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Estate Planning Oversight Will Cost Koch Estate 3 Million Dollars

After the death of New York City legend Ed Koch on February 1st, 2013, his estate plan became the topic of public conversation. A recent article discussing the plan suggests that he could have saved his estate 3 million dollars in taxes had he set up an irrevocable trust.

Edward I. Koch, mayor of New York City, sports a sailor’s cap at the commissioning ceremony for the guided missile cruiser USS LAKE CHAMPLAIN (CG 57). Location: NEW YORK, NEW YORK (NY) UNITED STATES OF AMERICA (USA) (Photo credit: Wikipedia)

Koch drafted his final estate plan in 2007. Through his will, he directed that his 10 million dollar estate be distributed mainly between his sister, three sons, and secretary of 40 years. His estate plan did not utilize any type of irrevocable trust in order to facilitate these distributions. According to Managing Director of Estate Street Partners, LLC, Rocco Beatrice, using such a trust could have eliminated the entire estate tax bill of 3 million.

Koch’s estate will be required to pay New York state taxes of 16% on the amount by which it exceeds $1 million, as well as federal estate tax of 40% on the amount by which the estate exceeds $5.25 million. Assuming his estate is worth $10 million, these taxes would amount to $1.44 million and $1.90 million, respectively.

According to Beatrice, “That is a lot of money in taxes which could have easily been avoided.” Beatrice explained that, had Koch set up irrevocable trusts, the $3 million could have gone to his family, rather than the government.

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How To Save Your Heirs From Your Debt

We will die, our debts will not. Many people falsely believe that any debts they have incurred will dissolve when they die. Unfortunately, this is not the case. A new article discusses steps you can take to ensure that your debts do not eat away at the assets you had intended would go to your heirs.

Wipe our Debt (Photo credit: Images_of_Money)

One important move you can take now to protect your heirs later is to do what you can to pay down your debt. Speak with a financial advisor about how much debt you have, and how you can responsibly continue to pay it down while you are still alive. If you have a large amount of debt, consider cutting your spending now so you have more money to put towards your debts.

You may also want to consider loan protection insurance. This type of insurance is offered in a declining-term policy that will pay off specific loans if you die or become otherwise unable to pay through disability. Whether you need insurance for your home loan, credit card balances, or car loan, loan protection insurance may be a good option for you. These types of loans are often offered from lenders who provide mortgages, and may be a sensible solution for some individuals and couples.

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Family Wealth Can Be – Surprise! – A Curse

What some people would think of only as a blessing can also be a curse.

Family wealth is, at times, a double-edged sword, as Thayer Willis, author of “Navigating the Dark Side of Wealth: A Life Guide for Inheritors” and “Beyond Gold: True Wealth for Inheritors,” wrote in a recent article for Forbes magazine.

“But what many people don’t realize is that family wealth can be a curse. It was for me as a member of the family that founded Georgia-Pacific Corp.,” Thayer stated. “And that has given me an inside perspective on the privileges and tragedies that wealthy families encounter.

The biggest curse of intergenerational wealth for me and many other people is the illusion that you don’t have to do much with your life. You might want to and you might make the effort, but you don’t have the same pressure to earn enough to live on. And that takes away a lot of the incentive to find meaningful work.

Though many wealthy families attend to tax, financial and legal planning, with expert advice and well-developed strategies, they often neglect psychological planning. The consequences can be dire.”

Thayer offered three ways in which, without the proper psychological preparation, inherited wealth can amount to a curse, rather than a blessing.

They are:

  • Too much too soon
  • Too much financial focus
  • Ingratitude

“This results in the familiar demotivation that wealthy parents worry about,” she said of the first issue. “A form of laziness, it involves remittance addiction, being dependent on the money source. Kids aren’t required to support themselves. Parents have low expectations of the next generation.”

“This focus can be so big that families neglect human, intellectual and social capital in the family,” Thayer indicated regarding a laser attention on money matters. “As a result, there’s no balance. Instead, the emphasis is on the dollars, the assets, the strategies and the money managers. Family meetings only cover financial concerns.”

“Ingratitude is insidious, based on fear and anger. It leads to low self-esteem, insecurity and the self-doubt that comes from never having become good at anything.”

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Selecting Your Personal Representative

When creating an estate plan, one of the most important decisions to make is selecting a personal representative. A recent article discusses some of the different options individuals have when making this important decision.

Most people will select a close friend or family member to serve as their personal representative. If you choose this type of person, be sure that you select somebody you can trust to follow your final wishes. This person does not necessarily have to live close to you, or even in the same state as you. However, proximity to your estate does ease the process of estate administration.

If you would like to select a professional to serve as your personal representative, consider an estate planning attorney. Attorneys are beneficial because they are knowledgeable as to the law, and have a wealth of experience in estate administration. Speak with your estate planning attorney to determine whether they offer such services. If they do not, they may be able to recommend another professional who can assist you.

Another professional option is the trust department of a bank. As with estate planning attorneys, banks are a good option because they are knowledgeable professionals with a wealth of experience.

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Why Everyone Needs An Estate Plan

With the current estate tax exemption over $5 million – $5.25 million to be exact – many people wonder if estate planning is necessary for them. As a recent article points out, the answer is yes.

Estate taxes are only one of a myriad of reasons why a person should put together an estate plan. The main reason for which people create estate plans is so that they can be sure that their assets will be distributed according to their wishes. No matter if you are very wealthy, or have a modest estate, an estate plan is vital if you wish to direct the distribution of your assets. Moreover, by providing instructions for an orderly distribution of your assets, you can save your heirs from the infighting that often results.

It is also important to draft a valid will if you wish to avoid probate. Many people falsely believe that if their estate is not subject to estate taxes, it is not subject to probate. This, however, is not the case. If you would not like your estate to go through the process of probate, you must put together an estate plan that utilizes various estate planning tools that will transfer the bulk of your estate outside of probate.

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Insurance Considerations When Transferring An Asset To A Trust or LLC

Two popular and time-tested methods of wealth transfer are the trust account and limited liability company. While both of these options can provide an excellent vehicle for the transfer of assets, it is important that the creator consider all the related details. One such detail that must be addressed is insurance.

Without addressing insurance considerations while forming a trust or limited liability company, a person may face an unexpected and catastrophic loss of insurance coverage. All insurance policies, no matter what type, are written to provide the owner or titleholder of an asset with coverage. Problems may occur, therefore, when assets are transferred to a trust or LLC.

For example, a person may transfer ownership in their home to a trust fund, LLC for various reasons including estate planning, tax considerations, or protection from creditors. Upon making such a transfer, the homeowner must be sure to change the homeowner’s insurance policy to reflect the fact that the home is now owned by the trust or LLC. Should the previous homeowner fail to make this change and the home is damaged, the insurance company may question the ownership change. Without making the appropriate changes, therefore, a homeowner could become potentially liable to pay any arising damages out-of-pocket.

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A Permanent Estate Tax For The Wealthy

After nearly a decade in flux, there is finally a permanent federal estate tax. In 2013, however, a mere 3,800 estates will be required to pay the tax. Moreover, the total amount paid by this small number of estates will only amount to $14 billion, which is a mere half of the total revenue from five years ago.

Prior to passage of the American Taxpayer Relief Act of 2012 (ATRA), the federal estate tax was in a state of constant flux. In 2001, the effective exemption was $675,000. The exemption amount jumped to $3.5 million in 2009. The ATRA has created the first permanent estate and gift tax in over a decade. As a result of this, wealthy Americans will be able to spend less time arranging gifts in anticipation of changing laws.

With the current exemption of $5.25 million, most estates – approximately 99.9 percent – will pass to beneficiaries tax-free. Large estates, however, now face a significant tax bill. For example, a $100 million estate will have to shell out approximately $5 million more in federal taxes.

As Forbes explains, the most important part of the ATRA is not the details of the taxes, but the fact that Congress has made the tax permanent. Although wealthy families are still likely to hire estate planning attorneys and financial advisors to create personalized estates that avoid taxes, the professionals that they hire will not have to face the challenges of a constantly changing rate.

 

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Equalizing Inheritance for Your Children

When one estate planner hears his business-owning clients say, “I love my kids equally, so I want to share my assets equally,” what he actually hears is, “I don’t know how to handle this, so when I’m gone, I’ll leave the business to the kids and let them sort it all out.”

The article in Forbes goes on to state that clients who truly want their business to continue to grow and thrive after their death, but also want their children to succeed in whatever career path they have chosen, should speak with an estate planning attorney about logically equalizing their children’s inheritance.

One potential method of inheritance equalization is through life insurance. Using this strategy, one can set up their estate plan so that, upon their death the children who would like to take an active role in the family business inherit your stock in the business, while those children who have chosen another career path receive monetary inheritance equivalent to the value of the stock through life insurance death benefits and other non-business assets you hold at the time of death.

Through inheritance equalization, parents can create equal and equitable transfers to the next generation.

 

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Estate Planning for Married Couples

In light of the fiscal cliff bill, a recent article in Forbes offers some estate planning advice for married couples.

One important item made permanent by the fiscal cliff bill was portability, the ability for a widow or widower to increase their $5.25 million tax-free amount by the unused exemption of their recently deceased spouse. When using the two exclusions in tandem, a widow or widower can potentially transfer up to $10.50 million tax-free.

Regardless of portability, spouses are able to transfer unlimited funds to each other both during life, as well as part of their respective estate plans. This is known as the marital deduction. Without portability, however, the first spouse’s tax exemption is often lost when the second spouse dies. Careful tax planning maneuvers, such as bypass or credit-shelter trusts, are often used to avoid this problem.

With the extension of portability, spouses who qualify will not have to create bypass or credit-shelter trusts for the sole purpose of preserving their deceased spouse’s federal exemption amount. The extension of portability only applies to spouses who died after December, 31, 2010. It is important to remember that portability is not automatic. In order to utilize this tool, an estate planner will have to assist you in transferring the unused exemption to the surviving spouse.

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Pitfalls of Joint Ownership

One popular estate tax avoidance device is joint ownership of property between generations. Unfortunately, this device often leads to an ugly and expensive family feud. An article in Forbes discusses common pitfalls to be wary of when considering joint ownership between generations.

When you become a joint owner with another person, you become vulnerable to their creditors. Due to the very nature of joint ownership, one owner’s creditors can attempt to satisfy their claim through some or all of the shared assets. Similarly, if the spouse of one joint owner files for divorce, he or she may claim that the joint assets are part of the marital estate.

Another common pitfall arises when a joint owner decides to borrow from a joint asset, because joint owners can borrow from such assets without getting permission from the other. Finally, once you pass away, there is nothing requiring the joint owner to share the assets with other heirs unless they file a lawsuit to enforce the joint owner’s intent. Such lawsuits often end in bitter family court disputes.

If you are considering joint ownership as part of your estate plan, it is important to speak with an estate planning attorney about these and other pitfalls.

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Using a Flexible Irrevocable Life Insurance Trust to Shelter Life-Insurance Proceeds

Many people do not realize that life insurance proceeds are in fact taxed. Although these proceeds escape income taxes, they ARE  counted as part of your taxable estate. An article in The Wall Street Journal discusses one way to shelter such proceeds from estate taxes, the Irrevocable Life Insurance Trust.

In order to avoid such tax consequences, you may choose to transfer ownership of your existing life insurance policy to an Irrevocable Life Insurance Trust (“ILIT”). By transferring such ownership, the ILIT is removed from your estate. Once established, an ILIT also allows you to split death benefits among several beneficiaries any way you wish. You also retain the power to decide how and when the benefits will be distributed to your heirs.

If you believe that an ILIT is right for you, you should act sooner, rather than later. Existing policies transferred to ILITs are subject to a three-year look-back period, meaning that if you die within three years of its creation, your life insurance proceeds will revert back to your name and be included within your taxable estate (Although this is not the case for new policies purchased directly by the life insurance trust.

An ILIT is usually used for life insurance policies that were set up for the sole benefit of the heirs. If you need to own or access your life insurance policy at anytime, an ILIT may still be a good solution for you, but it must be drafted with that goal in mind.

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What is a Family Limited Partnership (or Family Limited Liability Company)?

There are many sophisticated estate planning strategies available to affluent families to ensure that the majority of their hard earned money stays within the family, rather than in the hands of the IRS and state taxing authorities. One such device is the Family Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”.) FLPs & FLLCs are advantageous because they provide estate tax savings, gift tax savings, and asset protection.

A FLP or FLLC may own a variety of things, such as real estate or shares on your company. In order to retain control over the assets, you may choose to be the general partner or managing member. That way you can comfortably give your children a majority of the equity in the FLP/FLLC while maintaining control yourself.

By gifting limited partnership/membership interests to trusts or directly to members of your family, you reduce your taxable estate. Consequently, the amount of any applicable estate tax that your heirs will have to pay upon your death will be reduced by the ownership interest you gave away. Such gifts also apply for the annual gift tax exclusion.

As an article in Forbes points out, FLPs require not only good planning but good execution as well. Many times an FLP fails not because of a faulty set-up, but because of a poorly carried out transaction. The same can be said of FLLCs. It is therefore vital to coordinate between those who create your Family Entity, and those who will be working with it, such as accountants, to avoid problems.

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Estate Planning Tips for Female Entrepreneurs

For female entrepreneurs who juggle running a business as well as a family, it is often hard to find time to create an estate plan. However, as an article in Forbes discusses, not creating or updating an estate plan may create undesirable consequences for a female entrepreneur’s family after she passes.

The article suggests that female entrepreneurs take three simple steps to avoid leaving chaos for their families and business partners. Moreover, even if the female is responsible for managing the business and household finances, it is vital for her to make sure that her spouse — if any — has a working understanding of the finances.

One key area to focus on is ensuring that your business assets travel in the right direction. While many owners would like their ownership interest in the company to pass to their business partners, the laws of intestate succession  — which dictate disposition of your assets if you die without a will — will most often pass your share to your spouse or children. One way to avoid this is to put in place a buy/sell agreement. Such agreements provide instructions for how shares will be sold or distributed if a partner dies or otherwise disposes of his shares.

It is also important to assemble and make sure that you and your family are familiar with your team of advisors, and to put mechanisms in place to protect your family assets.

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Increase the Value of Your Charitable Giving

As the economy continues to heal, charitable giving is again growing. Following two consecutive years of decline, charitable giving increased 3.8 percent from 2009 to 2010. According to nonprofit leaders, however, it could take years for charitable giving to return to pre-recession levels.  A recent article in InvestingDaily discusses strategies for those who are able to make charitable contributions to maximize the current and future value of the gifts transferred.

Property (Photo credit: mallix)

First, consider giving property that you know is going to appreciate. By gifting such property out before it appreciates, you remove that appreciation from your own estate. Gifting appreciable assets should happen early in the year so that any subsequent appreciation during the year will not count against your exclusion amount. Alternatively, you can also save on appreciation costs by giving an asset when it has a low market value.

On the other hand, it is wiser to retain “loss property.” If a piece of property decreases in value during your ownership of it (rendering it “loss property”), neither you nor a future recipient is allowed to deduct that loss upon gifting the property. A better choice would be to sell the loss property so that you can deduct the loss on your tax return, and then gift the cash instead.

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T’was The Month Before ‘Cliff’-mas…

As I attended a Christmas play with my family last weekend (TWAS THE NIGHT BEFORE CHRISTMAS @ the Kelsey Theater), I tried for a couple of hours to completely ‘unplug’ myself from the office and focus on being “there” with the family.

Sadly,  I found myself so preoccupied with the year-end planning we are doing in the office (for client’s seeking to tax advantage of the increased exemption this year), that visions of ‘esate-planning’ danced in my head throughout the show.  My mind must have somehow mixed the two concepts, because the idea for the below poem came to me.

(Don’t worry, I won’t give up my day job.)

T’was The Month Before ‘Cliff’-mas…

T’was the month before the New Year and all through the country,

all were in a good mood, except (that is), Trust Attorneys.

 

It seems like we will miss all the holiday cheer,

as our procrastinating clients finally plan out of fear.

 

It will be taxed at their deaths or when they give it away,

But much less for those who actually plan today.

 

The gifts on our minds will involve Gift Tax Exemptions,

instead of Barbie and Wii’s  and Sony Play-stations. 

 

Oh, how we wished we could drink, eat and relax,

and forget for a while about the Gift & Estate Tax.

 

The House passed a bill and so did the Senate,

but since the mid-summer, they’ve just sat on it.

 

As $1 Million may well be the new Exemption,

we are swamped with the tasks of trusts cre-a-tion,

 

So on New Year’s Eve, make my drink real stiff,

as I’ve tried to steer clients from their own fiscal cliff.

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An Update on Developments, or ‘lack thereof’, on Estate Tax Reform, and a Little Estate Tax Trivia

Two articles about this week sought to shed some light on the estate tax developments, political positions as it pertains to the estate taxes & the “Fiscal Cliff.”

The Associated Press went the route of detailing the specifics of bills passed in the Democratic-controlled Senate in July and the Republican-led House in August:

Senate: Does not address the estate tax, allowing the top rate to increase from 35 percent to 55 percent. Currently, the first $5.1 million of an estate is exempt from the federal estate tax; the exemption rises to $10.2 million for married couples. If the tax cut expires, the exemption would be reduced to $1 million for individuals and $2 million for couples.

House: Extends the top rate of 35 percent through 2013, with the larger exemption [$5.12 million.]

You can find the article by clicking here

A Yahoo! article speaks a little more specifically about President Obama’s views on the estate tax, divisions among the Democrats within the party and it’s impact on illiquid assets such as farms and ranches (click here for the full article.) A testament to the discord between the two parties is their inability to agree upon a label for the tax:

The divide between the political parties over the tax is so wide that they cannot even agree on a name for it. Democrats call it the estate tax, as it is described in law.

Republicans, who generally want to repeal it, have another, more provocative name. They call it the “death tax” and characterize it as a penalty on being wealthy and successful.

Ever wonder what the highest rate in history has been for the Estate Tax? Although it has fluctuated, the rate hit a high of 77% before World War II.

According to the article:

“It was a Republican president, Teddy Roosevelt, that proposed the first permanent inheritance tax, arguing that inheritance of “enormous fortunes” does a society no good.

“No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax,” Roosevelt said.

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Estate Planning Devices That May Help Greedy Heirs to Your Assets

Several widely used estate planning devices may actually assist greedy heirs in helping themselves to your assets. A recent article warns of what these estate planning devices are.

The first device is a power of attorney for finances. This is a document that allows you to specify who you would like to make financial decisions for you should you become unable to make such decisions yourself. Depending on what your specific power of attorney document states, the person who holds your durable power of attorney may be able to write checks out of your bank account, buy and sell your securities, and collect your social security payments.

To avoid abuse of these privileges, it is important not only to carefully choose an agent whom you trust, but also to speak with your estate planning attorney about broadening or narrowing your agent’s power based on your unique situation.

Another device that may easily lend itself to abuse is the joint bank account. If two people jointly own an account, either can make a deposit or withdrawal. Furthermore, at the death of one joint owner, the bank account automatically reverts to the other owner. This reversion occurs even where the deceased joint owner’s will specifies that they would like the account to be inherited by someone else.

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Justice Department Seeks $28M Restitution in Estate-Planning Scheme

As reported in The Chicago Tribune, two men have been indicted in an estate-planning scheme that yielded $28 million from 120 investors. According to the Justice Department, Robert C. Pribilski and John T. Burns III fraudulently obtained the money by persuading wealthy retirees to invest in Turkish bonds. The ponzi-like scheme was in place from 2005 to 2010.

The men found investors through mass mailings that invited them to local estate-planning seminars. The investors were “absolutely and unconditionally” promised that, at the note’s maturity date, they would receive the principal and interest due on their note. In reality, the invested funds were paid out to other investors. The Justice Department alleges that Pribilski and third defendant Mahmut Erhan Durmaz – who has fled the country – took over $2.5 million of the investor’s funds to make payments to themselves, their friends, and their families. The pair also used invested funds to speculate in real estate and restaurants.

Counsel for Burns, Joseph Lopez, has stated that Burns should not have been indicted because he was simply an employee of Pribilski and Durmaz. He “didn’t get any proceeds” from the scheme beyond his usual compensation, Lopez said. The Justice Department hopes to retrieve the $28 million.

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Learning From Celebrity Mistakes: The Case of the Houston Estate

English: Whitney Houston talking to the audien...

The premature death of six-time Grammy winner Whitney Houston should serve as a somber reminder that wills not only need to be created, but updated every few years. As estate planner Andy Mayoras points out, “Celebrity stories like this are a great educational tool to share with clients and highlight what should be done, what was done wrong, and what was done right.”

According to the Investment News, Houston’s will named daughter Bobbi Kristina Brown as the main beneficiary. Surprisingly, Houston drafted her will in 1993 – while still married to Bobby Brown – and never updated it. The will specifies that if Houston had no living children at the time of her death, her estate would pass to Bobby Brown and specified members of Houston’s family. Furthermore, Brown is named as the guardian for their daughter Bobbi Kristina.

Even if this is what Houston wanted, she should have clarified her intentions in a modified estate plan after her split with Brown. Estate plans should be routinely updated after major life events such as divorce, death of a beneficiary, or birth.

Also interesting is that Houston’s will created a testamentary trust for her daughter. A testamentary trust is created by a will, and therefore must pass through probate. By passing through probate, it becomes a public document. Had Houston wanted to keep the associated financial information private, she could have created a “living trust.” Living trusts pass outside of probate, and therefore remain hidden from the public eye.

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The Human Component of Estate Planning: Leaving Your Legacy

Current estate planning clients are looking to leave more than money and property to the next generation. As Businessweek reports, people are now attempting to leave their personal legacies through devices such as ethical wills, life histories, and video recordings. Through these devices, people are adding a human component to traditional estate planning.

According to certified financial planner Neal Van Zutphen, “There’s an element regarding money, but it is really more about affirming your life as a legacy.” Because of the various ways to create a personal legacy component of a will, these can be done as a small do-it-yourself project, or a more intensive, expert-guided concept. Perhaps the most frequently used form is the ethical will, which is a simple letter to one’s family. Van Zutphen provides all of his clients with workbooks to assist them in preparing ethical wills.

Retired psychiatrist Paul Wilson undertook a more involved project when he decided to write a 60-page memoir for his children and grandchildren. Wilson plans to self-publish the memoir, which will contain photographs and newspaper articles. Wilson explained, “It’s therapeutic in that I come out of this learning more about myself – my present and my past … but the reward is more the experience of allowing myself to wander back to those times, and describe them in words as precise and concise as I can.”