Donor Education – Why Effective Donor Education Programs Are Important

Give sign image, estate planning

Image by Jello Fishy

One of the most effective ways to educate donors and help them achieve financial literacy is through sustained and focused donor education programs. The process of understanding the power of philanthropy and how it works best for a donor’s goals and objectives takes time. When donors learn together, share their ideas and understand what other donors have done and are doing, they become more comfortable with the process.

Donor education programs which focus on philanthropy and related topics, such as financial issues for women, can teach both men and women how to achieve the joy of giving while living. Your institution can incorporate into the donor education event faculty and student presentations which integrate messages into the mission of your institution. These programs can help differentiate/distinguish your institution and create deeper relationships with donors, alumnae, and alumni spouse (Women’s Philanthropy Institute 2009, 15). (8)

Effective donor education, combined with financial literacy, can also provide networking opportunities. Associating with women of similar financial standing increases their willingness to use their money to leave a legacy. This is especially relevant for women who are learning to be comfortable with their wealth. Many baby boomer women in this country will inherit twice—once from their parents and once from their spouse. Nevertheless, donors will not give until they know that they can take care of themselves first. As an estate planning attorney, the most common question I hear from a new widow is, “Do I have enough money to live on?” (Of course that question should be asked many years before that moment in time.) Taking the time to systematically educate your women donors, to help them achieve financial literacy, to teach them that by gifting they can reap both current and future rewards will help empower them to act when they receive their “double inheritance.”

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime. To download Annino’s FREE eBook, Estate Planning 101 visit,

Charitable bailouts can save your C corporation clients big on taxes

This strategy can be a win for donors, C corporations, and charities.

By Patricia M. Annino, J.D.

philanthropyBecause of the accumulated earnings tax, a C corporation with significant accumulated earnings can be a problem for a CPA trusted business adviser. Paying the money out as a dividend leads to a second tax the client probably does not want to pay. On the other hand, the longer the company holds the cash and does not use it, the more likely the IRS will impose the accumulated earnings tax.

But if a C corporation owner client is philanthropically inclined and would like to remove the earnings from the company while still maintaining a controlling position of its stock, it may be time to explore a charitable bailout. That’s because this technique can help the donor achieve his or her charitable objectives, avoid capital gains tax, and distribute excess cash that has been accumulated in the corporation tax-free. If the owner’s succession plan involves transferring ownership of the company to his or her children, the owner can also achieve this goal through a charitable bailout.

In a charitable bailout, a corporation’s owner gifts stock in the corporation to a charity, and the corporation then redeems the stock using the corporation’s retained cash. Both the gift of the stock and its redemption are income-tax-free. If the charity is public and if the donor has held the stock for more than one year, the donor is entitled to an income tax deduction for the fair market value of the stock under Sec. 170(b)(1). If the gift is
made to a charitable organization that is not a public charity, the income tax deduction is limited to the donor’s basis in the stock under Sec. 170(e)(1).

Stockholders may choose to donate the stock to a charitable remainder trust for redemption. Normally, if a charity is a private foundation or a charitable remainder trust, a redemption would violate the self-dealing rules. However, a “corporate adjustment” exception ( Foundations/Exceptions-Self-Dealing-by-Private-Foundations:-Certain-recapitalization-transactions) of Sec.
4941(d)(2)(F) permits redemptions when all stock of the same class as the donated stock is “subject to the same terms” and the charity receives at least fair market value for the stock. To be “subject to the same terms,” the corporation must make a bona fide redemption offer on a uniform basis to the charity and every other stockholder.

Why use charitable bailouts?

The charitable bailout can be very beneficial to all parties involved. It allows a charity to receive cash and a corporation to bail out its accumulated cash while the donor avoids any built-in capital gains tax on the donated stock. The capital gain on the redeemed stock is considered passive income and, as gain from the sale of property, is exempt from the unrelated business income tax (UBIT) under Sec. 512(b).

Charitable bailouts have far better tax consequences than direct donations by a stockholder. If a corporation paid a dividend to the stockholder that the stockholder then contributed to the charity, the stockholder would then owe income tax on the dividend. But, with a charitable bailout, the stockholder can claim the charitable income tax deduction for the donated stock (subject to the 30% and 50% limits of Sec. 170). Though it is the stockholder, not the corporation, who receives credit for the gift, it is the corporation’s cash, not the stockholder’s cash, that is being used. A corporation that has accumulated significant cash will have less cash after a charitable bailout, and thus be less likely to be subject to the accumulated earnings tax.

The charitable bailout technique can also be useful in succession planning. If parents and children all own stock in a C corporation, the parents could reduce or eliminate their ownership stake by contributing their stock to a charitable remainder trust, which stock the company could then redeem. For this strategy to be effective, the children must be stockholders prior to the redemption and the corporation must have sufficient cash to effectuate the redemption. (See IRS Letter Rulings 200720021 and 9338046. Redemption by a note and not cash is a prohibited act of self-dealing).

Potential trouble spots

Advisers and their clients should be aware of several possible pitfalls when using charitable bailouts. One is the imputed prearranged sale doctrine (Rev. Rul. 78-197; Rauenhorst, 119 T.C. 157 (2002); Letter Ruling
200321010). If a stockholder contributes stock in an arrangement in which the charity is compelled to sell the stock, the IRS could take the position that the shareholder had assigned the sale proceeds to the charity, and tax the transaction as if the stock were sold or proceeds distributed to the stockholder. It is worth noting that Rev. Rul. 78-197 states redemption proceeds are taxable as income to the individual stockholder only if the charitable entity is legally bound or can be compelled by corporation to surrender its shares for redemption.

As always, advisers should review state law before recommending a charitable bailout. Also, if the transaction is occurring between related parties, they should be sure to review the charitable organization’s conflict of interest policy.

Note that donor-advised funds, private foundations, and supporting organizations must be mindful of the excess business holdings prohibition and 10% tax under Sec. 4943. This prohibition and tax do not apply to public charities.

In summary, if a client has significant retained earnings in his C corporation and has philanthropic intent, the charitable bailout is a strategy well worth considering.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime. To download Annino’s FREE eBook, Estate Planning 101 visit,

Tom Clancy’s Widow Wins Legal Battle Over Taxes on $86 Million Estate

Judge rules trust for grown children must shoulder the bill

By Scott Calvert

Tom Clancy image, estate planning taxes

Tom Clancy’s widow has scored a legal victory in a long-running dispute over who should foot the hefty taxes on the author’s estate, which includes a rare World War II tank. Photo: Carlos Osorio/Associated Press

BALTIMORE—Tom Clancy’s widow has scored a legal victory in a long-running dispute over who should foot the hefty taxes on the best-selling author’s $86 million estate, which largely comes from a minority share of the Baltimore Orioles and includes a rare World War II tank.

Siding with Alexandra Clancy, a Baltimore judge ruled Friday that no taxes will come from the two-thirds share of the estate of which she is sole or main beneficiary. Instead, he ruled the entire $11.8 million tax bill is to be borne by the roughly $28.5 million trust that Mr. Clancy, who died in 2013, left his four adult children from his first marriage—a 41% tax hit.

The four children wanted the tax bill split evenly between their trust and a family trust of which Ms. Clancy is the main beneficiary. That would have raised the overall estate taxes to $15.7 million and divided it between the two sides at $7.85 million apiece.

If the judge’s ruling survives a potential appeal, Ms. Clancy would avoid paying the $7.85 million, while the adult children would owe nearly $4 million more than if they had prevailed in the case.

Although “some evidence” indicated Mr. Clancy wanted the family trust to help shoulder the tax burden, probate Judge Lewyn Scott Garrett wrote in his ruling that much of the evidence supported Ms. Clancy’s claim that her inheritance should be tax-free.

The judge pointed to language in the will that he said offers “the clearest and the predominant evidence” of Mr. Clancy’s intent, and he said that can only be achieved if his widow’s portion pays no tax. Her roughly $57.5 million share of the estate consists of the family trust and a tax-exempt marital trust. She and Mr. Clancy had a daughter, who is a minor.

Jeffrey Nusinov, Ms. Clancy’s lawyer, said in a statement, “We are pleased with the court’s thorough, well-reasoned opinion on this important issue.” Mr. Nusinov, managing attorney of the Baltimore law firm Nusinov Smith LLP, declined to comment further.

Sheila Sachs, attorney for the adult children, said she would review the decision with her clients before considering an appeal.

Mr. Clancy, who died at the age of 66, made his fortune writing techno-thrillers featuring the exploits of fictional Central Intelligence Agency analyst Jack Ryan.

Much of his estate consists of a 12% stake in the Orioles, valued at $65 million, according to court papers filed last year.

Mr. Clancy’s fascination with military equipment was on display in such best-sellers-turned-blockbusters as “The Hunt for Red October” and “Patriot Games.” Court filings detailed some unusual assets, such as a 1943 M4A1 Sherman tank known as a Grizzly. He kept it at a 535-acre Chesapeake Bay estate valued at $6.9 million.

An inventory filed with the court said Mr. Clancy had 26 “handguns and long guns of various makes and models” worth about $35,000.

Tom and Alexandra Clancy’s joint assets included six penthouse condominiums spread over 17,000 square feet at the Ritz-Carlton Residences on Baltimore’s Inner Harbor.

Judge Garrett’s ruling also restores J.W. “Topper” Webb to his role as the Clancy estate’s executor, called a “personal representative” in Maryland. Mr. Webb drafted a 2013 amendment, known as a codicil, to Mr. Clancy’s will, and his law firm advised Mr. Clancy on estate planning.

The judge said his ruling rendered “moot” the dispute between Mr. Webb and Ms. Clancy over his interpretation that the family trust was required to share in the estate taxes. Mr. Webb didn’t immediately respond to a request for comment on Monday.


Write to Scott Calvert at

Avoid these common mistakes when preparing a federal estate tax return

Attention to detail will keep your clients from paying more taxes than they should.

keyword image, estate taxes, estate planning, tax returnsAs a CPA, you may be asked to prepare or review the federal estate tax return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This form, which is due nine months after a client’s death, provides a snapshot of the assets included in the decedent’s taxable estate. The assets are valued as of the date of the client’s death and this value (for most assets) restarts the income tax basis for the assets included in the decedent’s gross estate. However, unlike on the income tax return, the client’s estate planning documents and how the assets are titled may determine how certain assets are characterized and whether certain elections should be made. Therefore, in my experience, it’s best if you and your client’s estate planning attorney both work on preparing Form 706, especially if it’s not a form that you prepare regularly. That way, you can work together to avoid costly errors such as the following:

  1. Missing the filing deadline. The estate tax return must be filed nine months after the date of death. Not doing so can jeopardize elections and cause interest and penalties to be due. If it will not be possible or practical to file the return on time, then you should file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes in a timely fashion. Keep in mind, however, that while filing Form 4768 provides an automatic six-month extension to file Form 706, it does not automatically extend the time allotted to pay the tax. If your client needs more time to pay, you must request an extension to do so (on Part III of Form 4768), but it’s up to the IRS whether to grant the extension.

  3. Not electing portability on the federal estate tax return of the first spouse to die. Sec. 2010(c) allows any unused federal estate tax exemption to be “portable” and therefore available to be used at the surviving spouse’s death—but only if the portability election is made on the federal estate tax return of the first spouse to die. Even if you do not think the surviving spouse will need to use the exemption, elect portability anyway, because his or her financial circumstances may change.

  5. Not including prior gift tax returns with the federal estate tax return. If you’re not a client’s first adviser, be sure to check whether his or her previous adviser prepared and filed any gift tax returns for him or her. Clients sometimes do not remember these details, so, after a client dies, have the named fiduciary write to the IRS Service Center and request copies of any prior gift tax returns. This is an important step to take, as prior gift tax returns will affect the amount of available estate and generation-skipping tax exemptions, which, in turn, affect the amount of any tax due on the federal estate tax return.

  7. Not including a tax allocation clause in a will and trust. Every will and trust should incorporate what is known as a tax allocation clause that allocates the taxes among the beneficiaries or against the residue of the estate. If there is no such clause in the document, then the law of the state in which the client is domiciled controls the allocation, and tax may be allocated to assets that would otherwise qualify for the marital or charitable deductions.

  9. Not providing adequate documentation for the assets that are valued on the return. Assets such as real estate, tangible personal property, and the interests in any closely held businesses can be hard to value. When adequate documentation is not obtained, the risk of an audit dramatically increases. Should taxes be assessed, penalties may also apply. Have appraisals (not opinions of value) made that show the fair market value at the date of death for these assets, and submit them with the tax return. These appraisals should be thorough and show comparable sales. If a discount from value is taken on the return, the appraisal should explain why that discount is the right one. The discount should also be a specific figure and not a range.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

Can Another State Tax Your Trust?

You could owe a state tax simply because a fiduciary or beneficiary was located there.

By Amy Feldman

Smartly setting up trusts requires knowledge of state tax laws, not just federal rules. Consider Robert L. McNeil, a couple of an image with an attacking cash register, non grantor trustchemist and onetime Pennsylvania resident who amassed a fortune as the business brain behind Tylenol. McNeil established trusts for his family but chose to locate them in Delaware, for tax purposes.

When Pennsylvania sent the trusts a tax bill of more than $500,000, the chemist’s family fought back. In May 2013, the Pennsylvania Commonwealth Court ruled that, despite McNeil’s residency in Pennsylvania at the time of the trusts’ creation, there was insufficient connection to the state for it to impose its income tax.

Score one for wealthy families who set up trusts in no-tax states like Delaware and South Dakota, then fight against another state’s tax grab. Fighting back isn’t easy. Pennsylvania has one set of rules and California has another, while New York — wising up to some of the complex tax-avoidance techniques used by wealthy families — changed its rules last year to crack down on certain maneuvers. “Each state has its own little unique twists and turns,” says Heather Flanagan, a senior wealth planner at PNC Wealth Management. “It’s kind of a hodgepodge right now. It would be nice to have some uniform law.”

Start by knowing that there are two types of trusts for tax purposes, grantor and nongrantor. With a grantor trust, all of the trust’s income-tax items (gains, losses, deductions, and credits) pass through to the person who set up the trust. With a nongrantor trust, the accumulated income in the trust is taxed at the trust level. The highest federal income-tax rate for trusts is 39.6% (plus the 3.8% Medicare surtax) on trust income above $12,300 for tax year 2015; state tax rates can reach double digits in places like California and New York. Beneficiaries, meanwhile, owe income tax on the distributions they receive from a trust, subject to complex calculations on what constitutes income.

IF YOUR TRUST HAS INCOME that’s sourced from another state — a rental property located there, say — you’ll generally owe tax to that state. But for a state to tax all of a trust’s undistributed income, it needs to have a substantial connection, called a “nexus,” to that state. The rules are all over the map: Your trust could be considered a resident of a state simply because the person who set it up was a resident there, or because the trustee, fiduciary, or beneficiary lived there.

You could, in fact, owe state income tax in several locales. In one infamous case, California levied a tax on a beneficiary of a Missouri trust when he received a final distribution, even though the trust had been paying Missouri state taxes during the previous years. PNC’s Flanagan points to a client who lived in Maryland and was paying taxes on a Delaware trust in several states, and wanted to decant the trust, or move the assets in it to another trust, to lower state taxes (see “How to Bust a Trust,” Penta, March 4, 2013). “We were not comfortable with their stance, so they went to another trustee,” she says.

While you may be able to get a tax credit in one state for state tax paid to another, the overlapping rules are so complex it’s not always clear how to claim one. Double taxation can happen, says Ronald Finkelstein, a tax partner at Marcum, a national advisory firm. Such issues regularly crop up in California, where there are many traps. If a New York family set up a directed trust in Delaware, then named a financially sophisticated friend in California to oversee the trust’s portfolio or to make distributions, it could face a tax hit in California.

What’s a person to do? Some wealthy families will pre-emptively move — or switch trustees — to avoid such problems. In one such case, a Californian who had sold a building-materials business for hundreds of millions of dollars, relocated out-of-state in advance to avoid the hefty state-tax hit. No surprise: Going into internal exile for tax reasons has become “a highly contentious issue in California,” says Matthew Brady of Wells Fargo Private Bank.

A client of Finkelstein’s switched from a grantor to a nongrantor trust and dropped a trustee who would have established a connection with a Midwestern state that could have staked a claim. Hundreds of millions of dollars of stock were in the trust, with a cost basis of zero for tax purposes, explaining why we were asked not to identify the players.

This, in short, is a high-stakes game of cat-and-mouse, pitting rich families wanting to hang on to their assets against states desperate for revenue. New York’s new rules crack down on a complicated planning technique known as an Incomplete Non-Grantor Trust; the strategy is to essentially straddle the rules of grantor and nongrantor trusts to cut state income taxes for residents of high-tax states. States, of course, are on to the technique. “New York is the most aggressive on doing this,” says PNC’s Flanagan. “Other states may follow.”

The game is ongoing.

Source: www.barrons.comIllustration: Dan Picasso for Barron’s E-mail:


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

Robin Williams’ Foolproof Estate Plan? How To Avoid Family Fallout

Posted by Steven Maimes,

Hartford Courant article by Kevin Hunt

5-12-15_Robin_Williams_foolproofBy Hollywood standards, Robin Williams created an uncommonly sophisticated, tax-efficient estate plan before his tragic death by suicide in August 2014.

It appeared almost beyond dispute, with a real-estate holding trust and at least one other trust, covering everything from his Villa Sorriso (Villa of Smiles) mansion in Napa Valley — listed after his death at $29.9 million — to his “memorabilia and awards in the entertainment industry” designated for either his children or widow.

But as March ended, attorneys for the estate and heirs appeared before a probate judge in San Francisco Superior Court in an ongoing battle between Williams’ widow, Susan Schneider Williams, and three children from his first two marriages.

What went wrong?

“Kids fight over the china and silverware,” says Darren Wallace, an attorney and estate planner at Day Pitney’s Stamford office. “These are the things that get people upset.”

Aside from the entertainment-industry memorabilia, Williams also left his children the “tangible personal property” in the Napa Valley home. Schneider Williams, in a court filing, requested clarity on the meaning of “memorabilia” and asked that “jewelry” left for his Williams’ children exclude his watch collection. After their marriage in 2012, Robin Williams amended one of his trusts so that she could live in their 6,500-square-foot waterfront home in Tiburon, Calif., valued at $6 million, the rest of her life and retain most of its contents. In the court filing, she asks for all property in the Tiburon home, even items the trust specifically designates for the children.

Schneider Wiliams also filed a suit in December alleging that some of Williams’ clothing and photographs, among other possessions, had been taken from their home by his three children, Zachary, Zelda and Cody. To avoid a jewelry-watch-photo challenge, says Wallace, an estate needs specifics.

“We try to be very clear in the drafting,” he says. “It looks like, from some of the reports, that language used to dispose of these things was what I would call more general language. With a client like Robin Williams, where there’s clearly celebrity or even in the more routine case, with specialty assets you could identify as having particular financial or sentimental value like wine collections, a gun collection, a car collection or art or jewelry, it’s important not to rely on more general language. You can’t leave it up to interpretation.”

Wallace often recommends a Qualified Terminable Interest Property Trust, known as a QTIP (available in any state), for blended families because it provides for the surviving spouse while retaining control of the trust’s assets after the surviving spouse’s death. A surviving spouse could remain in the family home, for example, but the house and assets ultimately belong to the children.

“It allows for exactly the situation they’re dealing with,” says Wallace. “It might not make everybody happy, but at least it avoids this type of division where everyone is putting stickies on everything they’re claiming.”

Supplement a will or trust with side letters or guidance memos, for further clarity. “Express in very clear language, not necessarily legalese,” says Wallace, “the intentions carrying out the estate plan.”

Nobody likes a movie spoiler, but a spoiler alert for a will is not a bad idea. Give your children and other loved ones an indication what you will leave them.

“Set expectations,” says Wallace, “so the folks involved, in this case the widow and children, have some idea of what the plan might call for so they’re not learning about it for the first time following a tragic event. After they lose a loved one, they’re going to be grieving. They don’t want surprises.”

Philip Seymour Hoffman, who died of a heroin overdose in 2014, did not leave money for his three children because, as court documents revealed, he did not want trust-fund kids. He left his estimated $35 million estate to Mimi O’Donnell, his partner and mother of the children. Because they were not married, however, O’Donnell did not qualify for the estate-tax law’s unlimited marital deduction. That estate-planning blunder left Hoffman with a $15 million tax bill.

The recent court appearance of Williams’ heirs probably says more about the relationship between his widow and his three children than the thoroughness of his estate planning. The judge apparently agreed: He gave the heirs two months to resolve the dispute by themselves.

Source: Posted by:  Steven Maimes, The Trust Advisor



Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

Beyond the $5 Million Federal Exemption: Today’s Estate Planning Trends

Family estate planning document image, estate planningAs 2015 continues to unfold, estate planning advisors should take note of the latest trends, which appear to be here to stay:


  1. Simplify, Simplify, Simplify (and get back to the basics) – The federal gift, estate, and generation-skipping tax exemptions are, for now, remaining at $5 million (adjusted for inflation). The trend, therefore, will be to simplify and unwind complicated structures, including trusts, which no longer have any estate tax benefit.

    Clients under the tax threshold will not want to pay to establish traditional, revocable bypass trusts, so there will be a trend back to creating simple wills. Managing the complexity and the administrative burden of numerous entities would be frustrating for many of these clients.

    Although the sentiment that “the law may change” will encourage some clients to cling to those structures, the move will be toward simplicity. Clients want transparent, understandable planning tools and no longer believe they need anything complex to accomplish their overall goals. Post-mortem techniques will allow advisors and families to have a “second look” nine months after the date of the decedent’s death to correct any factual mistakes or changes in the law that may have happened since the documents were established.

  3. Increase in Emphasis on State Estate Tax Planning. – For many families, federal estate tax planning will no longer be the main driver – state estate taxes will now be in the spotlight. In some states, there is a minimal $1 million exemption and the state estate tax rates reach 16 percent. For a $10 million estate that may not pay any federal estate taxes, the state estate taxes could be as high as $1.44 million.

    Although the state in which a family is domiciled controls the bulk of the tax, it becomes complicated to calculate the state inheritance taxes when families own property in several different states. If a husband and wife are domiciled in Florida (which does not currently have a separate state death tax), owns a vacation home on Cape Cod, and has commercial real estate in Greenwich, they would have to pay state estate taxes to both Massachusetts and Connecticut because they owned real property in both states. The state that claims estate tax domicile will prevail in assessing the estate tax on more than the real property and tangible personal property physically located in that state – it will reap the tax on the decedent’s intangible assets too, including investments and stock in the family business no matter where it is located. The determination of domicile for state estate tax purposes is fact-driven and differs from the determination of domicile for state income tax purposes. Estate planning professionals need to pay particular attention to these points.

  5. Increased Focus on Intergenerational Planning – As greater wealth passes down unhampered by federal estate taxes, it will become easier to hold broad discussions on family wealth that cut across generational lines. Insurance professionals must shift gears from the old goal – preserving the wealth by making sure that the government interferes as little as possible – to emphasizing the capture, preservation, and management of the assets for the good of a family system for generations to come. This requires a candid and thoughtful conversation with the family to discuss their common goals, their visions for the future, and how the family business will be managed in subsequent generations.

  7. Investment Choices on Dynasty Trusts Established to take Advantage of the Federal Gift Exemption. At the end of 2012, many high net worth families took advantage of their ability to gift $5 million, adjusted for inflation, and transferred assets to trusts. In the year-end rush, many of those trusts now have investments but no investment strategy. Now that this increased exemption has become permanent, many families will continue to implement and fund these trusts. From a leverage point of view, current law dictates that those assets, no matter how much they appreciate, will bypass estate tax for subsequent generations and will do so until the trust terminates. From an estate planning point of view, advisors should consider investment leverage and with their fiduciary duty in mind, contemplate investing those assets for future growth. Many families are also purchasing life insurance as part of this investment strategy, as it provides additional leverage and the funds used to purchase the insurance have already been moved out of the federal transfer tax system.

  9. Understanding the Impact and Influence of Double Inheritors. Many baby boomer women in this country will be double inheritors – they will inherit wealth from their parents and from their spouse. Over the next 20 years, the amount of wealth that will pass through and be controlled by baby boomer women will be staggering. As advisors, it is imperative that we understand the enormity of this market and acknowledge that reaching the woman client is different from reaching the male client. That woman client may be happily married now (and widowed later), single, divorced, widowed or remarried.
    Author Tom Peters, who has written extensively about organizations, leadership, and trends in the marketplace, is convinced that women represent the number one economy – and he believes that the impact of the women’s market on our global economy may be even bigger than the impact of the Internet. Understanding and reaching the double inheritor market is an important client service and an increasingly important business opportunity for estate planning advisors.

Now that the $5 million federal exemption appears to be permanent, estate planners need to refocus their energies – and their clients – to creating estate plans that are less concerned with avoiding federal taxes, and more concerned with managing and maintaining wealth for current and future generations.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

Common Post-ATRA Estate Planning Mistakes

A false sense of security can lead a client (and his or her adviser) to make mistakes.

estate planning imageThe American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, changed the game in estate planning by significantly increasing the amount of wealth that a taxpayer may pass free of federal gift and estate tax to beneficiaries. Many advisers and clients who are under ATRA’s $5.34 million exemption (inflation-adjusted for 2014) believe their past planning is sufficient, that estate taxes are no longer relevant as part of their planning, and no further action is required.
This false sense of security can lead a client (and his or her adviser) to make several mistakes. This article examines three of them.

  1. Mistake: Ignoring the impact of the state estate tax
  2. I recently had a telephone conversation with a very angry client whose mother had recently died. Her mother’s net worth was under the federal exemption, and I told her that the Massachusetts estate tax was estimated to be $160,000. I wanted her to reserve the cash now to pay the tax instead of investing it. All the publicity about the increased federal exemption had led the daughter (and many Americans) to believe that estate taxes were no longer relevant. I explained to her that her mother had been very aware of the Massachusetts estate tax and did not want to gift any of her assets to reduce it, as she had begun her planning when her estate would have been subject to a much more significant federal estate tax.

    Many states have an estate tax, and the rates in some rise as high as 20%. Fewer people paid attention to state taxes back when the federal estate tax exemption was much lower. Now that the federal estate tax is out of play for some of them, clients need to revisit their planning for state estate taxes.

    This is especially true for clients who have real estate or tangible personal property located in more than one state. That’s because the estate may be subject to state estate tax in several jurisdictions and there may be a dispute as to which state the decedent was domiciled in. It is important to review the plans of those clients and consider what options exist now.

  3. Mistake: Blind reliance on “portability”
  4. For federal estate tax purposes, the gift and estate tax exemption is now portable, meaning that if one spouse does not fully use his or her exemption during his or her lifetime, the surviving spouse can take advantage of it later.

    While clients and advisers may rely on portability as a default strategy, other considerations should be taken into account. Portability does not include an inflation-adjustment factor for the first spouse to die’s exemption. (This is different from a credit shelter trust where the funded assets and their appreciation will bypass estate tax at the death of the surviving spouse.) Portability is federal and is not recognized at the state estate tax level.

    Portability is an important planning strategy, but it should not be used as the absolute strategy. All factors should be considered and reviewed on an ongoing basis before assuming it is the “right” answer.

  5. Mistake: Failing to understand that the cost of long-term care may cause more significant erosion to family wealth than estate or income taxes

Families whose assets are under the exemption threshold and no longer have to plan to avoid or reduce the estate tax should still be concerned about the erosion of the family’s wealth. With an aging population that is living longer and needing additional assistance with custodial care, the key goals of estate planning could very well shift. Instead of focusing on how they can help clients protect their accumulated wealth from taxation, CPA planners may concentrate on helping clients protect their accumulated wealth from the escalating cost of health care. While the focus may change, the need for financial planning will be just as critical. The CPA, as a trusted adviser, is well-positioned to start that vital conversation and keep reviewing it as the client’s situation changes.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

Buyers Find Tax Break on Art: Let It Hang Awhile in Oregon


Francis Bacon’s “Three Studies of Lucian Freud,” one of the most expensive works ever sold at tax break, portland museum, schnitzer museum, hspace=auction, was lent to the Portland Art Museum. Credit Leah Nash for The New York Times

EUGENE, Ore. — The Jordan Schnitzer Museum of Art, tucked into a quiet corner of a college campus here in the hills of the Pacific Northwest, is hardly the epicenter of the art world. Yet major collectors, fresh from buying a Warhol or a Basquiat or another masterpiece in New York, routinely choose this small, elegant redbrick building at the University of Oregon to first exhibit their latest trophy.

The museum’s intimacy and scholarship are likely to play some role in their choice. But a primary lure for the collectors is often something more prosaic: a tax break.

Collectors who buy art in one state but live in another can owe thousands, tens of thousands, even millions of dollars in state “use taxes”: taxes often incurred when someone ships an out-of-state purchase home. But if they lend the recently purchased work first to museums like the Schnitzer, located in a handful of tax-friendly states, the transaction is often tax-free.

Beyond the benefit to museums, this lucrative, little-known tax maneuver has produced a startling pipeline of art moving across the United States as collectors cleverly — and legally — exploit the tax codes.

Dozens of important works have come to the Schnitzer in recent years, largely because of the tax break, museum officials believe — so many that the museum has a program called “Masterworks on Loan”; the featured works are housed in a second-floor gallery.

Similar loans — which rarely extend beyond a few months — also flow into other museums in Oregon, and occasionally New Hampshire and Delaware, all states that have neither a sales nor a use tax.
The Portland Art Museum, for example, has a long history of receiving art loans from collectors, including, most recently, Francis Bacon’s triptych “Three Studies of Lucian Freud,” one of the most expensive paintings ever sold at auction.

Portland officials say collectors lend art for a variety of reasons, not just for the tax break. But only a few weeks after the painting sold for a stunning $142 million last fall at Christie’s in New York, it landed, to the surprise of many, in the Portland museum, where it drew large crowds for 15 weeks.

By shipping the painting first to Oregon, instead of her home in Las Vegas, the new owner, Elaine Wynn, may be eligible to avoid as much as $11 million in Nevada use taxes, though it is not clear whether she intends to take advantage of the break.

Collectors typically learn of this strategy only through savvy lawyers, dealers and auction specialists. But within the circle of people who know of the practice, it generates debate between those who appreciate how it fosters public access to art and those who suggest that such access comes at too high a price to unwitting taxpayers.

For example, do taxpayers in, say, California even understand that they have given up millions of dollars in tax revenue over the years to, in effect, underwrite the display of paintings in other states?

“Some states are going to become aware of this and realize what potential revenue they are missing under the current laws,” said Steven Thomas, a lawyer in Los Angeles who advises art collectors on tax matters.

Supporters defend the practice as an important way to ensure public access to significant art before it disappears into private collections. Robert Storr, the dean of the Yale School of Art, described it as a “great resource” for museums. At the Schnitzer, a teaching museum, curators and members of the faculty use the loans in their programs.

“The two museums, the Portland Art Museum and the Jordan Schnitzer Museum of Art, are the beneficiaries of getting amazing works of art that they would not get,” said Jordan Schnitzer, a businessman and collector who donated millions of dollars to the Eugene museum that bears his name and served on the board of the Portland museum.

But critics of the practice also question whether museums curry favor with possible donors by accepting loans, and they complain that works are sometimes exhibited without the context or curatorial judgment that museums traditionally provide. A recent visit to the Portland museum found some lent works exhibited haphazardly: a Cubist work from the 1950s, for example, placed amid American art from the 1980s.

“It is an amazing opportunity for these smaller cities to show these works,” said Mack McFarland, a curator at the Pacific Northwest College of Art, in Portland. “But one does have to wonder, doing a cost-benefit analysis on a more global scale, whether or not the tax break for these wealthy collectors is worth it.”

States employ use taxes to compensate for residents who avoid sales taxes by shopping in another state. The tax rate is generally the same as the sales tax, and people are supposed to calculate what they owe on items bought out of state, then pay that amount as part of their tax filings.

Art collectors who seek to avoid the tax typically offer a recently purchased work to a museum in one of five states — New Hampshire, Oregon, Alaska, Montana and Delaware — that do not have a use tax so that the loan does not incur a tax.

As long as the painting stays at the museum for an extended period, typically more than three months, before being shipped home, the practice in several states where collectors live, like California, is to regard the exhibition as a first “use” of the item and waive any tax. The result is a tax-free transaction.

The Hallie Ford Museum of Art at Willamette University in Salem, Ore.; the Delaware Art Museum in Wilmington; and the Hood Museum of Art at Dartmouth College in Hanover, N.H., are among other institutions where collectors have lent art because of tax considerations.

The tax strategy is 100 percent legal, experts say, as long as all stages of the museum transfer are handled correctly.

Schnitzer officials said that many California collectors had taken advantage of the tax provision. “We are on their way home,” said Jill Hartz, the executive director of the museum.

California explicitly outlines a “first use” exemption in its tax code. It says that property, whether a couch or a Caravaggio, that is first “used” out of state for more than 90 days does not incur the tax.

Jill Hartz of the Jordan Schnitzer Museum of Art in Eugene, Ore., said art loans have aided its educational mission. (It is unclear if the owners of the works shown lent them for the tax considerations.) Credit Leah Nash for The New York Times

Experts said that for many years it was known in art circles as the “Norton Simon rule,” because Mr. Simon, an industrialist who died in 1993, was one of the first art collectors to make ample use of it with loans to several museums like the Portland Art Museum.

States have no reliable calculus to measure what sort of tax revenue is being lost. But in a recent example, a California collector is eligible to save at least $390,000 by employing the tactic.

The collector bought a painting, “Ribs Ribs,” by Jean-Michel Basquiat, at auction in New York last year for $5.2 million. Since the painting was being shipped out of state, the new owner was not liable for the New York sales tax.

But the buyer would still have owed use taxes in California (which range from 7.5 percent to 10 percent of a sale price), had the work been sent directly there. Instead, the Basquiat went to the Schnitzer, a detour that meant that the collector was eligible for the first-use exemption, according to the dealer involved in the transaction.

“It is one thing if you are buying a pair of shoes or pots and pans,” said Anne-Marie Rhodes, a Loyola University Chicago law professor, “but in these times, when regular taxpayers have it so difficult, to have such an easy way to avoid the use tax is hard to justify.”

Collectors who live in states that don’t recognize a first-use exemption are out of luck. New York, for example, typically imposes a use tax — 8.875 percent in Manhattan — on art brought into the state by a resident, even if it is first publicly displayed elsewhere.

Collectors, of course, routinely lend to museums for reasons that have nothing to do with a tax break. They want to educate the public, perhaps, or seek advice on conserving a work.

Andrew Teufel, a San Francisco private investor and collector who has lent many works without any tax consideration, said he lent one work, a Kay Sage painting now at the Schnitzer, that will qualify for the tax break. But he said he primarily lends art to enrich others, as well as to bolster its provenance and value.

“The tax preference is the icing on the cake,” he said.

Jerry Kohl, a California businessman, took the tax break when he lent a Warhol to the Schnitzer two years ago. But he said he would have made the loan even without any tax consideration. Still, he said, he thinks the tax code should be tightened.

“The provision should require owners to lend a work out at least every five years instead of just once,” he said.

In Portland, the use of the tax break took off in the 1990s, when the museum’s executive director was John E. Buchanan Jr., according to his widow, Lucy Buchanan. She said he built relationships with West Coast collectors whose loans helped the museum raise its profile.

In those years, questions arose about the sudden arrivals of unannounced loans, which were disruptive to the museum, said Kristy Edmunds, a former curator there who is now the executive and artistic director of the Center for the Art of Performance at the University of California, Los Angeles.
“Crates would land on the loading deck,” she said, “and everyone would be calling up, ‘What is in this shipment?’ ”

Current Portland museum officials said they did not promote the tax break. But they acknowledged that they had had to initiate a policy to deal with unsolicited offers for short-term loans that says that they must be approved by the director, and others, to ensure that the art meets the museum’s standards.

Ms. Wynn, the ex-wife of the casino magnate Steve Wynn, declined to respond to requests to detail her tax plans for the Bacon triptych, which was on display in Portland until last week. Museum officials said that they knew nothing about them.

They said the triptych came to the museum because the museum’s chief curator, Bruce Guenther, reached out to the owner shortly after the sale. (Museum officials have not identified the owner of the triptych, but art world sources have named Ms. Wynn.)

The museum said that tax considerations were not part of the discussions and that the owner had been impressed by the museum’s commitment to display the work prominently.

Brian Ferriso, the Portland Art Museum’s director, said his institution insisted in most cases that a work of art be lent for at least 120 days, not 90, to give it greater public exposure but also to avoid any appearance that its program exists purely to fit the prerequisites of the California tax provision.

“We want to be seen as an institution that is putting art on the wall in a transparent fashion,” he said.

Robin Pogrebin and Carol Vogel contributed reporting from New York.
A version of this article appears in print on April 13, 2014, on page A1 of the New York edition with the headline: Buyers Find Tax Break on Art: Let It Hang Awhile in Oregon. Order Reprints|Today’s Paper|Subscribe

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

3 Tips to Planning at the Intersection of Income and Estate Taxes

The American Taxpayer Relief Act (ATRA) significantly increased the federal estate tax exemption in 2013 to Estate Taxes$5,250,000 (adjusted for inflation). For estate planners that have traditionally overlooked the income tax during planning discussions, it’s time to take another look at that tax and how and where it intersects with estate taxes.

  1. A refresher course on the relationship between the federal estate tax and the federal income tax.
  2. If there is no federal estate tax, giving the asset away during lifetime can result in overall higher taxes paid by the family. Under the ATRA federal income tax rules, capital gains on appreciated assets will be taxed at a 20% rate for taxpayers with taxable income over $450,000 (joint filers), $400,000 (single filers), $425,000 (heads of households) and $225,000 (married taxpayers filing separately). The capital gains tax is 15% for taxpayers that are below those thresholds. Also under ATRA, there is a 3.8% investment tax that may apply, with a significantly lower threshold. The investment tax is based on modified adjusted gross income (adjusted gross income plus any excluded foreign income) and is $250,000 for joint filers, $200,000 for single filers, $200,000 for heads of households and $125,000 for married filing separately.

    When the asset is given during lifetime, the recipient inherits the income tax basis of the donor if that basis is appreciated (IRC Section 1015(a)). The result may be a significantly higher overall tax paid than if the asset transferred at death. In other words, if the gross estate of the donor is less than the federal estate tax exemption, and there is significant built-in gain in the asset, then giving it during lifetime will trigger the gain when that asset is disposed of or sold.

    When evaluating the tax cost to a lifetime gift, look at the state inheritance and estate taxes too. For states with an estate tax, the exemption is lower than the federal estate tax exemption level, so there may be a state estate tax due even if there is no federal estate tax due. Retaining the asset until death may result in no federal estate tax, a state estate tax, and a fresh start income tax basis for income tax purposes. It is important to run the numbers and determine the lowest combination of those three taxes to make an informed planning decision.

    If property given during lifetime is depreciated at the time of the gift, the donee takes as the income tax basis the fair market value of the property at the time of the gift – but only for the purpose of taking losses. (IRC Section 1015(a)). The donee’s basis is increased by the portion of the gift taxes paid on the gift transfer. (IRS Section 1015(d)(6)).

    When the bequest occurs at death time, the income tax basis receives a fresh start and is stepped up to the date of death value, or the alternate valuation date, if that was elected. (IRC Section 1014). This occurs even if no federal estate taxes are due, meaning that any gain accrued prior to the date of death disappears. On the other hand, if the asset was depreciated for loss recognition purposes, the basis steps down at the time of death and loss cannot be recognized.

    If the taxpayer is domiciled in a community property state, then the surviving spouse’s share of community property is treated as acquired from the decedent and receives the stepped up or stepped down basis even if it was not included in the taxpayer’s federal gross estate. (IRC Section 1014(b)(6)).

    There is a glitch if the decedent had acquired the asset within one year of death and if at the taxpayer’s death the asset passes back to the donor or the taxpayer’s spouse. In that case the basis does not step up (Section 1014(c)). From a planning point of view, if the taxpayer’s health is declining, it makes sense, if possible, to make the gift more than one year prior to death and to someone other than the donor or the taxpayer’s spouse.

    Another exception to the stepped-up basis rules pertains to what is known as “income in respect of decedent” under Code Section 691.  Section 1014(c) provides that these items are to be included in full in the decedent’s gross estate and treated as gross income when realized. Essentially, these assets are taxed at twice – once for the estate tax and once for the income tax. There is an estate tax deduction under Section 691(c) for the estate tax attributable to the inclusion of income in respect of decedent on the decedent’s federal estate tax return.

    Examples of assets subject to both taxes include certain salary and fringe benefits accrued at death, fees and commissions performed during lifetime and paid after death, and retirement plan assets and dividends. If the taxpayer’s intention is philanthropic, however, donating these assets to a qualified charity qualifies for both the estate and income tax deductions.

    In light of the significantly increased federal estate tax exemption, take into account these income tax considerations in determining which assets should be transferred during lifetime, at death, to individuals, and to charities.

  3. Carefully Consider the Tax Consequences of Installment Sales
  4. The older generation may decide to sell the family business or commercial real estate to the next generation on an installment basis, which freezes the value of the asset for estate planning purposes. With the significantly increased federal estate tax exemptions, however, this may no longer be important. For federal income tax purposes, installment sales allow the taxation to be proportionately spread out during the years that the principal payments are made. Since this is a lifetime sale, there is no fresh start basis in the underlying asset and the heir who inherits the note continues to pay income taxes on the payments as they are received.

  5. Determine if Charitable Gifts Should be Made Lifetime or Death Time.

For clients who wish to leave a death time bequest to a charity, if the estate is not subject to federal estate tax then there is no deduction.  If the estate taxes are deferred until the death of the surviving spouse, and the charitable bequest occurs through the estate of the first spouse upon their death, in all likelihood there will be no federal estate tax and therefore no estate tax charitable deduction. Alternatively, the client may decide to make the gift during his lifetime and obtain the charitable income tax deduction, or he may ask his spouse to voluntarily make it during her lifetime if she survives him and take the income tax deduction. His estate planning documents could provide that if that is not done then the charitable bequest is to be paid when they both die.

With the significantly increased federal estate tax exemption, it is increasingly important for advisors to understand and focus on the income tax consequences of estate planning.

Patricia Annino
is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,