March – June 2014

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
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Lead Article Title: Real Life Planning Not Just Estate PlanningSummary: This issue of the practical planner is months late. The reasons are personal. But hopefully sharing them will provide you with some valuable planning ideas. If you have or do face similar bumps in the road, perhaps it will even provide some encouragement. These points also emphasize the human aspects of estate planning that I have written and lectured about and endeavored to help clients address. But as with so many things, actually dealing with them is quite different than merely writing about them.■ Worse than a Dentist: A well-known reporter/author client of mine recently exclaimed at her annual review meeting after we discussed a range of issues I broadly call “later life planning”* that “Visiting you is worse than visiting the dentist!” Ouch! But as she recognized, this topic is essential for everyone to address as they age, as well as anyone with a health challenge. Not fun, but the Ostrich approach of sticking your head in the sand and pretending there won’t be a problem doesn’t comport with reality and will enhance the likelihood of your becoming an elder financial abuse statistic or worse. If this incredibly bright and financially astute women finds this stuff tough to address, everyone must. Perhaps my efforts not to be a barefoot shoemaker might help you tackle these issues without more lidocaine.*For the sake of full disclosure I stole this moniker from Bernard Krooks, Esq. a nationally known elder law specialist and all around good guy.■Yogi Berra: “It’s like deja-vu, all over again.” The August 2006 issue of the Practical Planner lead article was entitled “Chronic Illness: Special Planning Required.” My wife, Patti, had been diagnosed with multiple sclerosis a month earlier. That article was my first shot at grappling with how that diagnosis affected our planning, and similarly how living with chronic disease impacts the approximately 130 million Americans facing that challenge. A common challenge of those living with multiple sclerosis is difficulties with balance. In February of this year Patti lost her balance and fell down a flight of stairs in our home. We had to tackle a decision many people struggle with as they age or deal with an array of health challenges. Do we stay? If we stay what steps should be taken? Do we move to a home without stairs? For us the decision was made, not easily, but quickly. We decided to move to a condominium with no stairs. So now in 2014 it’s like deja-vu, all over again.

■ Where the 2006 Article Lead: In 2006 I was shocked at the dearth of resources available to professionals advising clients with these issues. I made it my personal mission to address that deficiency and since that first article in this newsletter have written four books (including ones for the Michael J. Fox Foundation, National MS Society, and the COPD Foundation) and about sixty articles and counting on chronic illness planning topics. A workbook for consumers facing the challenges of brain disease or injury is in process for the American Brain Foundation. Patti and I set up a charity (chill, we don’t fundraise) whose mission it is to help professional advisers guide clients facing chronic disease and disability. We travel around the country for about two months a year in our Airstream RV and lecture to professional (e.g., estate planning councils), consumer and charitable groups. We’re already planning speaking tours for next year (with one to Birmingham, AL in the hopper).

■ Hair Replacement Estate Planning: Planning our move, downsizing, and other steps we’ve taken, are all part of the broader scope of what I encourage people to consider as part of what I generally call “later life planning.” Estate planning historically has focused on wills and minimizing estate taxes. Not that these aren’t important for many, but they fall far short of addressing important issues people might confront. People now live 30 years longer than they did 100 years ago. Estate planning could have a narrower focus when the number of years post retirement were expected to be so limited. Today’s retirees may live two or three decades+ past retirement age, with many of those quite active. The incidence of chronic disease increases with age. The estate planning “conversation” has to be much broader to remain relevant. What steps might help make those later decades more secure so you can enjoy them as much as possible? These entail not only estate planning steps, but as we have discovered, home design decisions, personal organizational decisions, and much more. While many of the steps we’ve taken had nothing to do with the recent incident or move, they do all relate to the broad topic of later life planning. So I’m going to steal an idea from Sy Sperling’s famous Hair Club For Men commercials – “I’m not only the Hair Club president, I’m also a client.” The planning steps below are steps I’ve taken, not just recommended to clients.

►Downsizing: With aging and health challenges we felt “less is more.” Less space means less to care for, less time demands, etc. Thoughtful downsizing can also eliminate family fights, protect you from financial abuse and more.
■ Small Is Beautiful: Downsizing meant getting rid of lots of stuff. What I realized is that in so many cases clients defer this decision until it is thrust upon them, often at an age or state of health when they can no longer organize and purge their own accumulations, thus leaving the burden to children and others. In many probate situations, a personal organizer company is hired to deal with property. Children, often living at a distance, but almost assuredly pressured by their own career and family responsibilities, simply find the task overwhelming for them to handle without help, if at all. Sadly, in many cases I’ve seen over the decades of practice, heirs quickly pluck obvious valuables from a deceased parent’s home, and then a home clean-out company trashes everything else. There is no doubt that valuables, and sentimental objects end up in the bin too. There is another loss. Whatever children did not want from our downsizing that was usable was packed and taken to a local thrift shop and several local charities that collected clothing and other items. After perhaps the 10th such trip, the manager of the thrift shop told me a small part of his personal story. He had been homeless for many years. He explained that being able to find clothing and other items at local thrift shops was what helped him get back on his feet. He credited, in his words, the local thrift shops with saving his life. When a clean-out company is hired to trash the contents of a decedent’s home, the less fortunate often lose out as well.
■ Scanning: We began the process of going paperless many years ago. At first blush the task is insurmountable. We began simply by scanning current items. Once we grew comfortable scanning current statements, bills and similar documents, we slowly began the arduous task of culling through the scores and scores of boxes of old tax, legal and personal documents that seem to be a common ingredient for most attics. We identified federal income tax returns (even older than the statute of limitations), tax basis documents, key legal documents, and so forth. These were scanned at a rate of a few hours a week and everything else was shredded. We tackled a few boxes at a time and when they were completed, retrieved the next couple of boxes. With small baby steps the process was not overwhelming, and over years of time only two small boxes of original legal documents remain. Original of the following were kept: estate planning documents, birth certificates, insurance policies, and so forth. Having all key documents scanned makes them easy to find, saves incredible space, and more. They are all backed up both to the cloud regularly, and periodically as part of a mirror back up to a portable hard drive. Last summer, on a month long trip, our forwarded mail included a love note (i.e., audit) from the IRS. We were able to find the documents on our laptop necessary to resolve the issue, printed them on our portable printer, and sent a certified letter to the IRS from the Post Office in Mitchell, South Dakota. If you don’t recognize that city, then you’ve likely never seen the famous Corn Palace. Scanning not only saves space, but lots of time. Think of the burden you’ll save your heirs from having to sort through tons of old financial and tax files. Consider the reduction of the risk of your being subject to identity theft if all those confidential physical documents are destroyed and only remain on an encrypted password protected laptop. For those that struggled through natural disasters like Hurricanes Katrina and Sandy, or might in the future, your documents can’t be destroyed in the cloud.
■ Shoot it and Lose it: Gail and Ron are our idols of downsizing, though we fell far short of their remarkable accomplishments. They downsized to a small New York City apartment so that they could focus their time on enjoying the amazing offerings of NYC and not on dealing with “stuff.” I suspect more and more retiring Boomers will follow their path. One of their tricks, shoot it and lose it. We shot pictures of large clunky framed diplomas and professional awards and trashed the physical ones. Considering that we had not looked at any of them in years (decades!) we’re more likely to look at the photos of them (if ever). Big space savings and a growing sense of “lightness.”
■ Digitizing: We had the requisite number of boxes in our attic stuffed with bins of old 35mm slides and videos of toddlers waving. That stuff took up a lot of space so we, with the help of our friends at Digiphoto, digitized it all. We gave them crates and got back one small portable hard drive, the contents of which has been saved to our laptops and backed up to the cloud on Sugarsync. We also learned that those priceless home videos degrade over time. The sooner you digitize the better shape they’ll be preserved in. Also, once all this stuff is digitized you can easily share it with all of your kids. I’ve witnessed more than a few family fights over the years over who gets the photo albums. Now you don’t have to split the baby, just digitally clone it.
►Home Safety: The driver for our move might have been physical safety, but the fruits are much sweeter. An apartment means no worries about the lawn, shoveling snow, mail being left at the door, etc. So whether you are concerned about aging, or you’re a Boomer looking forward to a retirement of cruises, these changes may benefit you as well.
■ Automation: Home automation can empower those facing the challenges of aging or disability. Almost every system in your home: lighting, temperature, security, audio-visual, and more can be programmed to meeting health challenges, or your travel schedule. For those with any physical challenge these systems can be controlled from an iPad. Crestron Electronics, Inc. has created the leading products in this field. Dan Feldstein, VP of Crestron explained that whatever physical challenge you face an interface can be created to facilitate your controlling these systems. For seniors facing cognitive challenges, a “Night” button they push to turn off the light out in their room can also automatically adjust temperature, set the alarm, and cut power to the stove and cooktop just in case they forgot something. Many home automation features can be tailored to address physical challenges that you might face now or in the future as you age. Working with an electronics integrator with a bit of creativity, we used JD Audio and Video Design Inc., you can tailor these capabilities to any challenge. While most of us will face some of the same challenges with age, we cannot foresee what specific challenges we might face in the future. Prewiring to provide future capabilities to add features can create the flexibility to adapt a system to your changing needs. While much of this technology has focused on entertainment goals, the uses to those with disabilities are incredible.
■ Accessibility: Most of the literature on home accessibility focuses on wheelchair access. While critical to address it is not enough because only about 7% of those with disabilities use any type of walking aid. The challenges faced vary by disease. Fatigue is a common debilitating symptom for those living with MS, PD, COPD, and other diseases. Although so prevalent it receives scant attention in accessibility discussions. Design changes, a bench in a shower, a nook to hold a bench outside a dressing area, a stool that can comfortably sit under a kitchen counter, and other simple measures can help combat fatigue. Tripping is a common hazard for those facing chronic disease or aging or both. Gait is one of the most affected motor characteristics of those with PD. For those with MS foot drop is a common challenge. Yet the norm in residential construction is to have a sill between rooms with different floor surfaces to demarcate the change in floor heights. Our contractor, Tony Cervieri, varied the thickness of plywood subfloors carefully so that there would be no height transition from tile, to wood to carpeted surfaces. Where the levels could not be perfectly matched a bit of feathering below the final surface did the trick. Non-skid tiles, wood instead of tile to minimize injury from a fall, low pile commercial carpet with thin padding, all help. Sometimes simple steps can make an incredible difference. It is anticipated that by the year 2050 nearly 20 million Americans will be age 85+. These are issues and steps that many of us should take when feasible to empower us to deal with what is almost assuredly inevitable.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
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Checklist Article Title: Checklist: Getting $ Out of Trust

Summary: So you set up tiers of LLCs, SLATs, DAPTs and other acronyms in 2012. Sounded cool and if the exemption had plummeted in 2013 it would have saved bundles of estate tax. The plan was so successful that you’d now like to tap it for bread money. How can you get money out without torpedoing the plan? Assume for this discussion that you formed a family limited liability company (“LLC”) that holds a large portion of your investment portfolio. You and your spouse own 20% of the LLC each and two irrevocable spousal lifetime access trusts (“SLATs”) you created each own 25% and a grantor retained annuity trust (“GRAT”) owns 10%.

√ Turn off Grantor Trust Status: Most of these trusts were set up as “grantor” trusts which mean the income earned by the trusts shows up on your income tax return. It’s the gift that keeps on giving. That characteristic alone could result in your consuming cash personally while building the value of the trusts. That is all fine from the perspective of estate planning, but it can get a bit tricky for you in terms of cash management to pay income taxes, etc. So a long term solution may be to turn off grantor trust status. This could be done on just one SLAT (not the GRAT during the annuity term) to preserve flexibility for the other SLAT. You might even divide a trust into parts and terminate grantor trust status for only one part. If you’re in your 80s it would be a mistake because you would not be able to swap assets back into your name to get a basis step up on death.

√ LLC Distribution: If you make a distribution of cash from the LLC, the cash would have to be distributed pro-rata to the members. Thus, if the LLC distributes $100,000 you and your spouse would get $20,000, each or $40,000. This might help but be inefficient if your direct ownership of the LLC is low relative to cash needs since most of cash would go to the trusts. There should be no negative tax implication since income from the LLC would flow through pro-rata to owners in any event.

√ Salary: If you provide services to your family LLC you could draw a salary for management or other efforts. That would create taxable income subject to self-employment tax. While the compensation would be deducted by the LLC as a guaranteed payment to you, you’d be reporting the same amount as compensation income. If you can’t corroborate that the LLC really provided arm’s length compensation for real services, the IRS might argue that the purported “compensation” is really a retained interest in the income of the LLC so that the gifts you thought you made to the trusts are all pulled back into your estate.

√ Purchase: The family LLC can use cash to buy, at fair market value, stocks, or other assets, you own in your personal names. While that might sound simple, the LLC in contrast to the trusts, Is not treated similarly as a grantor trust so that the sale would trigger capital gains costs. Not a winner.

√ GRAT Distributions: GRATs must pay you a mandatory annuity to qualify for the favorable tax treatment intended. But some GRATs include provisions permitting additional distributions above the mandated annuity to you. That might provide you desired cash but it would be counter-productive from an estate planning perspective defeating the GRATs objective of leveraging growth out of your estate. Definitely not a winner.

√ Borrow: You probably can borrow money from the LLC or any of the trusts. This can be relatively simple and should leave asset protection and estate planning in place. Just be careful that a sufficient interest rate is charged, a written loan document signed, and that the terms of the loan adhered to (e.g., regular payments). Avoid creating a pattern of loans and correlating the borrowing with major life events, like a child’s wedding.

√ Redeem: You could have the LLC redeem some of your interests to infuse cash to you, but have your CPA run the tax numbers first.

Recent Developments Article 1/3 Page [about 18 lines]:
■ Trusts Aren’t Always Passive: Trust can qualify for real estate professional exception to PAL rules The Tax Court has determined that a trust that owned real estate properties and engaged in other real estate activities qualified for the Code Sec. 469(c)(7) exception for real estate professionals and thus wasn’t subject to the passive activity loss (PAL) limitations. In so concluding, the Court found that services performed on behalf of a trust may be considered personal services performed by the trust. Frank Aragona Trust, (2014) 142 TC No. 9
■ Mississippi Joins the DAPT List: Effective July 1, 2014, Mississippi became the 15th state to permit the creation of self-settled domestic asset protection trusts (“DAPTs”). This seems to confirm a trend of more states permitting self-settled trusts. Naysayers of this planning technique should take note, but those with DAPTs, or considering them, should still be cautious in light of the number of cases that have challenged the technique. Title 91, Chapter 9, Article 15, Miss. Code Ann. §§91-9-701–91-9-723.
■ Trust Expenses: The IRS published final regulations governing which costs incurred by trusts and estates can be fully deductible without having to be reduced by 2% of adjusted gross income. IRC Sec. 67(e). A cost will be subject to the 2% reduction if it is included in the definition of “miscellaneous itemized deductions” under IRC Sec. 67(b), is incurred by an estate or non-grantor trust, and it is “commonly or customarily” incurred by an individual holding the same property. Costs incurred by an estate or trust which would not have been incurred if the property were not held in in the estate or trust are fully deductible without the 2% haircut. The big number in all this is investment fees. The Regs provide that investment advisory fees are subject to the 2% floor, unless they are an incremental cost beyond the amount “normally charged” to an individual.
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■ #Valuations – becoming less likely to permit taxpayer to rely on appraisers to avoid accuracy and negligence penalties on undervaluation.
■ #Income tax side more aggressive. Must be that you have evidence suggesting that an inherited asset has a differ basis than 706 it is the value of the 7that will control value. IRS is increasing asserting position arguing consistency requirement with Form 706 to determine income tax basis for the successor
■ # The problem is that with a lot of the planning today it is complex and requires disciplined and clients are unwilling to be that disciplined.
■ #During estate tax exam IRS sees this and realizes no mention in a Form 709 and they went after the taxpayer. Sales were taxable sales reported on 1041 but they were not reported on a gift tax return. Whose gift tax return it was a QTIP? Only potential beneficiary of a QTIP is surviving spouse? So on whose 709 should the non-gift disclosure should have been made. IRS went after deceased spouse even though precluded by statute. One of the issues to address on Form 709 is not to concentrate the numbers on the return but the non-gift disclosures not reported on the return. What about capital contributions to an entity are they gifts? A capital contribution transfers assets to an entity is that a gift transfer? It has come up in an estate tax examination. IRS often takes position that a refinancing of a note is a gift and should be reported as a non-gift transaction.
■ # Be cautious about notes in FLPs and multiple churning like transactions. If you have underperforming notes and fail to collect in default or accelerate it is tantamount to a second gift. This means the same property can be taxed twice.
■ Use defined value clauses to backstop large transfers. These clauses transfer
1. Public charity and donoar advised fund. Use a Petter type lcause which was accepted by Tax Court.
2. Private foundation.
3. Lifetime QITP and GRATs used by many but no case law.
4. Wandry. IRS did not appeal.
vi. Gift tax reporting tips.
1. Start the statute of limitation by reporting.
2. Report consistent with the formula.
3. Attach formual documetns and appraisal.
4. If charity gets an interest file a protective cliam in case value of charitable deduction will increase.
5. Include if units may be reallocated a protective claim to reallocate deduction items in the event of a change. ■ # ■ # ■ # ■ # ■ #
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