article titled, “What is a Family?

You see, the problems with the definitions of family have less to do with federal or state law (unlike “marriage”) because it can be defined by the person actually planning his or her estate.

The original article discusses three different contexts and each only muddies the definitions of family. For example, consider a “family trust” established in 1910 to serve multiple generations. Did the person establishing such a trust foresee how the family would look like in 2013 after divorces, second marriages, children out of wedlock, same-sex partners and all other manners of contemporary occurrences?

What is a trustee of such a “family trust” to do?

Are we any better in imagining the future as we write our own estate plans today? If you think about it, even without considering the social mores matters, there are potential family problems whenever a trust lasts for multiple generations. After all, with every generation that comes along the number of potential beneficiaries that comes along tends to grow exponentially. Over time, each generation is less related and less connected to the others and the original maker of the trust.

All of this highlights the importance of working with an experienced estate planning attorney.

So what is “family” to you and is that what your documents say in their black and white?

Reference: (June 28, 2013) “What is a Family?

So, What Will Be Your Legacy?

Your legacy is putting your stamp on the future. It’s a way to make some meaning of your existence: “Yes, world of the future, I was here. Here’s my contribution, here’s why I hope my life mattered.”

Much of our lives are spent in the pursuit of wealth so that we can provide for our families, enjoy the “good life”, and provide something for our heirs. Sometimes it can be easy to see the trees, but miss the forest. This is true when it comes to planning for your estate.

You can get mired in the tax laws, the tricks and the tools, and even some petty family squabbling. Then again, there are those planners who find direction in an old axiom: “Don’t just leave an estate. Leave a legacy.”

An estate is just so much stuff, figuratively or literally. However, a legacy is so much more. As in the movie “Pay It Forward”, we have a chance to make our own world better by leaving our own mark on the world, even if it is by small random acts of kindest.  Whether a beloved memory with your family or even a contribution to those around you, leave a “legacy”.

When you are considering this notion of your “legacy,” take time to think through what you are trying to achieve.

So how do you work out your legacy?

Fortunately, there is some help in a recent article in Forbes titled 4 Smart Ways To Leave A Legacy”.

Certainly, there is no one way to leave a legacy, or even a single way to guarantee it.

In the end, it is your call when it comes to the legacy you wish to leave. Nonetheless, leave a legacy, not just your money.

Reference: Forbes (August 1, 2013) “4 Smart Ways To Leave A Legacy

GRATs Can Be Great for Utah’s High Net Worth Individuals

In a low interest rate environment, a grantor retained annuity trust (GRAT) can serve as a powerful estate planning tool to allow … high net worth [individuals] to transfer assets with minimal—and in some cases zero—tax liability.

GRATs are still pretty great, but we might have to act soon! The law and the market conditions that give Grantor Retained Annuity Trusts (GRATs) their power are still favorable. However, as a recent ThinkAdvisor article warns, “The Clock Is Ticking on GRATs.

As we all know, since 2008, interest rates have been low to nonexistent.  These low interest rates provide  a perfect environment for estate tax planning with GRATs. They thrive in a low interest rate environment where so many other plans languish. Briefly, the GRAT works by allowing the grantor to put assets into the trust which then continues to provide regular annuity payments to the grantor for life or for a term of years. Eventually, at the expiration of those annuity payments, the remainder interest in the GRAT passes to the trust beneficiaries, ususally the beneficiaries of the Trustor.

The taxable gift value of the reminder interest is determined, in part, by the current month’s “applicable federal (interest) rate” (or either of the previous two months, if lower) for the month the trust is funded. Accordingly, a great time to implement a GRAT is when such interest rates are low (and especially if the rate is expected to climb). The value of the assets in the trust simply needs to outperform the low rate you have locked in for the maximum benefit.

While there are many complicated ways to make a GRAT do even more wonders, especially for highly appreciated assets, but there are at least two easy ways to ruin them.

First, do not die. Seriously, the grantor must outlive the annuity term of the trust. Until the annuity term ends, the assets are “grantor retained” and will wind up counting as part of the grantor’s estate and taxed as such. For this reason GRATs are commonly created with a shorter term than the life expectancy of the grantor.

Second, do not procrastinate. As long as there is a sitting Congress and a president in the White House, no tax planning is safe. In fact, more than a few proposals have been advanced to limit GRATs. Even though existing GRATs almost certainly would be grandfathered, why take that risk?

Bottom line: If you are considering a GRAT, this may be the perfect window to proceed in earnest.

Reference: ThinkAdvisor (July 29, 2013) “The Clock Is Ticking on GRATs