Building a Team for Your Key Client When There Is a Disruptive Change in Income and Financial Status

Wham – your client suddenly comes into money. He is an athlete or entertainer who has just been discovered and his income is about to inheritance, bankruptcytake a quantum leap forward. He just won the lottery. His aunt died and left him a significant inheritance. A public company has just become interested in his “decades-old” start-up and makes him a substantial cash offer.

Wham – your client suddenly loses a great deal of money. He gets the pink slip. He owns a small business and his major vendor suddenly goes bankrupt leaving him with a cash shortage, tremendous bills, and nothing in the pipeline. He thinks he is all set financially and watches the news – the Bernie Madoff Ponzi scheme wiped him out. His house burned down. He becomes disabled. His business partner dies unexpectedly and he should not have cancelled the life insurance last year. Or your client is Paula Deen and her financial empire implodes in a second, causing a catastrophic and sudden loss in income and net worth.

As the client’s accountant and most trusted advisor, you are his first call. He can’t think straight and you know – whether the wham is good or bad – that he is in the middle of a life-changing event and that you will be helping him through this next phase.

A critical first step is to help your client form a team of advisors that is right for his particular situation – a team that is likely different from his current one. By working with the client to form a new team, the client is forced to come out of shock and into action. It is only through action that the right result will unfold. And while he may be uncomfortable even thinking about replacing or expanding his team, the issues he is now facing may be more advanced or complex than what the team normally handles.

In light of the unexpected turn of events, suggest what types of advisors or specialists he will need, and help him find good candidates. If some members of his current team are not right for his current situation, it may be up to you to make that clear to them.

You could think about this in medical terms: if the client was diagnosed with a serious illness he would consult various physicians for treatment options. The same goes for attorneys and advisors. The client should interview several specialists and pay them for their time. With each meeting, he will learn what advice has been given to others in similar situations. If the event was a negative one, the client will start to acknowledge the depth of the crisis during the interview process.

If the shock is a positive one, the lawyer that is right for the client’s sudden windfall may be different from the one he normally deals with. The lawyer who formed his corporation and negotiated his leases is probably not the right lawyer to help him sell his business to a public company. The financial advisor who has been counseling him in his current financial situation may not be used to dealing with wealth at the level of a significant liquidity event or lottery win.

The client must also be aware that some of the advisors he interviews could have their own agenda. If the financial upside is significant and the advisor would benefit from that upside, that is an important factor to consider. In this situation, the client should interview advisors who have dealt with significant wealth. And as the client’s most trusted advisor, your role is critical – you knew him long before Lady Luck arrived and you will know him long after she disappears.

If the shock is not positive, his current lawyer may not be right for this crisis. While a good general lawyer may be part of the solution, a specialized lawyer is essential. If the client has creditor/bankruptcy issues, he should retain a lawyer who specializes in that. If the crisis may lead to divorce it might be a good idea to consult with a divorce lawyer too.

One of the most important factors in selecting advisors is identifying who the client is most comfortable working with. Whether the wham is good or bad, this is a significant life event and the psychological component cannot be overlooked. Trust is essential. The client is at his most vulnerable, and he needs advisors with whom he can share everything, where he won’t feel judged, and where he won’t feel like someone is using his situation to further their own agenda.

If the wham is negative, don’t underestimate the power of spiritual counseling – even if the client has never sought that type of advice before. He may be feeling shame, guilt, and anger, so speaking with a rabbi, priest, minister or other spiritual/religious advisor might be important to him – someone who has no ulterior motive, who might help him forgive himself, and who will keep whatever he has to say totally confidential.

Having someone like that to confide in may help the client navigate the storm, and help him deal with the impact that his actions have had on those he loves and who depend on him. It is also important for one of the members of his team to be completely independent from the crisis at hand – someone who will bring a fresh perspective to the situation.

The client will find that in bad times, people who know about his crisis will seek him out – friends he never dreamed would care often show up. When that happens, the client should be open to them. Consider whether they would be the right ones to talk to and lean on. There may be a good reason they are showing up now – he should be approachable.

As the client’s most trusted advisor, forming the right team and staying the course while he works through the tsunami of financial, legal, and psychological issues will be one of the most important client services you will ever provide.

 

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, http://www.patriciaannino.com.

Estate planning for valuable art (Part Two)

Lessons Brooke Astor could have used.

To continue our discussion from May 22.  Here are several additional options and considerations you may find appealing.

CRATs and CRUTs

The donor may determine how the income interest will be calculated with a CRT. There are two types of CRTs: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). The CRAT is designed so that the actual dollar amount distributed to the donor (and/or the other persons the donor designates) are fixed when the trust is created and funded. Generally the predetermined annuity amount will not change no matter how the trust assets fluctuate in value. A CRAT can be appealing to the donor who needs a specific amount of income and who is concerned about a change in income payments.

A CRUT is designed so that the amount distributed to the donor is recalculated each year based on a fixed percentage of the trust’s fair market value for that year. Unlike the CRAT, the CRUT is not a fixed annuity payment. The fixed percentage will not change; however, the amount that the donor receives can fluctuate. If the CRT performs well and the trust assets increase in value, so will the income interest payment, which is calculated as a fixed percentage of the increased trust value. However the reverse is also true, and if the trust decreases in value, the income interest will also be affected. A CRUT is appealing for the investment-minded donor who wants to benefit from increased income payments resulting from the long-term appreciation of the trust assets. There are various types of CRUTs, which should be explored in greater detail before the client makes a final decision.

A disadvantage of using a CRT for art is that because art is personal property, the income tax deduction may be limited significantly. In addition, when a charitable contribution consists of a future interest in tangible personal property, no deduction may be taken until all interests and rights to possession or enjoyment of the property have expired or are held by a person other than the donor (Sec. 170(a)(3)).

The tax benefits of transferring art to a CRT and later selling it include avoiding the capital gains tax on the sale of the asset and removing the underlying value of the asset from the donor’s taxable estate. Of course, the reason that the art is removed from the taxable estate is that it is no longer owned by the donor. For that reason, some donors couple the use of a CRT with what is known as an irrevocable life insurance trust. When used together, these tools replace the art’s value and keep that value out of the donor’s taxable estate.

Trusts

The client may also choose to make a gift (lifetime or at death) of the art to family members in trust. If the client wishes the art or collection to stay with intended beneficiaries, he or she can establish an irrevocable trust and transfer the collection to it. That will protect the assets from the creditors of the beneficiaries and preclude its value from being taxed in the client’s estate. If doing so, it is advisable to add enough funds to that trust to insure and maintain the art. Choosing a trustee must be carefully considered as the trustee or trustees will have the continuing ability to manage the trust assets, including the art.

Fractional Interests

A gift of a fractional interest in art should also be considered. However, the Pension Protection Act of 2006 (PPA) greatly limited the value of this strategy. Until passage of the PPA, a collector could donate a fractional interest in a work of art to a museum that qualifies as a charitable institution. Collectors did so for many reasons, one of which was that they could take a tax deduction for the value of the fractional interest. For example, if a collector donated a 50% interest in a painting to a museum, he or she could write off half the value as a charitable deduction. The painting would spend half the year in the donor’s possession and half the year in the museum’s. Unfortunately, this led Congress to be concerned that collectors may have been abusing the write-off by enjoying more than their rightful share of the art. For example, if a collector donated 50% of the art but kept it for more than six months a year, the public would be losing out on the painting’s availability during the excess period.

To address this perceived abuse, Congress changed the law to make donations of partial interests in artwork much less attractive for donors. Generally, before the PPA, the collector would bequeath the remainder of the fractional interest to the museum so the collector’s estate would take a charitable contribution deduction for the remaining current fair market value at the time of the collector’s death. But the PPA changed the law to require that the write-off be based on the art’s value at the time the original fractional interest was donated if the art appreciated in value, rather than on its value at the time of the collector’s death. If the art’s value has appreciated in that period, as it typically does, the law will reward the collector by reducing the amount his or her estate could take as a deduction for the donation and thus increasing the estate tax liability.

Consider the example of a painting worth $1 million when the collector first donated 50% to the museum. The collector bequeaths the remaining 50% of the painting when she dies, at which time it is worth $10 million. Under the old rule, the painting would pass to the museum and the estate would take a $5 million charitable contribution deduction. Under the new law, her estate may only deduct $500,000 and the estate would have to pay taxes on $4.5 million more than it would have under the old law.

The PPA also introduced recapture rules (deductions turned back into taxable income) that further reduce the desirability of contributing a partial interest in art. If the collector fails to donate the balance of the art to the museum on or before the earlier of 10 years of the original gift or the collector’s death, the collector will be forced to recapture the deduction. In addition to paying income tax and interest on the recaptured amount, the collector must pay an additional 10% tax on it. This essentially requires the collector to donate or bequeath the remaining fractional interest or lose the tax benefit of the original gift.

Conclusion

If the client has valuable art, it is important that he or she assemble a team of advisers that understands how to deal with it. The team may include an attorney, financial adviser, tax specialist, and an art succession planner. It is wise to make sure that the team members know the extent and value of the art and how the client intends to dispose of it so that it can properly be taken into account when establishing a financial and estate plan.

The decisions and choices as to how to preserve the legacy of artwork should be thought through with care and involve a discussion with the client, the intended beneficiaries, the charitable organization, and the team of advisers.

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, http://www.patriciaannino.com.

Patricia Annino Receives “Best in Wealth Management” Award

The Euromoney Legal Media Group chose Patricia Annino, Chair of Prince Lobel’s Estate Planning and Probate Practice Group, to receive the prestigious “Best in Wealth Management” award at the second annual Americas Women in Business Law Award ceremony held May 24, 2012, in New York City.

Selected from a short-list of eight well-known, highly-qualified nominees, Patricia’s award was based on extensive peer review research conducted by Euromoney’s research team, her professional accomplishments during the past 12 months, and her advocacy and influence in the field of wealth management.

Following the success of similar award ceremonies in Europe and Asia, the Americas Women in Business Law Awards was launched by Euromoney Legal Media Group to give law firms and professional services firms the recognition they deserve for their efforts in helping women advance in the legal profession.

Patricia Annino is a nationally recognized expert on estate planning and taxation, with more than 25 years of experience serving the estate planning needs of families, individuals, and owners of closely held and family businesses. She speaks regularly on many issues of concern to family owned businesses, including succession planning, risk management, managing a business with multiple stakeholders, the risk of divorce, and more. Annino is a graduate of Smith College and Suffolk University School of Law.

Patricia is the author of two widely utilized professional texts: Estate Planning in Massachusetts, and Taxwise Planning for Aging, Ill, or Incapacitated Clients. Patricia’s recent books for consumers include, Cracking the $$ Code: What Successful Men Know and You Don’t (Yet), Women in Family Business: What Keeps You up at Night, and Women & Money, A Practical Guide to Estate Planning.

About Prince Lobel

Prince Lobel Tye LLP is a full-service law firm providing a wide range of services for Fortune 1000 companies, closely held businesses, and individuals. Prince Lobel’s attorneys are guided by the highest standards of legal excellence, professionalism, and service – whether they are addressing complex business issues or providing advice on personal legal matters. Practice areas and industries served encompass corporate law, data privacy and security, domestic relations, employment law, estate planning and probate, insurance and reinsurance, intellectual property and Internet law, litigation, media law, nanotechnology, real estate, telecommunications law, construction law, environmental law, renewable energy, health care, and education. For more information, visit Prince Lobel at PrinceLobel.com.

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, http://www.patriciaannino.com.

Estate planning for valuable art (Part One); Lessons Brooke Astor could have used.

According to many who knew her, noted heiress and philanthropist Brooke Astor had a favorite painting, a Frederick Childe Hassam work known as “Flags, Fifth Avenue.” This American impressionist painting hung in a prominent place in her apartment since the early 1970s. Her son, Anthony Marshall, sold the painting while she was alive (and not competent) for $10 million and paid himself a $2 million commission. A short time after the sale, the dealer resold the painting for $20 million.

For many individuals and families, what to do and whom to trust with art is a thorny issue. It is important to consider the legacy of the work itself. Understanding the choices of who should receive it, who can afford to pay any estate taxes on it, who can afford to maintain it, who will use it, and who will appreciate it is an important part of the planning process. For many families these are not simple decisions. The right solution lies at the intersection of many complex and sometimes competing considerations.

Valuing art is an inexact science. No one can ever be sure what the market will bear. A first step to understanding the value is to get a qualified appraisal and valuation. The appraiser should be a member of either the American Society of Appraisers, the Appraisers Association of America, or the International Society of Appraisers.

It is important that the client understands the impact of taxation on the art in his or her estate (editor’s note: for more on this topic also see this Journal of Accountancy article.) For estate tax purposes, the gross estate of a U.S. citizen or resident at the time of his or her death, includes “the value of all property, real or personal, tangible or intangible, wherever situated” owned by the decedent at the time of his or her death (Sec. 2031(a)).

The IRS has established an Art Advisory Panel whose task is to assist the Service in reviewing and evaluating appraisals of artwork in conjunction with federal income, gift, and estate tax returns. (IRS Internal Revenue Manual, §42(16)4). The panel consists of 25 art experts. If a tax return containing art with a claimed value of at least $20,000 is selected for audit, the case must be referred to the panel. If the artwork exceeds $50,000, Rev. Proc. 96-15 (modified by Announcement 2001-22) provides that a request can be made for an IRS-expedited review of the art valuation.

The client should understand that with valuable art, more may be included in his or her gross estate than the art itself. Art may have to be sold and substantial commissions paid on the sales. If that is the case, it may be desirable to mandate in estate planning documents that a sale be made by the executor so that the commissions are deductible as administrative expenses. The only other way that commissions paid on the sale of the art after death are deductible from the estate is if the sale is necessary to pay the estate taxes. In other words, if the art is sold by the estate (for any reason other than it was essential to pay estate taxes) and the estate planning documents do not mandate that the art be sold, then the expenses of the sale, which can be significant, will not be deductible. Therefore, in essence, the heirs will be paying an estate tax on the lost deduction.

That is one reason it is important to have a frank discussion with family, beneficiaries, and any intended charity before bequeathing art. If a piece of art has always been in the client’s family and the client believes that his or her children wish to receive it, it is wise to have a conversation with the children or heirs to see if they want the art or if they are more interested in converting it to cash. In reality, the children or heirs may be unable to pay the taxes and the cost of maintaining the art.

The possible lack of deduction from the taxable estate for expenses attributable to the sale of art underscores how critical it is to discuss the art’s legacy with heirs and with any charitable organization in the planning process. If the client wants to leave the art to a charitable organization and the organization is willing to accept it, then the art’s value is included in the taxable estate and the estate receives a charitable deduction for the gift. If the charitable organization does not accept it and there is no alternative provision and the art is sold and added to the residue or passes to individual heirs, the expenses attributable to the sale are not deductible.

If, in the discussion about art, one family member does wish to receive it, then in the planning process you must carefully address how the estate taxes on that art are to be paid —who is to bear the burden of that tax? Is it the recipient or is it the estate’s remaining assets? Another option may be to consider what is known as a disclaimer—that is, the client leaves the art to the charitable organization or to a family member, and if they disclaim it (or choose not to take it) then the will mandates the sale of that asset to ensure that the estate will receive the requisite deduction.

If the client is considering gifting art to a charitable organization, find out now whether it is realistic for that organization to accept the gift and discuss any terms of the gift. Will there be any restrictions? Are those restrictions realistic? Are there endowment funds that will accompany the donation? It can be a burden to maintain and store art for a significant period of time. In my experience, donating funds to assist with maintenance and storage is prudent.

Charitable Remainder Trusts

Lifetime gifting options should be explored. There can be income tax benefits to making the gift of art—whether outright, in trust, or by fractional interest now. To assess the benefit, you must determine the income tax basis in the asset and quantify any capital gains tax that will be due on the sale. To avoid that gain, some clients consider transferring the art to a charitable remainder trust (CRT). A CRT (known as a split interest gift) is an irrevocable trust. The donor can gift the assets to the trust and retain the right to receive income for a predetermined period. When the income period ends, the CRT ends, and the remaining assets are distributed to the charitable organizations the donor has selected.

When the donor contributes an asset to the CRT, the donor will (in most cases) receive a current income tax deduction equal to the present value of the gift the charity will eventually receive when the CRT ends. Because CRTs are generally tax-exempt, appreciated assets can be gifted to a CRT and later sold without the donor or the trust owing capital gains tax. However, a CRT with unrelated business taxable income may be subject to a 100% excise tax on the unrelated business taxable income.

When the CRT is being established, the donor must decide the length of the income interest. In many cases, it is a lifetime payment stream (and/or for the lifetimes of one or more other persons the donor designates). As an alternative, the donor may direct that the income interest be paid for a specified period not to exceed 20 years. Once the specified income interest has concluded, the CRT terminates and the remaining assets are distributed to the charities that the donor has chosen.

Next week we’ll continue this discussion by looking at several types of trusts you may want to consider when making these types of gifts, as well as, the Fractional Gift option, and changes in the way these are managed.

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, http://www.patriciaannino.com.

Donor Education & Financial Literacy

Educating the Donor about Tax Savings and Efficiency Matters

A significant advantage of financial literacy is that it can save the donor in estate tax depending on the type of gift made to institutions. It is important for donors to realize that inaction is involuntary philanthropy.  That is, what donors pay in taxes to the federal and state governments is spent by the government as it wishes on programs of its choosing.

So when donors pay taxes or give money without exercising any specific influence, they have engaged in de facto involuntary philanthropy.  That involuntary philanthropy can be at least partially converted to voluntary philanthropy by donating part of what the government would otherwise receive to charities of the donor’s choosing for purposes of the donor’s choosing.

Once donors realize that they have engaged in involuntary philanthropy, they are often motivated to consider philanthropic gifting. In other words, when the donor makes a private charitable gift and receives an income tax deduction for that gift, then the government loses part of its share of revenue and those funds are instead redirected to the specific philanthropic causes of the donor’s choosing.

Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in an estate plan. (http://www.360financialliteracy.org/Topics/Budgeting-Spending/Budgeting-and-Saving/Charitable-giving?print=1). By leaving money to charity, a donor may deduct the full amount of a charitable gift from the value of a gift or taxable estate. Understanding that there may be tax benefits and exploring what those benefits may be can be an effective way to start the giving conversation.

In particular the effective use of specific bequests to institutions, charitable lead trusts and charitable remainder trusts result in the donor and his/her family paying less in estate taxes. In 2011, generally, the federal gift and estate tax is imposed on transfers in excess of $5 million and at a top rate of 35 percent. (http://www.360financialliteracy.org/Topics/Budgeting-Spending/Budgeting-and-Saving/Charitable-giving?print=1).

Making an institution the beneficiary of a tax deferred retirement plan is the most tax efficient way to leave money if assets are greater than the federal estate tax exemption, as the charitable institution will receive the funds free of both estate and income tax. (Ann Kaplan. 2010.”Philanthropic Planning” Smith College, October 20, presentation).

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, http://www.patriciaannino.com.

Polo club founder adopts his 42-year-old girlfriend

A rather unique attempt at protecting assets in a lawsuit. Thought you might find it interesting. What do you think of Mr. Goodman’s solution?  Leave your comments below.

By Michael Inbar

A wealthy Florida man has set off a firestorm by legally adopting his 42-year-old girlfriend as he prepares for a potentially costly wrongful death suit.

John Goodman, 49, founder of the Tony International Polo Club in Wellington, Fla., was involved in a crash on Feb. 12, 2010 that killed 23-year-old Scott Patrick Wilson. Local police say Goodman ran a stop sign while driving with a blood alcohol level twice the legal limit in Florida.

While Goodman faces criminal charges of DUI manslaughter, vehicular homicide and leaving the scene of an accident that carry a possible 30-year prison term in a trial set for March 6, he also faces a civil suit from William and Lili Wilson over the death of their son. That trial is set to begin March 27.

In recently released court documents, the Wilsons learned that Goodman had legally adopted his girlfriend Heather Hutchins in October. Attorneys for the Wilsons say it was a blatant move to protect his assets.

“It cannot go unrecognized that [Goodman] chose to adopt his 42-year-old girlfriend as opposed to a needy child,” The Palm Beach Post newspaper quoted family attorney Scott Smith as saying.

Palm Beach County Circuit Judge Glenn Kelley had previously ruled a trust fund Goodman had established for his two minor children could not be considered an asset in any court-rewarded damages to the Wilson family. Now, with Hutchins also considered Goodman’s daughter, she is entitled to one-third of the trust fund, and as an adult over 35 she can begin drawing money from the fund immediately.

Judge Kelley was critical of Goodman’s move in his order granting the Wilson family the right to information regarding the adoption. Kelley said the adoption “border(s) on the surreal,” The Palm Beach Post reported.

“The Court cannot ignore reality or the practical impact of what Mr. Goodman has now done,” Judge Kelley wrote. “The Defendant has effectively diverted a significant portion of the assets of the children’s trust to a person with whom he is intimately involved at a time when his personal assets are largely at risk in this case.”

While Goodman’s move has tongues wagging on the society scene in south Florida, a state adoption expert told WPEC-TV in West Palm Beach that Goodman adopting his girlfriend may not be strictly legal.

“Adoption means the act of creating the legal relationship between parent and child where it did not exist,” adoption attorney Charlotte Danciu told the station.

“Unless you intend to create the parent-child relationship, you are violating the letter of the law.”

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, http://www.patriciaannino.com.

New Risks to Wealth Management: To Gift or Not to Gift

Traditional risks related to the family’s wealth (including financial, intellectual and social assets) include the illness or death of the key family stakeholder, economic downturn and changes in the regulatory or legal environment. New risks are triggered by the dissipation of wealth due to generational mathematics—with each ensuing generation, the wealth is splintered—and the lack of creation of new wealth; this very turbulent economic time; the increased complexity of legal and tax matters; and the increased complexity of wealth management choices. These risks can be mitigated when the family coordinates its advisors and monitors the integration of all professional services.

The risks are further mitigated when the family embraces and encourages financial education and financial literacy across the generations. Mentoring, shadowing, exposure to the concepts and resources along the generation continuums reduces the chances for unintended consequences.

New Risk: The Bracket Game:  To Gift or Not to Gift…That Is The Question…..

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act). The Act significantly changes the federal estate tax, which impacts estate planning for many and presents significant estate planning opportunities. The biggest surprise in the new law is the ability to give $5,000,000 of assets away now and remove those assets and any appreciation in their value from the donor’s taxable estate. In a marriage, this doubles the amount to $10,000,000. This law is in effect until December 31, 2012, and it is unclear what the state of the law will be from 2013 on.

This significant increase in the gift exemption adds to the donor’s ability to gift the annual exclusion of $13,000 each year and the donor’s ability to pay anyone’s tuition and medical expenses as long as payment is made to the provider.

The Act has prompted spirited discussions, “Well, now that I can really give that much, should I? What are the non tax risks to making those gifts?”

     Factors to consider when deciding whether to gift or not to gift:

1.     How much is enough?

This question is always worth discussing. Warren Buffet’s answer is, “Leave your children enough money so they can do anything, but not enough that they don’t have to do anything (although Buffet did not leave his children the bulk of his fortune, he did leave each of them a foundation of $1billion dollars to give to the charities of their choosing).  In my experience, the answer depends upon the individual, often changes over the lifetime of the donor and has to do with his/her children and the economic times.

2.     What strings do I want on the gift?

Whatever the amount, you must decide how much control there    is over the gift. Is it to be given outright? In trust? Who is the trustee? How long should the trust extend? What are the terms of distribution? Who are the permissible beneficiaries?

3.     Should I leverage the gift?

In addition to the strings that you want to impose on the gift, you should also address leverage. If you make a gift that is eligible for a minority or marketability discount, that increases the value of the gift by at least 20%. If you fund an irrevocable trust and anticipates that the trustee will use the funds to make annual life insurance premium payments, then significantly more may be added to the trust through leverage than if the gift were to be invested along more traditional methods.

4.     Am I willing to assume the risk that the gift, once given, is gone?

What if the donee becomes divorced or has creditor issues during the donor’s lifetime, and the gift is jeopardized? Can you live with that consequence? The cascading effects from a gift can have far reaching consequences. For example, if the donor parent gifts 20% of the stock in his closely held business to his children; and one of the children becomes divorced, it is not just that the child’s interest in the business may be vulnerable. Even if it is not vulnerable, the divorce court also has the right to order the valuation of the child’s interest in that business. To do that means valuing the business in its entirety;  and having that asset valued in a hostile environment—where the ex-in-law’s lawyer will try to value that as high as possible—will in all likelihood be in direct opposition to the donor parent’s valuation and appraisals for estate planning and transfer tax purposes. In addition, if the donee child is ordered to pay alimony or child support, then the income from the gifted asset will be taken into account when the court establishes the dollar amount. If the income is phantom income, which the child donee does not actually receive, that can present additional complications and litigation.

5.     Am I willing to give up the “fruit as well as the tree”?

In most cases, the fruit and the tree—meaning the income and the principal—go hand in hand. For example, are you ready to give away 20% of the underlying asset, knowing that the corresponding 20% of the income which is attributable to that asset will also no longer be available to you?

6.     Have I considered gift splitting?

Gift splitting—where one spouse makes the gift, and the other gives consents to that gift—is a very effective estate planning technique for the second marriage couple. Frequently, in that case, one spouse is wealthier than the other. If the less wealthy spouse does not have $5,000,000 of assets in his/her own right, then using the less wealthy spouse’s $5,000,000 exemption in full or gift splitting, with the wealthier spouse giving his/her assets to his/her own children can be a very creative technique. In effect, it doubles the amount that can be gifted. When considering this technique, especially if there is a prenuptial agreement or postnuptial agreement in place, care should be taken to protect the estate of the less wealthy spouse who consented to this gift or allowed the use of his/her $5,000,000 exemption.  The possibility that the exemption could decrease later, resulting in additional estate taxes in his/her estate to his/her beneficiaries, should be thought through and discussed.

7.     Should I gift more than the $5,000,000/$10,000,000 exemption and incur the 35% gift  tax?

For many very wealthy individuals, this is a question to consider seriously. The gift/estate tax rate has not been this low in eight decades. The difference between a tax exclusive gift and a tax inclusive bequest is significant at the higher dollar levels, and exploring this (especially if the underlying assets have significant growth potential or discount opportunities) should be an option.

 Solution: Creation of a Family Risk Management Policy Statement:

A solid family risk management policy contains the purpose, principle and procedure for implementation. The purpose of a family risk management policy may be to reduce the risk for family members, both individually and as a whole. Adherence to the policy would go far to protect the family’s human and financial assets and minimize potential liability. The principle of the policy may be to make clear that the responsibility is to identify the areas of high risk and to do whatever possible to mitigate that risk. The procedure of the policy may make it clear that each family member is expected to:

  • Achieve financial literacy with regard to his or her own wealth as well as the wealth of the family enterprise.
  • Draft and have both parties sign a pre-nuptial agreement.
  • Contact their insurance providers annually to review their insurance coverage to ensure that they are current and adequate.
  • Have in place basic estate planning documents: will, revocable trust, health care proxy, power of attorney for financial assets.
  • Participate in the development of an investment policy that is aligned with the family’s shared values.
  • Protect the family’s reputation by learning how each individual’s behavior, both positive and negative, can impact the family’s reputation.

A family risk management policy statement is dynamic. It should be reviewed and adjusted as the risks that families face evolve and change.

 

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, http://www.patriciaannino.com.

Women & Money: Dividing Assets Fairly For A Special Needs Child

If you do have a special needs child or a child who is not disabled or on governmental assistance but who has greater needs than the other children, the question of how to divide the assets can be very tricky. Some parents prefer to have all assets held in a special needs trust for the child who needs them, and then at that child’s death have the trust end and the money distributed among the other children.

Other parents do not feel that the special needs child (because of the government programs available) will actually need all that much money and do not feel right denying their other children an inheritance. If need be, they feel, the other children will take care of the special needs child. This approach, of course, comes with risks. It’s possible the other children may predecease the special needs child, spend the money on their own legitimate needs, become disabled or get divorced and need the funds.

For that reason sometimes a special needs trust will be funded with life insurance – and the special needs child will be omitted from the other terms of the estate plan. That way, if the trust is irrevocable (and funded only with life insurance) when the insurance is paid, it will come in free of gift, estate and income taxes. To the extent the special needs child needs it, it is there. To the extent it is not needed, it will eventually be distributed to the other children free of any tax consequence.

One of the most difficult issues for a special needs child is where the child will live if the parents die. Frequently that child cannot live by himself. Yet it is a tremendous burden to a sibling or family member to take in that child. For that reason I have seen an increas­ing trend of parents placing special needs children in group homes during their lifetimes so that a support structure has been put in place and the adjustment that comes with the death of parent (and best friend) does not also mean a change in home.

It is especially important when planning for the future of a special needs child that the assets are coordinated with the plan. All beneficiaries of life insurance policies, pension plans, IRAs, and annuities must be reviewed. If a special needs child is named directly (instead of the trust) or if there is no designation of beneficiary and the asset defaults through your estate, then your plan can quickly unravel and the receipt of those funds by the disabled child will jeopardize his government eligibility.

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 announced the release of 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.  Annino’s book is an exhortation, resource and trusted companion for women in all facets of life.  To purchase the book visit:  http://amzn.to/hOHuEV or for more about Annino, visit: www.patriciaannino.com

 

 

Family Business Magazine Article Participation

Many thanks to Barbara Spector for allowing me to participate in an article recently published in the Summer 2010 Issue of Family Business Magazine (www.familybusinessmagazine.com), where we discuss family relationships when issues of family wealth, inheritance and competence are combined with powerful emotional issues, that result in explosive situations that are not at all about the money.  Read all about it (“The Brooke Astor case: It wasn’t about the money” by Thomas D. Davidow and me!) http://bit.ly/aul4po

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