November – December 2014

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
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Lead Article Title: Estate Planning MistakesSummary: While estate planning might be one of the most important financial steps anyone can take, it just doesn’t make it to the front burner for many. The result is that most estate plans suffer from a host of shortcomings. Here are some of the common mistakes made in estate planning. Some of these are quite simple and apply to all wealth and age ranges, others are more specific. Call any of your advisers and make a New Year’s resolution to protect yourself and your loved ones by address whatever mistakes that are on your list.
■Mistake #1: “Do what?” The number one mistake is easy and obvious – people don’t address estate planning. The consequences: family fights, significant probate costs, the wrong people inheriting, avoidable tax costs, and more. ■Why do so many people avoid dealing with estate planning? Likely the unpleasantness of dealing with issues is an incredible turn-off. No one wants to focus on issues of death and disability, the realities that you might run out of money if you continue current spending patterns, deciding who will raise your children if you are not hear, and so forth. ■The reality is simple as each of your advisers will assure you. If you deal with potential issues proactively you are far more likely to have a better result. So pull up your socks and, in the words of the famous Nike add “Just do it!”
■Mistake #2: “Estate planning = a will.” It is not only about a will. ■Most consumers think an estate plan means a will, but for most that is not the most important document or step. Pension assets and life insurance, which for many people may be the lion share of their estate, pass by beneficiary designation. Your will may be irrelevant to the disposition of these important assets. (Note that it might make sense to create a special trust for your pension assets under your will and direct via a customized beneficiary designation that retirement assets fund that trust). Other assets, e.g. a house or brokerage account that is owned jointly, pass outside of your will to the joint owner. Many people use pay on death (POD) and similar accounts. Those too are governed by the title to the account and not your will. Estate planning can never be only about a will. ■Anytime you change investment firms, or buy a new house, purchase additional life insurance, you need to review the estate planning implications. ■Even for those meticulous people that put together a will and coordinate beneficiary designations and title to assets, after a few years’ time, the plan can shift out of sync and if not revisited and adjusted can undermine your intent.
■Mistake #3: “It is planning for death not life.” Not so, it’s the opposite. ■If you’re a baby boomer that has retired you have good odds of living three more decades. Shouldn’t you be focusing on planning to be safe and secure for those 30 years more so then focusing on planning to pass assets when you die? ■Perhaps the number 1 planning issue for boomers is having sufficient cash flow for those future decades. Constructing a budget, coordinating your investment planning with that budget, and monitoring it on a regular basis is vital. ■This planning needs to be coordinated with your estate planning. Which trusts, personal accounts, retirement accounts or other “buckets” should assets be held in? Coordinating the income tax and other consequences across this spectrum is vital to achieving planning goals. ■Aging generally is accompanied by decreasing physical ability land mental acuity, and increasing prevalence of age related health challenges. Creating a structure to safeguard your finances, you personally, and your loved ones in advance is a key to planning. ■A funded revocable trust, consideration of professional wealth management and trust services, integration of a care manager into the planning team when appropriate, are all steps to protect you while you are alive. That should be a major focus of all of your planning. ■Too many advisers still think of living trusts as a limited tool to avoid probate. They’re missing the boat and you could end up in the surf! Fully funding the trust, getting a trust tax ID number from inception, having a professional successor trustee or co-trustee, can all provide an incredible security net if Alzheimer’s disease or another challenge strikes. ■Perhaps recasting estate planning with a focus of planning for life, more so than planning for death, will help you get past Mistake #1.
■Mistake #4: “It’s a standard form.” Unless your last name is “Standard” whatever documents you get, and however you get them, they need to be tailored to your personal circumstances. ■There is no such thing as a “standard” estate planning document. No form, or plan, is standard. While standard provisions and planning “building blocks” can be used to craft almost every plan, it is the creative and tailored use of those standard steps that will give you the result that works for you. View estate planning as a Lego set. You can creatively assemble standard blocks into tailored plans that meet your goals. ■That is very different then “I have a will.” ■Living wills, which are a statement of your health care wishes, are a great example. You can find free simplistic forms on line. But will they work for you? Most of the generic forms violate the tenants of every major faith. So if you sign a “standard” living will, you are almost assuring a violation of your fundamental beliefs, and wreaking havoc as your loved ones try to sort out the inconsistencies. ■Powers of attorney, which designate an agent to handle financial and legal matters if you cannot do so, are ubiquitous in planning. But “standard” is a dangerous word. ■Most form powers of attorney include gift provisions permitting agents to make annual gifts. In 1987 you could gift $10,000/year and the lifetime exemption was a mere $600,000. Gifting was real important then. ■But in 2015 the annual gift exclusion is $14,000 but the federal exemption is $5,430,000. For the vast majority of even wealthy Americans annual gifts are passé. ■But using a “standard” power of attorney with a broad gift provision could expose you to elder financial abuse. Perhaps most powers should prohibit gifts. ■On the opposite end of the wealth spectrum if you are an ultra-high net worth family you might want a broad gift provision permitting gifts of any unused exemption to capture the annual inflation increases. You might also benefit from express powers to your agent to exercise a swap power you hold under a grantor trust. So “standard” is pretty dangerous.
■Mistake #5: “Only very wealthy people need planning.” Another favorite is “My estate is too small/simple to need planning.” Not true. Everyone needs planning no matter how rich or poor, you just need the planning appropriate for you. ■If you become disabled in your 40’s from a work related injury, skiing accident, or debilitating disease, what is simple? Someone who is very wealthy might have adequate resources to fund living expenses. Few people, especially at a young age, have adequate resources to fund decades of living expenses. Having a disability income replacement policy, a buyout agreement for your business and other steps is vital for most people. ■If your resources are limited at any age and you don’t have the appropriate documents in place to address the issues that will arise, a court appointed guardian may be necessary. That can be a costly procedure and may not result in the person you want controlling your personal or financial decisions. ■So, if you have more modest means, having a durable power of attorney, health care proxy (medical directive) and perhaps a revocable living trust, a financial plan to provide a framework for your fiduciaries, etc. is vital. It is more vital perhaps then for someone of substantial means who may have an army of advisers that can assist the family (the ultra-wealthy need this planning too, just different). ■It is often a fallacy to think that having less money makes your estate plan simpler. “I don’t need trusts, we don’t have that much money.” For a wealthy family there is ample money to cover college, medical, and new home costs for all. For a family of lesser means, parsing the myriad of options, and prioritizing limited resources, in a cost effective manner is far more of a challenge then completing a $5 million transfer to a GST trust for a very wealthy person. Sorry, StarKist is not looking for estate plans with good taste but rather for estate plans that actually work. Wealthier families can easily hire a major trust company to invest family resources and use their 100 years+ of experience to distribute funds in a rationale manner to accomplish family goals. Families of more limited means may have to rely on unskilled family members to handle these delicate Solomon-like tasks. ■Folks that feel they aren’t wealthy enough to undertake appropriate planning often have misconceptions of wealth. Wealth can be relative. Someone with $10 million of net worth may not feel particularly wealthy because they are paupers by comparison to their even more affluent neighbors. You’ve heard of “affluenza!” Compared to 99% of the population this same person might be in the financial stratosphere. ■Someone with $5 million of wealth might have $2 million in their home and $3 million invested. If 4% were a reasonable withdrawal rate for that person, they would have to live on $120,000/year. Unlikely to be sufficient given the costs of maintaining a $2 million home no matter how frugal they are otherwise. Planning is critical for those who aren’t wealth, those who are wealthy, and especially for those who are misinformed on what their wealth status really is.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Trust Tips

Summary: Trusts, just like your estate planner, need regular TLC. Here’s a few tips:
√ 5/5 Power: Spousal Lifetime Access Trusts (SLATs) are quite a popular planning tool. Husband sets up a trust for wife and descendants and wife sets up a similar (but not reciprocal) trust for Husband and descendants. One of these trusts might include the common estate planning tool of granting the spouse/beneficiary the right to withdraw in her discretion the greater of 5% of trust principal or $5,000/year (called 5/5 power). This is the greatest withdrawal right that can be granted without causing estate inclusion. However, there are consequences to this power. If the money over which the power is exercised each year is not distributed to the non-grantor spouse/beneficiary it could be considered as if he/she made a contribution to the trust and that could make the trust a partially self-settled trust. If that trust is in a state that permits self-settled trusts (e.g., NV, AK, SD, DE) the problem may be mitigated. If the trust is in a state that does not (e.g., NY, NJ) might the trust corpus be exposed to claimants of the spouse/beneficiary? Included in his or her estate? Thanks to Kristen Simmons, Esq. of Oshins & Associates, P.C., Las Vegas.
√ Don’t Pay Your Trustee Bill: Many trust companies send bills for their trustee fees and other charges to the grantor/settlor of the trust. This might be a result of state law, or trust company policy. These costs in many cases should be paid directly by the trust, not by you the grantor. The payment by the grantor may constitute an additional gift with gift and GST tax consequences, trigger the need to file a gift tax return, etc. If the amount is paid by someone other than the grantor it could create worse complications. Before paying trust bills consult with your tax adviser. If your trust company can put trust charges on auto-pilot and deduct them from the trust, even better.
√ QTIP ESBT: When a Qualified Terminable Interest Property (QTIP) marital trust owns stock in an S corporation special precautions must be taken to protect the tax favored S-election. Historically most QTIPs would elect Qualified Subchapter S Trust (QSST) status. The requirements for both QITP and QSST of passing income to the spouse/beneficiary are consistent. However, it might be more advantageous in some instances when the trust and spouse are in the maximum income tax brackets to have the QTIP elect Electing Small Business Trust (ESBT) status. If the trustee is active in the S corporation business, and the spouse is not, this approach might avoid the 3.8% Surtax year after year.
√ Divorce Planning: Most estate plans endeavor to address the risk of an heir divorcing. A key to protecting gifts and bequests is for them to be held in trust to protect a beneficiary. But merely using a trust will not assure the desired level of protection. The trusts must be formed and administered properly. If you have separate/immune assets held in a trust but pay the income tax triggered by the trust out of marital property, that may weaken the protection the trusts affords. If you commingle trust and marital assets you may undermine the trust plan. While trusts can provide substantial protection, failing to monitor the details of operation of the trust may be fatal.
√ Life Insurance Trusts: If you have an insurance trust, or if you are serving as trustee, the trust, life insurance and overall plan is unlikely to succeed unless you periodically (every 2 years) have an insurance expert review the life insurance held in the trust to confirm it is performing adequately, that the insurance carrier remains sufficiently strong, the coverage meets current needs, and so forth.
√ Complex Trust Distributions: Many modern trusts are structured as grantor trusts, with the grantor paying all income tax. Many trusts are structured as “simple” trusts which means they are required to payout income annually. Other trusts are “complex” trusts in that there is discretion to pay out income. If income is paid out generally the beneficiary will bear the tax cost. If it is not the trust will pay the tax cost. Since trusts hit the maximum income tax bracket at about $12,000 of income paying out income to lower bracket family members can save income tax, avoid the Medicare 3.8% surtax and might save state estate tax depending on where beneficiaries reside. Year end planning coordinating your estate planner (to determine what the trust provides and to consider non-tax factors), your wealth manager (gain harvesting) and your CPA (income taxes) is a must. This planning can have more pronounced benefits than in the past so be sure your team is geared up for the new paradigm. Be sure to authorize and insist that your advisers collaborate to get the best result.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Tax Figures: Why do all your rich neighbors live in Miami? ■The NYS estate tax exemption is being phased up to the federal exemption amount in 2019. In April 2015 the exemption will be $3,125,000. But be wary, exceed that by 5% and the exemption is phased out. This gem is affectionately referred to as the NY “cliff.” Don’t fall off! ■The NJ exemption remains at $675,000. If a NJ taxpayer moves permanently to NY might the tax savings pay for the cost of that that NYC apartment? ■CT remains at $2,000,000. Be wary, however, CT has a gift tax, and NY during its phase in of the exemption may recapture gifts in the calculation. ■Other new figures for 2015: The top tax bracket of 39.6% for married taxpayers kicks in at $464,850 in 2015. The Personal Exemptions Phase-out (PEP) begins at $309,900. Itemized deductions are phased out by 3% of adjusted gross income (AGI) over the PEP amount or 80% of itemized deductions reducing the benefit of state taxes, mortgage interest and contributions. ■Trusts and estates hit the maximum bracket of 39.6% at a mere 12,300. The annual gift exclusion is $14,000/done and $147,000 for a non-citizen spouse.
■ Stored Reproductive Material: A recent NY law highlights the growing impact of reproductive technology on estate planning. Reproductive material might include sperm, eggs or embryos stored by a someone, for example, prior to undergoing chemotherapy. One of the controversial issues this material can raise is should a child born from such stored material, especially after the donor/parent’s death, be entitled to inherit. If the material is used years after someone died, and without their knowledge, should that child be a beneficiary of a trust the deceased donor/parent created? NY has endeavored to provide some clarity and parameters to these issues. If you store material you have to authorize its use after your death in writing and you must designate an agent to make decisions concerning its use. For a posthumous child to inherit the agent you appoint must give notice to your executor within seven months of the executor’s appointment. The child must be in utero within 24 months of your death or born within 33 months.

Potpourri ½ Page:
■ Succession planning is vital for every closely held business owner. For many estate plans it might be the single most important economic decision you will ever make. You should consider all your strategic options. ■ Transitioning a business to children or other heirs is certainly an option, but realistically, it is not always viable. ■ Should you take some money off the table now by selling part of your company or partnering with another entity. This might be a larger entity looking for a strategic value in your company or a financial investor. It might also be a competitor, a supplier, another company looking to enter your market, etc. ■ To succeed you must consider more than just having a qualified heir or the right legal documents. If you don’t think the plan through with investment bankers or business consultants, the best laid plans may not suffice. Some markets, like retail, are facing greater competition from the internet and it is affecting their viability. So the time to plan is now, not tomorrow. Also, addressing succession without a strategic plan may be of little practical value. Other markets, like those focused on a new technology, may be experiencing explosive growth. For these companies, the transition process may require an infusion of capital or additional expertise to succeed. Merely handing off a family business to the next generation, even if they are capable, may not suffice. ■ Another point needs to be addressed. Too often succession planning hinges on the readiness of the Patriarch or Matriarch to undertake the requisite steps. But that alone is too narrow a perspective. The business itself may have to be groomed for some transition options. Does your business have the right financial reporting and internal control systems? Too many closely held businesses run like a family pocket book – kids on the payroll, personal expenditures booked as business travel expenses, personal use cars paid for by the business, etc. Some close businesses hide profits in inventory. If you want to show the company to a larger suitor you may need to clean up lose practices and recast the earnings so that the company can be presented in the optimal light. ■ You cannot always control succession on your time table. It can be advantages to engage a consultant in advance and groom the company to keep your options open even if you have not yet committed to the transition. Thanks to Michael Richmond, of the DAK Group, Ltd., Rochelle Park, NJ.

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