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.

Source: http://www.wsj.com/articles/tom-clancys-widow-wins-legal-battle-over-taxes-on-86-million-estate-1440438903

Write to Scott Calvert at scott.calvert@wsj.com

You Can’t Litigate Love (so why are you trying)?

I love my brother image, estate planning attorney, trustsThis week a woman came into her attorney’s office wanting to sue her oldest brother in a trust dispute. She felt he had been taking advantage of her, not giving full financial information and making decisions that only benefitted himself.

At the end of a two-hour meeting (and her admission that a prior attorney had retained a forensic accountant who went through all the trust books and did not agree that her brother had breached his fiduciary duty), it made me think one more time that in family dynamics it is much safer for some family members to walk into a law office than a therapist’s office and it is critically important as attorneys that we do not fall into the trap of believing that what a client says is what the client means. If the client is trying to litigate love it just can’t happen…

 

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 Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

Pitfalls and Risks When Your Client Owns Commercial Real Estate in an Irrevocable Trust

Long before he met you, your client bought his first piece of commercial real estate – that two-family house, apartment building, office building, or strip mall. At the time, he went to a real estate lawyer who advised him to take Trusts, wills, estate planningtitle to that real estate in an irrevocable trust so that it would be protected from creditors. That lawyer also told him that he could stay in control and be the trustee.

Now, decades later, the property is still in that trust, and after a visit to you and his new lawyer, the client now understands that this trust is included in his taxable estate in full.  After all, he made the down payment, he is the trustee, the primary beneficiary, and has been taking all of the income and deductions on his personal income tax returns.

For many business owners, the disposition of the real estate that houses the family-owned business, the apartment buildings, office buildings, or rental units the family has collected over the years is a troublesome issue. Planning is not as simple as it seems. In fact, planning for the future typically means going back to a hodgepodge of isolated transactions that occurred over a period of time.

How title is held and what type of vehicle it is held in – irrevocable trust, corporation, limited partnership, or limited liability company, is an issue that should be reviewed and examined from the viewpoint of income taxes, estate taxes, succession planning, and liability concerns and consequences.

When property is held in an irrevocable trust that was funded by the donor, and the donor retains the benefits of the property (the ability to receive income and/or principal distributions), and/or retains control over the property, it will probably be included in his taxable estate in full. If set up that way, it will also be treated as a grantor trust for income tax purposes and all income and deductions will flow to his individual income tax return.

When that donor dies, it will no longer be a grantor trust and will become a separate taxpaying entity. The trust probably contains what is known as a spendthrift provision, which protects the assets in the trust from creditors. However, in many states, spendthrift provisions do not necessarily mean the trust property is protected from the donor’s creditors while the donor is alive and a beneficiary of the trust.

Holding title to the real estate in an irrevocable trust presents another significant issue that may not be apparent from the document itself. The trustees of a trust have a fiduciary duty to not just the donor, but to all of the trust beneficiaries, including any other permissible beneficiaries during the donor’s lifetime and what is known as the remainder beneficiaries- those who will later take the benefical interest. The fiduciary duty of the trustees includes the duty to prudently invest and manage the trust assets. The concept of prudently investing and managing the trust assets is quite different from the concept of the business judgment rule, also known as the businessman’s risk.

In many states, the “prudent man” rule applies, and the trustee owes the beneficiary the fiduciary duties of skill, loyalty, diligence, and caution. Some fiduciary factors for the trustees to consider when managing investments include: (1) marketability of the trust property, (2) length of term of the investment, if a term is set, (3) duration of the trust, (4) probable condition of the market regarding the investment at trust termination, (5) probable market conditions for reinvestment of the proceeds if the investment is sold, (6) total value of all of the trust property and the nature of any other investments, (7) the needs of the beneficiaries, (8) other assets of the beneficiaries, and (9) the effect of any investment on the trust.

When operating under the businessman’s risk standard, trustees may choose investments that have a moderately high risk of losing value, but that also offer growth potential and capital gains, or sometimes tax advantages, rather than for the purpose of growing current income. Individuals can make riskier choices when they are dealing with their own investments rather than holding them in trust for the benefit of others.

When the business is owned by a trust, the prudent man rule for investments made by the trustees may conflict, in practice, with the business judgment rule that would control if the property were owned by a business entity, such as a corporation, limited partnership, or limited liability company. For example, when deciding whether to retain, mortgage, or sell one of its properties, the trustee must consider its fiduciary duty, rather than the lower standard that would apply to a businessman faced with those same choices.

Holding commercial real estate in an irrevocable trust also presents issues pertaining to income. For example, if the trust document requires all income to be distributed to the beneficiary (whether during the donor’s lifetime or after death), then the questions will be how to define income and what does the trustee have a duty to distribute?  Is it income for trust accounting purposes, for income tax purposes, or for cash purposes? If the trustee is to distribute all income each year, how can he hold an operating reserve? What happens with depreciation? What about reinvestment for repairs? How will the accounting be prepared?

From an estate tax point of view, if the value of the trust is fully included in the donor’s estate and he is married, does the trust say that his/her spouse is the lifetime beneficiary after the donor’s death? Does the trust qualify for the estate tax marital deduction so that there is the option to defer estate taxes until both spouses die?

When faced with the issue of a client owning commercial real estate in an irrevocable trust that no longer makes sense, there are remedial options to consider. One is to proceed to court and ask that the trust be reformed as it does not accomplish the donor’s intent. Trust reformations are permissible in many states and I have seen trusts reformed to ensure the marital deduction option, to add improved language for managing the property, and to handle the question of how income is defined.

Another option is to transfer title to a limited liability company that the trust owns. This would make it easier for the entity to obtain financing, since few institutions that sell their mortgages in the secondary market will issue mortgages to trust-owned real estate. It is also cleaner from a liability point of view in that the liability should be limited solely to the LLC assets. The LLC would be subject to businessman’s risk and all of the business decisions would be made at that level by the managers of the LLC and the terms of the operating agreement. The trustee of the trust would be dealing with the trust assets and would not be in charge of, or responsible for, the business decisions.

The term irrevocable does not always mean that the plans set in place decades ago are set in stone – rather there are mechanisms available that provide flexibility to bring those plans into current times.

 

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.

Blessing or Curse? When Your Client Asks You to Serve as Trustee

estate planningAs the person who clients rely on to provide sound advice and direction on family and business matters, and as someone who shares and understands their views and perspectives, it is natural for clients and their accountant as trusted adviser to develop a personal relationship that extends beyond their professional one.  As an extension of this relationship, it is common for a client to name his accountant as a trustee in his estate plan.  The client wants the trustee to guard a host of goals and dreams that go beyond the basic preservation of assets and wealth.

The client/donor believes that his accountant as his trusted advisor understands him; that he has the wisdom to incorporate the donor’s most important values, spoken and unspoken. However, the dual responsibility of the advisor/trustee can blur the parameters of those roles, and may have legal, financial, and psychological ramifications.  Indeed, the blurred or hybrid nature of the advisor/trustee’s role offers advantages and disadvantages, risks and opportunities.

When the client becomes disabled or dies, the accountant serving as trustee has fiduciary responsibilities to the trust and its beneficiaries. Even though the advisor/trustee should give credence to the founder’s intent, the advisor must now switch his loyalty from the founder to the trust, where the standard for decision-making is significantly different from that of trusted advisor.

The founder can do anything he wants with his own assets, his own business, and his own money. He can take risks. If his net worth or income declines, it’s his responsibility and he deals with the consequences. When the advisor takes over as trustee, the problems exacerbate. As a fiduciary, the advisor cannot take the same risk – it’s not his money, his assets, or his income. As trustee he is obligated to preserve the assets for the beneficiaries. He therefore cannot act in the same role as the founder, or even in the same role he had as the trusted advisor to the founder.

For example, the founder may not operate his business based solely on profitability. He might make decisions for other reasons – to employ friends, keep older employees who are no longer productive but who were loyal to him during his lifetime, or operate a division of the company for fun, regardless of the economic consequences. The problem is intensified, however, if one of those non-productive employees is a family member who may also become a beneficiary of the trust. When the trusted advisor takes over, he cannot maintain those decisions or take those same risks.

The combination of coping with the disability or death of a friend and significant client, switching roles, understanding the risks, and navigating the family’s issues is a Molotov cocktail—and often where the trouble begins. I have previously written about the hidden psychological traps that go along with this responsibility. This column is focused on the practical provisions within the trust document that the advisor should review and be comfortable with before taking on the role of trustee. (And a preliminary point worth noting is that even if you are nominated as a Trustee you are not liable until you accept the office so if every bone in your body is telling you not to proceed decline the position; once you accept the position you are in line of liability. Should you decline before serving you have no liability).

Right to Resign and Method for Appointing a Successor Trustee – Life is a movie, not a snapshot. While it may seem like a good idea now to serve as trustee, that may not be true in five years. You may end up in conflict with a beneficiary, you may face illness, or a life changing event such as divorce that takes much of your time and energy, or you may switch jobs. At some point, serving as trustee may not be right for you. When reviewing the trust document, determine what it says about resignation and your obligations should you do so. Do you have a responsibility to appoint your successor? Who has to approve it? What if there is disagreement among the beneficiaries? If you discuss this with your client while the trust is being drafted, your input may be important. You may ask the client to provide you with a list of persons or institutions that he would consider suitable to carry on. The client may have specific thoughts about who is qualified to take that role and include those parameters in the document e.g., independent trustee (not related to donor or any member of his family), trustee with a certain number of years of experience, or a certain amount of assets under management.

Indemnification Clause – Carefully review the duty to defend and indemnification clause – most trusts contain a standard one. State law provides default protection. If there are risky assets in the trust, or obvious issues with difficult beneficiaries, it is wise for the trust document to be clear about how the trustee will be indemnified and defended. For example, a clause that limits the trustee to gross negligence only may make sense.

No-Contest Clauses – Determine if there is a no-contest clause, which means that if a beneficiary challenges the terms of the trust or the way in which it is operated, that beneficiary’s rights are impaired. A trust document that includes this type of clause can be a signal that stormy waters lay ahead.

Distribution Language – Every trust has language that specifies the standards by which the trustee may distribute income and/or principal to the beneficiaries. The trustee should be clear as to what those distribution standards are and how to implement them. If possible, ask for clarification as to what the intention is and have a mission statement prepared that sets forth both the goals and objectives. These guidelines, although precatory, can be useful to both the trustee and the beneficiaries when the trustee is exercising discretion.

Actions of Trustee: Unanimous or Mandatory – If there are co-trustees, review the document to determine if decisions are to be made by unanimous or majority action. If the document does not specify, state law will have a default provision to that effect and should be reviewed. This can be particularly important if difficulties lie ahead. It can also be important to understand how transactions (once the underlying action has been determined) are to be effectuated – in other words how many signatures are necessary. The document should be reviewed for the power to delegate administrative or ministerial tasks.

Authority to Hire Advisors and Experts – Review the document to determine what authority you have, as trustee, to hire the standard advisors such as your own attorney (in your role as trustee), accountants, and investment professionals. If there are unusual circumstances, such as a beneficiary with special needs or substance abuse issues, review the trust document to determine if you will have authority to hire mental health professionals and related caregivers. It may also be advisable to have broad authority to hire others, such as private investigators.

Investment Language – As fiduciary, you have an obligation to invest the trust assets prudently. Review the trust to determine if the trustee is to make allocations between income and principal. If the trust holds risky assets such as a closely held business or real estate, review the language to be sure the trustee has the authority to continue to hold that asset even if it is not productive or profitable. Just because the donor chose to retain those assets, without specific language in the trust document, that investment authority does not transfer to the trustee. Also, owning a significant concentration of one stock is probably not a prudent investment unless the trust document authorizes the trust to continue to hold it even if it loses value. If the trust holds loans, those should be secured unless the trust specifically authorizes loans to be unsecured – it is prudent however, to secure loans even if they are made to a beneficiary.  If, as trustee, you hire investment advisors, make sure that you do due diligence and check the investment advisor’s references and background. Make sure you determine how the investment advisor is compensated and how those fees are charged to the trust.

Accountings and Reportings – A critical element of a successful trustee/beneficiary relationship is open and transparent communication about finances and distributions.  Review the trust document to determine what reports are required and who should receive them. Also determine what the procedure is for assenting to the accountings –especially if a beneficiary does not acknowledge or assent to the accounting. It is also advisable to have regular in-person or telephone meetings with the beneficiaries to answer any questions and ascertain their needs.

Compensation – Review the document to determine how your compensation will be established and what expenses are reimbursable. If you are also serving as the trust’s accountant, be clear on whether that is part of your trustee fee, and if not, how compensation would be otherwise billed. Since you, as trustee, are paying yourself as accountant, it is important that there is a clear understanding of when you are acting as trustee (and how you are compensated for that) and when you are acting as accountant (and how you are compensated for that).

Serving as a trustee for your valued client can be an honor and a privilege –but it is important to understand the difference between your role as trusted advisor and your role as trustee and to review the trust document objectively with an eye to the future.

 

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.

A Special Gift for Moms on Mother’s Day

As Mother’s Day approaches, I am reminded of those times when I was just not sure of what to give my Mom on her special day.  I recall a time when I helped get her estate planning and affairs in order, and how much she appreciated the peace of mind that it allowed her once the process had been completed.  Now that she has Alzheimer’s disease I am very glad we had that conversation and she had the ability to put her affairs in order. I am also glad we had the opportunity to discuss what type of care she wanted and how that should be managed.

Whether you’re looking to support your Mom, or get your own house in order, take this time to make sure that, much like you normally focus your time as a Mom making sure that everyone else is protected and safe throughout the year, that you and yours are, too, as it relates to your estate planning needs.

It reminds me of what the flight attendants say every time the plane takes off, if the barometric pressure changes and the oxygen mask drops from the sky, put the mask over your own face first…it is only when you do that, and protect yourself, that you can know that you are strong enough to protect the others you by instinct protect.

What a wonderful gift to you and your family at a time when we pause to honor you on Mother’s Day.

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.

Gifting Ownership of the Vacation House: A Gift or a Curse?

Ben Franklin once said that fish and houseguests smell after three days. But what if the houseguest co-owns the house? The perils of the vacation home, what to do with it, who should own it and what the rules are can be a source of family satisfaction and family conflict.

Under current law, the 2012 federal gift exemption is $5,120,000. Since many parents and grandparents are uncertain of their economic future, they may not want to gift assets that still earn income. Nor do they want to give away assets that have a low income tax basis that may be sold in the future. For these families, the vacation home is an attractive asset to consider gifting.

Gifting the vacation house to the next generation, or to a dynasty trust for the benefit of subsequent descendants, can remove that home (and any appreciation in its value) from the taxable estate. But before heading down that path, homeowners must carefully consider how that home will be owned post transfer.  We will explore three options: (i) outright ownership, (ii) an irrevocable trust (which could be a dynasty trust), and (iii) a family limited partnership or a limited liability company.

Outright Ownership

Often, the choice of making an outright gift of the vacation home is not appealing, whether the next generation owns the property as tenants in common, or as joint tenants with a right of survivorship. Many states have the right to compel a sale of that asset through a court proceeding, so the ownership of the home may be divisible in a divorce and subject to that family member’s creditors.

Also, family issues and resentments may develop with co-ownership. The child who lives out of state and never uses the home may resent sharing the expenses. Plus, with each generational transfer, the ownership becomes more fractionalized and the ownership of the asset is included in the taxable estate of each subsequent generation. There could also be conflict, such as who uses it the week of July 4th? Who pays for maintenance? Should rent be charged to cover expenses?

Irrevocable Trust (could be a dynasty trust)

A more appealing option for many families is transferring ownership of the home to an irrevocable trust. To complete the gift, the trust must be irrevocable, meaning that the donor cannot retain the ability to change, amend, or revoke its terms. The art of drafting an irrevocable trust is to remember that life is a movie not a snapshot, and that the document, while irrevocable, must also be flexible enough to contemplate the future.

The trust should address what happens to the child’s share at his or her death, whether or not the child’s spouse or stepchildren can continue to use the property in a divorce, or if the child predeceases his or her spouse. It should also address who is responsible for paying expenses, the line of succession of trustees, how the home should be furnished or updated, whether nonpaying guests may use the property, and who sets the rules for using the property.

Reasonable rules include who can use the property and when, the process for how that determination is made, whether use can be exclusive or must be open to all families all the time, payment of operating expenses, noise, cleanliness, pets, number of people, who pays for landscaping, parking, whether the property can be rented to nonfamily members, and other issues affecting the use and enjoyment of the property. The trust document can also address who has the right to determine the operating reserve and when income and/or principal may be distributed to the beneficiaries.

It may be also helpful for the donor to state intent – perhaps the use of the property is not intended to be equal, but based on relative degrees of interest in and ability to enjoy the property, and to take into account relative contributions (financial or otherwise) to its maintenance and improvement.

The document may also include a buyout provision by which one beneficiary (or beneficiary’s family) can sell his or her interest to other family members. Many families do not allow family members to cash out of their share in the home. An advantage to restricting what a family member can do to convert his or her share to liquid funds provides additional creditor protection and also helps keep that interest out of the taxable estate of subsequent descendants.

The trust should also address the mechanism by which a decision can be made to sell the home – should a decision that important be left only in the hands of the trustee? Should it include the trustees and all adults in the next generation? Should the vote be by majority or unanimous? The tension in that choice is that one family member who wants to use it more than others may block the sale for personal gain.

It is important to fund the trust with enough liquid assets to cover ongoing expenses and trustees. Future family discord might be avoided if family members who do not use the property are not expected to help cover its expenses. The funding can occur during the donor’s lifetime or at his or her death, through the donor’s estate plan. Once the property is transferred to the trust, the trustees should ensure that the property has sufficient property and casualty insurance coverage.

The trust document should also address the duration of the trust. It could end at a certain date, when the underlying asset is sold, when the trustees decide to end it, when the trustees and all adult beneficiaries agree to end it, when the Rule Against Perpetuities Period ends it, or if it is governed by a state that does not have any Rule Against Perpetuities, then it may never end.

Family Limited Partnership or Limited Liability Company.

A third choice is transferring the home to a family limited partnership or limited liability company, where the terms of the operating agreement control how the property is used. These entities are more businesslike than a trust, as they are members or partners. They offer the same benefits of the irrevocable trust, but may be more flexible. The operating agreement can provide a mechanism that allows it to be amended. If the entity is underfunded, the manager or general partner can make a capital call on the owners to contribute additional funds to the entity. As with the trust, the agreement will appoint a manager or management committee. The ownership structure can have two classes- voting and nonvoting. The transfer of ownership through sale or gift can be restricted.

Another benefit to gifting in this manner is that the valuation of the gift may have additional leverage and qualify for minority discounts or lack of marketability discounts. If the gift is not made all at once – but rather over several years – then all gifts are made off the record of the respective Registries of Deeds. In other words, the transfer to the entity is recorded initially, but ensuing gifts are transfers of the units or shares in the entity and are done within the entity itself, not in the Registry. This can save annual recording fees.  Additional benefits include income tax consequences in that each owner may have the benefit of the income and deductions flow through to his or her individual income tax returns.

Summary. Gifting the vacation house this year while the federal exemption is so high may be a very wise move. It is important for clients to think through their choice of entity and the considerations mentioned above before making this irrevocable decision.

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.

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