March – April 2013

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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 Risky BusinessSummary: So we have a $5 million inflation adjusted exemption and a couple can transfer $10.5 million in 2013 with nadda tax due, so like who cares about estate planning? Well, you might like to be the Alfred E. Neuman of estate planning “What! Me Worry?” but Alfred, there are still worries out there.
■ Estate Exemption Bad Penny – its back! Just when you thought the estate tax was permanently out of your heir [pun intended] President Obama issued on April 10, his new budget/tax proposal, affectionately referred to as the “Greenbook.” This fiscal gem includes a call for a 45% estate tax rate and a $3.5 million exemption in 2018. Yes, this is the same exemption that was permanently pegged at $5 million inflation adjusted and a rate that was permanently reduced to 40%. While it’s hard to understand the delay in effective date, or to imagine this ever being enacted, elderly or ill taxpayers that have estates over $3.5 million that haven’t used all of their exemption, might want to plan before Congressional budget horse trading results in a worse result.
■ Grantor Trust Bad Penny: Last year’s Greenbook included an estate tax planning bomb that would have all assets of grantor trusts (trusts on whose income the grantor is taxed) included in the grantor’s estate. That broad sweeping proposal could have taken down every common insurance trust along with more sophisticated planning trusts. The new 2013 Greenbook proposal seems to narrow the range to focus more on including in the grantor’s estate appreciation in assets sold to a grantor trust. While this may remove many trusts from the legislative crosshairs, it leaves one of the most powerful and common planning techniques still available to the very wealthy subject to potential elimination. For those high net worth taxpayers who might still benefit from these transactions they should be completed before the legislation becomes effective.
■ GRAT Bad Penny: Last year’s Greenbook proposal to mandate a minimum 10 year term for Grantor Retained Annuity Trusts is baaaaaack! GRATs are a great leveraging tool whereby you could gift an asset to a trust, receive back an annuity for a set number of years, and thereby shift any increase in value of the asset above the interest rate used to calculate the annuity out of your estate. GRATs are an especially great tool if you’ve used up all your exemption, want to make more transfers to heirs, but don’t like the prospect of paying gift tax. The moral of this story is the esame as that for the note sale transactions described above, complete planning now, don’t wait for the law to be changed.
■ Home State Connections: When planning for self-settled trusts (you form the trust and are a beneficiary) there are some that worry about any connections your trust has to any state that doesn’t permit this type of planning. For example, you might live in NY but set up a trust like this in South Dakota that does permit it. This problem could be particularly concerning when the trust owns interest sin a close business and you’re named the investment trustee of the trust. Some advocate forming a family limited liability company (“LLC”) in the state where the trust is set up. That way the “direction” is in the trust and any investment activity is inside the LLC that the trust is directed to hold. Further, having this type of LLC formed in the state where the trust is arguably another connection to the state in which the trust was formed, perhaps boosting the nexus to that state and thereby further supporting the trust. South Dakota has lead the charge in this arena and might present an opportunity worth considering.
■ Grantor Trust Surprise: – So you put assets into a trust, structured as a grantor trust, for your spouse and descendants. Then the big “D” happens. Your now ex-spouse has the growing trusts assets to benefit from. But if the trust is a grantor trust might you still bear the income tax burden on the trust earnings post-divorce! Ouch. Be sure that the mechanism to turn off grantor trust status is addressed in your property settlement agreement and implemented as a condition to the overall divorce.
■ Reciprocal Trusts: This is a common planning technique. Wife sets up trust for Husband and descendants, and Husband sets up a trust for Wife and descendants. This is a great way to grow wealth outside both of your estates, protected from claimants and in a way you can each access significant assets. But to succeed the trusts have to be different enough that the IRS won’t unravel the plan as mirror trusts (reciprocal trusts) without substance. Did you really differentiate the trusts sufficiently? Perhaps it is worth a review to be sure, and if not use the various powers in the trusts, or the possibility of decanting (pouring one trust into a new better crafted one) to bolster your position. Some advisers claim using a limited power of appointment (LPOA, explained below) in one trust but not the other suffices to differentiate them. Not so according to one expert, Jeffrey A. Baskies, Esq. of Boca Raton, FL. The idea of using a LPOA to distinguish one from the other comes from a misreading of the Levy case. Levy can’t be cited as precedent (TC Memo) and apparently never even reached the issue of whether having a LPOA in one but not the other made the trusts non-reciprocal (as the IRS and taxpayer apparently stipulated to that issue – the trial was over whether or not the LPOA was valid under state – NJ – law).
■ Tax Reimbursement: – So you set up a grantor trust for your heirs, and the trustee has the right to reimburse you for income taxes you pay on income earned by the trust. So you have a big sale of the business and ask the fiduciary to reimburse you for taxes. Well in the intervening years you and your kids who are the beneficiaries of the trust have had a falling out. Yeah, that usually only happens after the big bucks are given away to them. So when you ask the trustee for a reimbursement the kids who are the beneficiaries, and to whom the trustee has a fiduciary duty, object to any distribution to reimburse you! Egaads! What happens? Is there any law on this? Would your trustee make a huge discretionary distribution to a non-beneficiary when the real beneficiaries say don’t? Even if your kids still talk to you, might the IRS still argue that you had an “understanding” with the trustee about the reimbursement and pull the whole trust back into your estate? If you have a reimbursement clause and hope to use it, chat with your advisers well in advance to address these and other issues.
■ Spousal Lifetime Access Trusts (SLATs): The use of a SLAT, or lifetime bypass-type trust were a hot ticket in 2012 and still present what for many is the optimal way to minimize or avoid federal or state estate tax. But SLATs can present potentially surprising tax concerns. Bear in mind that while the concepts of SLATs have been used for decades, historically they were most frequently used in the context of life insurance trusts which are different in application than the SLATs many taxpayers are setting more recently. The comparison to the traditional bypass trust can be a bit dangerous too since for a traditional bypass trust the grantor spouse is deceased. In the inter-vivos bypass-like trust such as a SLAT the grantor spouse is alive. If a distribution is made to the beneficiary spouse, and really used by the grantor spouse, and if the IRS could demonstrate that such cash flows corroborated an agreement that the grantor spouse would continue to benefit from the funds in the trust, the IRS might argue that the trust assets should be included in the grantor spouse’s estate. Creditors might argue the same. If distributions the beneficiary spouse receives from the SLAT are deposited into a joint checking account on which the grantor spouse writes checks, that sequence may corroborate the IRS challenge. What assets did you transfer to your SLAT? Some assets just should not be transferred (pension assets, professional practices, or favored assets whose status might be undermined, e.g., a Florida homestead). If the wrong asset was transferred address what can be done to mitigate with your attorney ASAP.
■ Powers of Appointment: Powers of appointment, a right given typically in a trust or will to someone to designate who might enjoy property, are one of the most powerful and flexible of planning tools. But alas, roses have thorns. Limited powers of appointment (LPOAs) are sometimes used to create flexibility without causing estate inclusion. A limited power is the right to appoint to anyone other than your creditors, your estate or creditors of your estate. In reality, many limited powers are more restricted, e.g., to descendants. But limited powers don’t always assure problem avoidance. If you made a gift to your spouse, and your spouse gifts the assets to an irrevocable trust over which you are given a limited power of appointment to appoint trust assets to say descendants, does that create an incomplete gift as to you? The IRS may argue that the transfer to your spouse was merely a step along the way to your transfer to the trust. And if you are treated as the grantor to the trust and you hold a limited power of appointment over assets of that trust, the fact that a limited power should not cause estate inclusions generally won’t save your day. What if that power is only given in a contingent marital trust that will only be funded if the assets are included in your spouse/grantor’s estate? Will that suffice to create a link to you for estate inclusion in your estate? This might cause inclusion in your estate under Code Section 2038 regardless of whether the trust was formed in a jurisdiction that permits self-settled trusts.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
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Checklist Article Title: : What’s in Your Wallet

Summary: Here’s a few tips to answer the Viking question “What’s in your wallet” that hopefully will give you some practical pointers on this basic financial instrument that is viewed as so basic few folks stop to think about it.

√ First, whatever you have in your wallet, make a photocopy of the front and back of it all and keep it in a secure place. Scan the copies. Perhaps black out portions of the numbers from credit cards to avoid the risk of misuse if your computer gets hacked. If you ever loose your wallet it’s a lifesaver. I actually lost my wallet about 20 years ago. Took my photocopies and went to the Department of Motor Vehicles to get a new license. While in line I called and canceled all my credit cards and had new ones issued. On the way home I stopped at the library and Blockbusters (life before Redbox and Netflix) and got new cards. But for the photocopies, I would not have easily or quickly remembered what was in the wallet, or had all the numbers readily accessible.

√ Here’s one ‘cause I’m a tax attorney. And this will be a great tax benefit to lots of readers. I carry two American Express cards, one Master Card, and one Visa Card. One Amex is for business and on for personal. Visa is business and Master card personal. I intentionally obtained different cards so that it is visually easy to identify personal from business. This is an easy, and pretty audit proof way to simply tax reporting and legitimately maximize deductions. If I’m buying something for business I use a business card. If I am buying something personally I use a personal card. If I go into Cosco or Home Depot, for example, I almost always end up buying personal stuff as well as stuff for my business. Simple – I put the business stuff on the business card and have a second order I pay for on the personal card. I cannot overlook deductible items at year end and I don’t have to hunt for them, they’ve already been paid for from the business. I don’t have to worry about garden ornaments ending up on my business and causing grief on a tax audit, because they were paid for personally. Anyone that has their own business will benefit tremendously from this.

√ Here’s another one that is a bit personal to us, but should serve as an example of how you can tailor emergency planning for your personal circumstances. For any of your readers who are among the 130 million Americans living with chronic illness or disability (yes that is a real number!) and who travel, some of these steps (or similar ones) should be considered. We travel around the country in an Airstream and I lecture to professional advisers (CPAs, attorneys, financial planners) and consumer groups on financial and estate planning for chronic illness. See www.chronicillnessplanning.org. We travel through lots of rural areas, and far afield. If there is an emergency I carry a number of cards for emergency services we’ve signed up for. I might have a problem with our truck (that pulls the Airstream), the Airstream itself, or with a health emergency. So we carry AAA which could help with the truck (and the cars at home), a Good Sam Club Platinum Emergency Road Service Card (Good Sam is like the AAA of the RV world), Good Sam Travel Assist (they can fly us home and have someone drive the RV back) and Skymed a medical evacuation service (I like a plan “B” because in life “stuff” happens). Anyone with a significant health issue or disability can carry what works for them, but the bottom line for everyone if you carry what you need to protect yourself and your family/loved ones in an emergency you’ll be better prepared.

√ Record all your key data, card numbers and passwords in an encrypted cloud based system so you can access it if needed even on the road, and in an emergency, someone you trust can access it to help. While it’s nice to have a scan of your wallet, especially accessible on the road, it really doesn’t suffice in a web based world. While there are a number of such services, we use a password App called Keeper. https://keepersecurity.com/

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√ If you have lots of affinity credit cards in your wallet, e.g. with Airline miles, plan for them. Consider making a specific bequest of them in your will. The reality is that transferring miles post-death can be difficult and costly, if feasible, try to spend them prior to death.

Recent Developments Article 1/3 Page [about 18 lines]:
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■ Related Party Loans: Lots of you make them to closely held businesses. But caution is in order. As a recent case illustrates, it is difficult to establish that an employee’s dominant motive for a loan was to retain his job when he was a significant shareholder. If a substantial investment motive was present, the shareholder-employee’s loan, if unpaid, will result in a non-business bad debt rather than a business bad debt. Haury, TC Memo 2012-215. Caution should always be exercised when making any related party loan.
■ Avoiding Penalties Not Always Easy: An estate was subjected to a late filing penalty. The executor demonstrated that the estates CPA obtained an extension but incorrectly advised the executor as to the due date being a year later rather than the correct six months later. The court held that relying on the CPA did not constitute “reasonable cause” to abate the penalty. Peter Knappe, Executor of the Estate of Ingborg Pattee v. U.S. (CA 9 4/4/2013).
■ New Jersey Law Updates: Several new laws updating New Jersey’s New Jersey Business Corporation Act and the Revised Uniform Limited Liability Company Act have been enacted. For example, the changes permit shareholders to participate remotely at meetings. For LLCs operating agreements may be more broadly construed to include certain verbal agreements. The prior statutory right of a terminated member to receive fair value for membership interests if the operating agreement was silent has been eliminated. Non-controlling LLC members have been given more rights analogous to minority shareholders.
■ Valuation of Interest in Art: In Elkins the estate owned fractional interests in art that had to be valued. The co-owners of the art were the decedent’s children. While the case provided a substantial victory for the IRS, that victory may prove short lived. It appears according to some commentators that the Tax Court committed what might be a fatal valuation error in considering the circumstances of the children/co-owners in the analysis. The valuation should have used the tax paradigm of a hypothetical willing buyer, not the children themselves. Elkins Est. v. Comr., 140 T.C. No. 5 (March 11, 2013).
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Potpourri ½ Page:
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■ Power of Attorney – most folks sign POAs to avoid the need for guardianship. While this can work a POA is not always sufficient and you might want your position as agent reinforced by being appointed guardian of the property for the person (grantor) you’re serving. It provides a structure, you can do a formal accounting to protect yourself, and the rules are more defined. This can be done preemptively to fend off potential problems or claims from difficult spouses or heirs. Thanks to Steven Greenberg, Esq. of Hackensack, NJ.
■ Terminal Illness Planning Denial and emotional issues make planning once a loved one is diagnosed with a terminal illness very difficult. Involve care managers and others to help move the process forward as updating documents and planning while feasible can avoid potential costly problems later. Consider signing a new durable power of attorney that is effective immediately (i.e., non-springing to avoid having to prove it is effective). Update or obtain a revocable trust and transfer appropriate assets to the name of the trust. This is the best tool to manage asset during health challenges. Consider including a clause that permits an independent person to revoke your loved ones rights to trust assets transforming the transfer to the formerly revocable trust into a completed gift.
■ Elderly and Infirm: For elderly or infirm use American Express for all credit card transactions. Their customer support (e.g., if a vendor charges an inappropriate amount, or doesn’t respond to a complaint), and fraud detection are incredible. This can provide a great addition to the other more routine safety net procedures. It is also advisable for the same people to sign up for a credit monitoring service as they are the vulnerable targets that those committing financial abuse. But before signing up for such a service be sure that you can designate an authorized representative to act on your behalf. At least one of the major monitoring companies won’t permit this.

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