July – August 2012

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Estate Planner Cocktail Party ChatterSummary: Have you tried a “Nerdz” – 1/3 oz Three Olives® grape vodka, 1/3 oz sweet and sour mix
1/3 oz DeKuyper® Watermelon Pucker schnapps. Pour, shake and strain……enjoy at, where else but a cocktail party of estate planners (yawwwwn)! If you worked the floor with drink in hand, here’s some of the chatter you’d hear:

■ Hug Your Appraiser: The Tax Court denied a real estate developer’s charitable contribution deduction for $18.5 million worth of properties donated to a charitable remainder unitrust (CRUT). Although the Court acknowledged that the donations were made, and speculated that his self-appraisals actually undervalued the real estate, the deductions were denied because he failed to satisfy the substantiation requirements under Code Sec. 170 the Regs. Mohamed, TC Memo 2012-152. Lot’s of folks making donations or gifts get cheap on the appraisals. This case is a painful lesson that the dough spent on a good appraisal may well prove money well spent.
■ Cleaver Family Harmony”: While the folks might believe (perhaps justifiably so) that one child has greater financial needs then the others, leaving more to that child, however justified, might just leave a legacy of anger for all. Another approach would be to have a family meeting, with or without advisers, and discuss the issues and concerns openly. Things are often different than the folks perceive. And surprisingly, if given the opportunity some siblings may step up to the plate to help another if asked to do so. That can be a far better result than a surreptitious unequal distribution plan. If the focus can be shifted from something being an individual’s issue, to a collective family matter, more harmonious solutions may become feasible. Thanks to David Schechner, Esq. West Orange, NJ.
■ “Talk to Lori”: Instead of “Talking to Chuck” try “Talking to Lori.” Sometimes it’s the simple ideas that have so much impact on getting planning going. “Change the perspective and conversation at life transition Points” and “Plan proactively not only defensively.” Example: Before marriage, a prenuptial agreement is common. But the focus of the conversation is usually negative, i.e., on the marriage not working out. Reframe the talk to a positive perspective of how overall planning during their marriage will be handled, gift tax planning to benefit both parties, integrating asset protection considerations into the prenup, and planning for your new life; and so forth. Change the conversation and enhance the result. [Thanks to Lori Sackler of Morgan Stanley-Smith Barney, Paramus, NJ.
■ Deed Transfers: In spite of portability many spouses still should re-title assets to fund a bypass trust on the first death. Can the lender call the mortgage? Depends on state law. Section 341 of the Garn-St. Germain Act of 1982 prohibits a lender from exercising its option pursuant to a due-on-sale clause upon a transfer where the spouse of the borrower becomes an owner of the property. Thanks to James Costello, Esq. Bridgewater NJ.
■ Better ILIT: You remember new and improved Tide, well why not new and improved ILITs (irrevocable life insurance trust)? Why set up an ILIT in a boring state like NJ or NY for example, when you can set it up in a zippy state like Delaware, Alaska, etc.? If you can get the cost of using an institutional trustee down to a modest enough level, taking advantage of better state law might be well worthwhile. Consider the following advantages an Alaska ILIT might afford: ◙ Very low life insurance premium tax (10bps); ◙ The trust can be a self-settled trust that includes the grantor as a discretionary beneficiary PLR 200944002; ◙ No rule against perpetuities so the trust can last forever; ◙ No state income tax. This may be academic today, but if the insured dies and the trust hold substantial funds to invest, it can be a biggie. Thanks to Matthew Blattmachr, CFP® Alaska Trust Company.
■ Clawback: If you make a $5.12M gift today and in 2013 we end up with a $1M exemption, will the $4.12M excess gift be clawed back into your estate triggering an estate tax? Bright estate tax minds take opposite views as to whether this is “to be or not to be.” Bottom line, that is not the question. In most conceivable cases, gift planning should still be pursued ‘cause lifetime gifts may outweigh the risks of clawback: ◙ lock in discounts that may be repealed, ◙ remove post-gift appreciation from your estate, ◙ grandfather grantor trust and GST allocations to a done trust, etc. Nevertheless work the numbers, consider the risks, try to evaluate who will bear the clawback tax if it happens (not easy!). State tax apportionment laws may not address this if the will is silent. Will taxpayers really pay their lawyers to go through these hypothetical mental gymnastics and draft more complex clauses? They should. But they should also floss daily.
■ Death Bed Planning: ◙ If you have highly appreciated assets in a grantor trust (an irrevocable trust you give assets to but on which you continue to pay the income tax), and the trust used a power of substitution to achieve grantor trust status. This permits you to swap say cash for appreciated assets inside the trust of equivalent value. This technique can bring those assets back into your estate and let them get a basis step up on death. Help your heirs avoid the higher capital gains the folks in Washington keep threatening. ◙ If there is no swap power it the irrevocable trust you set up there is another way to skin the cat (isn’t that an awful saying!). Buy the appreciated assets from the trust. This purchase will similarly be ignored for income tax purposes. Rev. Rul. 85-13. ◙ If you live in a decoupled state (e.g., NY, NJ) you can make a death bed gift and save state estate tax. But Goldilocks, check the gift provision in your durable power of attorney – some are too cold and prohibit gifts, some are too hot and limit gifts to the annual gift exemption, but some have a power that is just right. ◙ What if you only have appreciated assets in your name (gee I wish my portfolio looked like that!) and worry that a death bed gift will saddle your kids with a bigger capital gains tax then the state estate tax saving you’ll realize? Take a smarter route – margin your securities account and gift the borrowed cash (but make sure the check clears before death). The debt should reduce the size of your estate, but the appreciated securities will be in your name and get the step up in tax basis to reduce the capital gains your heirs would otherwise pay.
■ Power Roth’ing Your IRA – Make sure your durable power of attorney affords your agent the right to convert your IRA to a Roth. If you’re on your death bed a conversion will trigger income tax due the payment of which might reduce your estate for estate tax purposes, and may even push your estate below the threshold to file a return (but lots of estates should file a federal estate tax return anyway to secure portability for their surviving spouse). If you recover, you can recharacterize your Roth back to a regular IRA and avoid the tax. But if your power of attorney doesn’t expressly permit Roth’ing and recharacterization, the general language in your power might not suffice.
■ Home Sweet Home: Home ownership use to be a given. Now planners are evaluating the pros/cons and helping clients determine if renting is a better economic deal than owning. Just ‘cause appreciation may not be likely doesn’t mean renting wins the day. Consider other benefits of owning: ◙ You can improve your home for medical reasons and deduct all costs as a medical expense. ◙ If you’re wealthy you can use a Qualified Personal Residence Trust (QPRT) to shift value in a very advantageous way to kids. ◙ $250,000/$500,000 home sale exclusion. ◙ Meet the home office requirements and you can use a room as an office and take a tax deduction. ◙ Home ownership in many states benefit from special laws that afford valuable asset protection that is cheaply and simply obtained. Example: If a husband and wife own a home together as tenants by the entirety a claimant of one spouse cannot force the sale. ◙ The legal, tax and other benefits of home ownership can be significant.
■ Big Apple Takes a Bite out of Nonresident Partners: Arizona residents were partners in a partnership that owned hotels in New York. The partnership sold New York properties and apportioned the entire gain using the three-factor apportionment formula. NY recently held that the gains from the sale of New York real estate were not apportionable using the three-factor formula. Rather the gain should be considered as entirely allocable to New York since the properties were in NY.
■ 2012 Two-Step: As the 2012 year draws to a close clients will be coming out of the woodwork realizing gee maybe I should do something. But as we get nearer the end of the year timing presents unique planning issues. For example, what will we (the client and the planners) still have time to do? What if there is no time for an appraisal? Do you really want to wing it on a guesstimate relying on defined value clause? What if really late in the year the trust company cannot open a new trust account in time? What do time constraints do to how you would structure funding an LLC and gifts to a trust? Would you, or must you, opt for non-trust gifts (e.g., gifts of LLC interest direct to a child) thereby losing any GST benefits and the trust asset protection benefits? What happens if you try to set up a trust in say NJ and later shift it to Delaware to get advantage of Delaware law? What issues does that create? How should practitioners try to protect themselves from the added risk and complexity near year end transactions may present? Act now.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Shaft-ed

Summary: Elder financial abuse is a misnomer. It is a much broader issue. Seems that a growing number of people, especially anyone with any type of vulnerability (age, health, other stress, lack of sophistication) are being taken advantage of. Here’s what Isaac Hayes sang about not getting the Shaft:

√ Team Effort: Who’s the cat that won’t cop out When there’s danger all about? SHAFT!
Have a coordinate estate planning team. If your CPA, attorney, insurance consultant and wealth manager are from independent firms and all look over each other’s shoulders, there is a much lower likelihood of you getting the shaft. Can you dig it?
√ Understand: You don’t need to understand the esoteric nuances of a GST allocation but you do need to understand the big picture of all your planning and documents. Even the most exotic planning idea can be explained in broad terms. If the stuff is complicated, get other advisers or family involved. No shame in getting help. Big risk in someone drafting something you sign that you truly don’t understand. Example: Most good wealth managers have some knowledge in their shops about estate planning. Similarly, most CPAs have some background as well, while many have considerable expertise. Include them in the estate planning discussions to assure that your wishes are really being implemented.
√ Oversight: Checks and balances are critical. There’s lots of ways to build them into your planning. Have duplicate monthly statements sent to a trusted family member or better yet your CPA. Ideally have the recipient log information into a computer bookkeeping program to generate reports that can be reviewed to identify unusual items. Use an institutional co-trustee on trusts.
√ Be a Detective: Private eye John Shaft asked lots of questions. So should you. Be alert for anything out of the ordinary. Often when something doesn’t seem right, it isn’t! Is one of your advisors being unusually solicitous? Are there inconsistencies in recommendation a particular adviser is making? Has a nice or nephew that you haven’t heard from in years suddenly resurfaced without logical reason? Has an “investment” adviser made recommendations without looking at your overall financial situation? Does someone selling you a product get uncomfortable if you ask how they are compensated, or if you request that another adviser review the proposal? When a planning technique or product has a unique or trademarked name, or combines several different products or techniques into one, especially if it is complicated to decipher the component parts, be wary. It’s a bit like dieting, gotta eat less and exercise more, most of the rest if fluff. Financial and estate planning requires a budget, estate planning documents, investment allocation, appropriate insurance coverage, etc. Anyone recommending esoteric slick sounding stuff before the basics are in place, is not looking out for you. The investment product with a high guaranteed return is as real as the muffin with no fat, sugar or calories.
√ But That’s What the Client Wanted: Perhaps the biggest excuse professionals use for taking actions that may be inappropriate. Professionals should make sure that the steps a client requests are rationale and reasonable and not blindly follow requests made under stress or when in emotional pain. Clients should encourage their advisers to challenge them. A “yes man” might be good for the go but not for much else. Encourage your advisory team to engage in discussions and to advocate for different options. Meaningful evaluation of different views will lead to better decisions. If you tell your attorney to disinherit your son, she might simply do so. A better attorney will engage you to understand the underlying reasons and propose possible alternative solutions that may better meet your objectives.
√ Simplify and Organize: Get bills on auto-pay and deposits made automatically. Not only is it harder to miss something, but the more automatic the less opportunity for the bad guys to dig in. Consolidate accounts, less is more. The less accounts the easier to keep track of your assets. Use a P.O. box to minimize the risks of someone snagging your mail. Get credit reports from the major bureaus and review them for anomalies.
√ Checks and Balances: How do you protect a client who is aging from elder financial abuse, or a client that is so busy they cannot keep tabs on all the details of their financial life. There are so many problems that can affect clients. Some ideas might include: ◙ duplicate copies of monthly statements to your independent CPA (it’s not only the funds under management, but checking accounts and other accounts); ◙ Appoint a monitor under the power of attorney; ◙ Use co-trustees instead of one trustee; ◙ Have annual meetings of all advisers so that there are checks and balances on advisers; ◙ Any adviser that doesn’t encourage others to review his or her work deserves suspicion; ◙

√ Checks and Balances: Have a care manager meet you in your home and complete an independent evaluation periodically. Abuse of those who are elderly or vulnerable is common, growing and usually undetected.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Florida Trust Change: Non-probate and non-trust assets of divorced couples (e.g.) insurance, annuity, and retirement plan beneficiary designations, and transfer on death accounts). A final judgment of dissolution (i.e., the divorce) will treat the ex-spouse as predeceased if the client failed to change the beneficiary designation after the divorce. Anyone who is divorced in Florida must carefully evaluate the ownership (title) to accounts and beneficiary designations post divorce. If an ex-spouse was to remain a beneficiary of a particular account or assets be certain to review with Florida counsel what steps to take to secure that result in light of the new law. Thanks to Jeffrey A. Baskies, Boca Raton, FL. An important lesson of this development is for those living in states that don’t have this Florida type of law. If you divorce and don’t revise your beneficiary designations, your ex-spouse may remain your heir regardless of what you agreed in the divorce agreement because. So the really real lesson of this Florida law change is a reminder to everyone to be sure your planners periodically review all of your beneficiary designations and title to your accounts to make sure they are consistent with your goals.
■ Same Sex Couples: A surviving same-sex spouse pursued victoriously a constitutional challenge to Section 3 of the Defense of Marriage Act (DOMA), which denies recognition of same-sex marriages for purposes of Federal law. The court found that the provision violated the Equal Protection clause of the Constitution and allowed a marital. Edith Schlain Windsor v. U.S. (DC NY 6/6/2012) 109 AFTR 2d ¶ 2012-870.
■ Basis Adjustment: A partnership was granted a 120-day extension of time in which to file a basis election under Code Sec. 754 to adjust basis. When a FLP or LLC interest is sold or a member/partner dies be sure your CPA looks into this. While the IRS was lenient in this case its not the position you want to be in. The IRS found that the failure to file the election resulted from “inadvertence” and the partnership acted reasonably and in good faith. PLR 201222012.

Potpourri ½ Page:

■ Whimpy Wandry Appraisals: Post-Wandry might taxpayers use a defined value clause and be less concerned about the quality of their appraisals then the price?
■ Post-Death LLC Planning: A sale of a minority member’s interest or the death of a member will close the partnership (an FLP or LLC taxed as a partnership) tax year as to the transferor but not terminate the partnership. Allocations to the transferor member can be determined by: ■ an interim closing of the partnership books. ■ by the proration of annual income, ■ or any other “reasonable” method. If the operating or partnership agreement specifies an approach that is what you must use. If not, have a sharp CPA evaluate the tax impact of each alternative and see what nets the best tax result for the family. In 2013 if we get a 3.9% Medicaid tax the spread from higher to lower bracket family members (including say a deceased parent’s estate) may net a few tax dividends. Without a provision in the governing agreement there could be abuse. A departing member could be allocated much more income than expected. Say for example there is a taxable loss from operations up to the date of death (or the date of a buy-out). If the remainder of the year is very profitable using the days allocation method can have an adverse result for the deceased (selling) partner/member. Most taxpayers would opt for a closing of the books to avoid surprises but in the family context there could be creative post-mortem advantages for not addressing this in the governing agreement and instead leaving it to the family to pick the optimal approach after the fact. The problem is that it could backfire on certain beneficiaries. Thanks to Ira Herman, CPA – JH Cohn, Roseland, NJ.

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