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How’s This for GRAT-itude? – Basics of the GRAT

As a recent article explains, a Grantor Retained Annuity Trust (“GRAT”) is a great estate-planning tool for high-net-worth individuals.  This type of irrevocable trust permits you to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years.

Often, individuals making large transfers to their beneficiaries choose to utilize GRATs because of associated tax benefits.

A key aspect of GRAT transfers is that they minimize or even eliminate estate and gift tax liability on the transferred assets. Moreover, the creator of a GRAT may receive fixed annual payments for the life of the trust. Through receiving this annuity, the creator is paid back his or her principal, as well as interest. After the trust term has concluded, the remainder of the trust passes to the trust beneficiaries.

When setting up a GRAT, it is important to carefully select a trust term. If the trust term ends while the creator is still alive, the remaining assets will be included as part of his or her gross estate for purposes of determining estate tax liability. Those who anticipate outliving the trust term of their GRAT should consider employing a life insurance strategy to offset any additional tax liabilities.

Those who wish to set up a GRAT should act quickly because the Obama administration may soon eliminate the tax benefits that a GRAT strategy would reap as proposed in the President’s latest Green book proposals.

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Back to Some Basics: Estate Planning for a Family

The fact that estate planning is of paramount importance to every American is nothing new. Although it may be uncomfortable to consider your eventual death, a good, updated estate plan is the only way to make sure that your loved ones are cared for after you are gone. As a recent article emphasizes, estate planning is vital no matter how big or small your estate is.

One important part of estate planning is integrating your bank accounts into your estate plan. As business integration executive Ally Bank explains, “Many people often overlook the importance of incorporating their bank accounts into their estate planning strategy.” One way to achieve this integration is to set up an account for trust.

There are several benefits of establishing an account for trust. First, the trust account helps a person to ensure that their beneficiaries are cared for in the future through the assets in the trust. Second, a trust account may reduce a person’s estate tax liability. Third, trusts do not go through the process of probate. Finally, if your account is at a Member FDIC bank, it is insured up to a minimum of $250,000.

If you are considering a bank account for trust, consider accounts that offer competitive interest rates and do not have minimum fees or minimum balances. Visit several financial institutions to determine which institution and type of account is best for you.

 

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When You Lose Trust in the Trustee: How A Beneficiary Can Enforce A Trust

As a recent article explains, sometimes trustees do not do what they are supposed to. Sometimes trustees make mistakes in carrying out their duties while other times, they knowingly fail to comply with the terms of the trust. If you are the beneficiary of a trust, there may be some things you can do to ensure that the trustee follows the terms of the trust.

Because a trust is created by a legal document, each trust contains rights and duties that are legally enforceable. If a trustee has not followed the terms of the trust, he or she is considered to be in breach of his or her duties. There are several steps a beneficiary should take when he or she believes that the trustee of his or her trust is in breach.

The first step that a beneficiary should take is to review the trust documents. The beneficiary should be certain of what the terms of the trust are before he or she confronts the trustee concerning an alleged breach. Often, discrepancies over the behavior of a trustee are based on misunderstandings about what the trust documents actually say.

If you have consulted the trust documents and still believe that your trustee is in breach of his or her duties, speak with the trustee first. A majority of trust issues can be resolved through proper communication. If communication does not solve your problem, review the trust document to determine what the procedure for replacing trustees is. Although each trust is different, many trusts contain a provision that allows for the relatively easy replacement of a trustee.

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Even the Wiseguys: Gandolfini’s Disastrous Estate Plan

After “Sopranos” actor James Gandolfini’s unexpected death at the age of 51, a recent article has described his estate plan as disastrous. Americans should take this opportunity to learn from the mistakes in Gandolfini’s estate plan in order to avoid making the same mistakes themselves.

James Gandolfini
James Gandolfini (Photo credit: Wikipedia)

According to the report, an estimated $30 million of Gandolfini’s $70 million estate will be paid out in taxes. There are many methods through which Americans can avoid a similar fate. These methods are all rooted in proper estate planning, which can dramatically reduce, or even eliminate, the tax burden on your estate.

One way to avoid a large tax bill is through the establishment of trust vehicles. Current federal law allows individuals to transfer $5.25 million into an irrevocable trust without having to pay gift tax on that amount. Married couples can combine their tax-free amounts to make a total of $10.5 million. The different types of trust accounts you may choose include marital trusts, life insurance trusts, and special needs trusts.

It is also important to update your estate plan as the size and characteristics of your estate and family change. Constant updates will also allow your estate to stay current with tax laws.

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For Better or Worse: Estate Planning for Same-Sex Spouses

As a recent article explains, the United States Supreme Court’s recent ruling on same-sex marriage will radically alter estate planning for same-sex married couples.

taking their first steps as a legally married ...
(Photo credit: ehoyer)

Prior to the decision, thousands of federal laws available to married couples were not available to same-sex married couples due to the Federal Defense of Marriage Act (“DOMA”), which defined marriage as between a man and a woman. By striking down DOMA, the United States Supreme Court suddenly made thousands of federal estate planning tools available to same-sex married couples.

One of these tools is portability. Portability allows a surviving spouse to utilize the unused portion of his or her deceased spouse’s estate tax exclusion. Portability was made permanent in the new 2012 tax law. In order to use the unused portion of your spouse’s estate tax exemption, the surviving spouse needs to have the executor of the deceased spouse’s estate transfer the unused exclusion, as this is not automatic.

Another estate planning maneuver that will now be available to same-sex married couples is gift-splitting. Every year, federal law allows each individual to gift $14,000 per year, per recipient, to as many recipients as they wish. Any amount gifted over the yearly gift-tax exclusion counts against a person’s lifetime gift tax exclusion. Married spouses, however, can combine their gift amount in order to jointly gift $28,000 to a single recipient.

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The Difference Between an LLP and LLC

In order to transfer assets to the next generation, some people may choose to use an LLP or LLC. Both of these are legal business arrangements that can be implemented into any estate plan.  A recent article discussed the differences between the two.

An LLP, or limited liability partnership, is a general partnership. In this type of partnership, ownership of the business is split between the partners. Profits from the business are distributed based upon the percentage ownership of each owner. An LLC, or limited liability company, is a partnership wherein owners are issued shares of stock. Profits from the business are split between the owners based on their share of the stock.

The use of an LLC or LLP may be beneficial for those Americans who have estates valued above the federal estate tax exemption, are seeking asset protection, or both. This is because these devices lower the value of the entire estate by dividing ownership of the business between yourself and your children. Moreover, if you gift a portion of your LLC or LLP to a child, that gift can be discounted by 20 percent or more for purposes of the federal gift tax exemption. By giving such gifts, you increase the value of your allowed $14,000 gift by 20 percent.

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Protecting Your Inventions with a Patent: Recent Change in U.S. Patent Law

According to a recent change in U.S. patent law, specifically the Leahy-Smith America Invents Act, or AIA, the system has been switched from first-to-invent to first-to file. This revision means that your invention may be at risk if another entity is able to file an application before you with a similar idea or product. A recent article discusses some tips that will help you navigate these new guidelines.

To determine if you have a new invention, you will need to search internationally. During the application process, your invention will be judged against global inventions before you are able to win the patent. You can also consider filing a provisional application rather than a full application, which holds your patent for a year. This translates to a more affordable application fee and less required information. However, it is important to keep in mind that your provisional application should be consistent with future claims. In addition, a full application needs to be submitted within a year from the filing of your provisional application.

Under the new patent law, confidentiality agreements are more important. If you publicly disclose an invention, you have one year to file for a patent or you risk losing your rights to that invention. Finally, if you can qualify as a microentity by having fewer than four patent applications on record, filing fees for a full application will be dramatically reduced.

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Million Dollar Babies: Leaving Assets to a Minor

Can you imagine receiving a few hundred thousand dollars in your account when you were 18 years of age? Typically, parents wish to leave their assets to their children or grandchildren. Although many people simply leave their assets to their children and grandchildren outright, a recent article discussed why it might be best to leave gifts to minor children and grandchildren in trust accounts.

If a parent leaves an inheritance to a minor child outright, the inheritance must go through the process of probate. Because a minor cannot legally hold property in his or her own name, a probate judge must appoint a guardian to hold the property until the child reaches the age of 18. The court-appointed guardian may not be a person that the parent or grandparent would have chosen. Moreover, the cost of compensating the guardian may diminish the inheritance.

Creating a trust for your minor child is the only way to remain in control of the assets. Through the trust, you can dictate how the funds may be used, and when they may be distributed to the beneficiary. Moreover, through creation of the trust you can select a trustworthy person to serve as trustee. Finally, a trust will take effect immediately. Therefore, the beneficiary will not be forced to submit to the probate proceedings.

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Surprise! You Now Own a Business! When There Is No Succession Plan

By creating a succession plan, a business owner can determine what will happen to his or her business once he retires, becomes incapacitated, or dies. Often, succession plans can mean the life or death of a family business. A recent article discussed the story of clothing company Bari Jay, which was passed on to the owner’s daughters without the benefit of a succession plan.

The article profiles Susan Parker and Erica Rosenberg, who are co-owners of Bari Jay. The two sisters became owners of the business suddenly when their father unexpectedly died. According to Parker, their father never even informed them that they would be inheriting the business. Moreover, the sisters did not work at the company at the time of their father’s death.

The sisters faced many problems when they took over the business. Not only was it in the red, but they also lost a key employee who was not willing to partner with the girls. Rumors quickly spread around the company that, soon, it would no longer exist. Although the transition was rocky, the business continues to thrive. Too often, however, this is not the case.

If you own a family business that you plan to pass on to your children, take time to create a succession plan. Be sure to discuss the succession plan with your heirs, as well.

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When the Conference Table Meets the Family Dinner Table

Often, succession plans for family businesses only consider the technical aspects of the business. However, it is just as important to consider the softer sides of the business. A recent article discussed the importance of creating a succession plan that considers the technical, as well as soft aspects of a family business.

When engaged in succession planning, most family business owners focus on the technical elements of business planning. This is important, as business transfers carry significant tax and legal implications. However, the technical elements of the transfer should not be the business owner’s sole concern. Business owners need to also consider the “qualitative aspects of leadership, communication, and control over decision making.”

One business owner set his company up for failure when he ignored these considerations when he passed his company evenly on to his five sons. The owner left no outline for a decision making structure between the sons. The business quickly fell apart, as the sons had no clear sense of direction and engaged in a power struggle.

In order to plan for the softer side of a business transfer, it is important to create a plan that will manage family relationships. Through this type of plan, the business owner can dictate a decision making structure for his or her successor children to follow. Such a plan can help avert disaster when successor children disagree about leadership and direction.

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Some String Attached: Protection Through a Spendthrift Trust

Under the terms of a trust, a trustee holds legal title to the trust assets for the beneficiary. The trust documents dictate how and when the trustee may distribute the trust assets to the beneficiary. There are many types of trusts that can be used to serve various purposes in estate planning. A recent article discussed the purpose and benefits of a spendthrift trust.

A spendthrift trust is essentially a trust with a spendthrift clause. A spendthrift clause prohibits the beneficiary from accessing the assets within the trust. This clause thereby prevents creditors of the beneficiary from intercepting payments meant for the beneficiary. Once the beneficiary receives a distribution, however, his or her creditors may then reach the distributed assets. Spendthrift clauses may also prevent beneficiaries from voluntarily or involuntarily transferring their interest in the trust.

Spendthrift trusts may protect a variety of people. They are a popular choice among parents who want to leave money to their children but are worried that their children will spend it quickly and irresponsibly. Spendthrift trusts may also protect a person against an unexpected creditor, such as the victim of a car accident, a future ex-spouse, or a business creditor.

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Inquiring Minds (Like Me!) Want to Know: Who Feuded Over National Enquirer Fortune?

The founder of the National Enquirer tabloid magazine, Generoso Pope, died in 1989. His two beneficiaries were his wife, Lois Pope, and his son, Paul Pope. Years later, Lois and Paul are again in court over Generoso’s multi-million dollar estate.

the scoop
(Photo credit: &y)

When the National Enquirer was initially sold, Lois received $200 million, and Paul received $20 million. Lois recently filed court documents claiming that her son has been harassing, stalking, and threatening her because he wants more of her inheritance.

According to court documents, Lois once gave her son $8 million and bought him a yacht. After that, the two have been involved in nonstop litigation. Paul has most recently demanded another $875,000 from his mother. Neither attorney has commented on the case.

Lois claims that, when she refused to pay her son, he spread public rumors about her through a gossip columnist. Included in these rumors, Paul claimed that Lois planned to kidnap one of his children. Lois countered that Paul asked Lois to kidnap one of his children so that he could get the kidnap insurance. Paul also maintains that Lois throws lavish parties to the tune of $1 million, and that she owns a private jet to transport her 18 dogs.

(and, no, this blog post was not written in the checkout aisle at our local grocery store!)

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RUN FOR SHELTER!!! Or Don’t? Is a Credit Shelter Trust Still Necessary?

Before the statutory portability provisions were made permanent, people often used Credit Shelter Trusts (“CSTs”) in order to maximize the estate tax exemption of the first spouse to die. The use of CSTs therefore reduces the estate tax on the entire marital estate. As a recent article discusses, however, the need of CSTs has been called into question after portability was made permanent.

The portability provision automatically allows married couples to utilize their combined exemption amount. In 2013, this exemption amount was $10.5 million. For high net-worth families, however, a CST is still a beneficial estate planning tool for saving estate taxes.

It is important to understand that, under portability, a deceased spouse’s exemption freezes at the time of his or her death. Therefore, if the first spouse dies many years before the second spouse dies, he or she could miss significant estate tax savings. CSTs are also beneficial for appreciable assets. The value of any assets placed in a CST is frozen at the time of the spouse’s death. Therefore, if the assets were worth $1 million at the time of the spouse’s death, and $5 million when the surviving spouse dies, all $5 million would be excluded from the estate of the surviving spouse.

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Estate Planning: Lessons from Warren Buffett

One of the most interesting parts of Warren Buffett’s estate plan is how he designed it to leave his children just enough so that they can do anything they like, while also not leaving them so much that they never have to do anything. As a recent article explains, many people would like to replicate this part of his estate plan.

Warren Buffett
Warren Buffett (Photo credit: MarkGregory007)

Many parents wonder how much they can leave their children, before their children become lazy spendthrifts. However, simply leaving money to children may not be the whole problem. As Warren Buffett recently explained, “I think that more of our kids are ruined by the behavior of their parents than by the amount of the inheritance.” Parents who do not want their children to grow up as spoiled brats should focus on the environment that they raise their children in, rather than the inheritance they will give them.

Buffett also believes that it is “crazy” for your children to read your will for the first time after you have died. This is because communication is key to a smooth estate transition. If you discuss your will with your children before your passing, you stand a far better chance of avoiding disaster after your death. Although this conversation may be awkward, it is often necessary to outline your intentions and reasoning.

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After Success, Don’t Forget About Succession

The amount of work required to start a business, make it successful & keep it growing is substantial.  Unfortunately, the business owner isn’t done even when all that has been accomplished.

There are many challenges to developing a successful succession plan for your small business. Common challenges to succession planning include fear, confusion, uncertainty, an undefined action plan, and dysfunction. A recent article discusses how to overcome some of these challenges.

Many succession plans are hindered about uncertainty regarding the economy, as well as the success of the business itself. To best shield the succession plan from uncertainty, be sure to hire the best employees possible for the transition. Moreover, attempt to lock in key employees who are vital to the businesses continued success.

An undefined action plan is particularly harmful to a succession plan because it can lead to gaps in ownership and poor follow-through. It is important, therefore, to integrate the succession plan into your strategic plan for the business. To keep the plan on track, consider documenting expectations, creating a timeline, and crafting ways to measure success.

Lastly, dysfunction is often rampant with family business succession. Although this may be hard to avoid, consider communicating every aspect of your plan with your heirs. Be sure that your children understand the reasons for the decisions you have made, and listen to their concerns and opinions.

Importantly, remember that there is no standard solution for every business. If your business succession plan should stall, seek help from an experienced attorney or financial advisor.

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Estate Planning for Business Owners: Make it Salable

Many business owners do not have a plan in place to sell their business. Therefore, when it comes time to sell the business, approximately 80 percent of businesses are not salable. As a recent article explains, businesses are not salable because “they offer no strategic fit to a buyer.”

It is therefore vital for business owners to put a strategy in place that will protect the business by ensuring that, when it is time to sell, the business is salable. The author suggests crafting such a plan at least five to seven years before you plan to sell the business.

Before considering whether your business will be salable, it is important to determine what personal goals you have for your life beyond the business, and determine how the business can help you reach these goals. For example, if you determine that you need $7 million to retire, but your business is only worth $4 million, you will need to determine a way to close that gap by increasing the value of the business. Increasing the value of the business may also make it more attractive to potential buyers.

If you decide that you want to transfer the business to a key employee or family member rather than sell it outright, the buyer may not have the funds necessary to purchase the business outright. In this case, you will need to have a plan in place that will assist the new owner in determining how they will get paid from the cash flow of the business.

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Don’t Forget About State Estate Taxes

With the federal estate tax exemption set at $5.25 million, many people are resting easy knowing that their estate will likely not be subject to estate taxes. As a recent article points out, however, many individuals are quick to forget that their state may levy estate taxes, as well.

Currently, some type of death tax is imposed in 21 states, as well as the District of Columbia. Most of these taxes are applicable at a much lower rate than that at the federal level. New Jersey, for example, taxes estates that are worth over $675,000. In Rhode Island, estates are taxed when they are worth over $910,725. Finally, New York taxes estates that are worth an excess of $1 million.

English: The stone mansion at Deering Estate a...
(Photo credit: Wikipedia)

When considering whether state estate taxes will apply to your estate, remember to include the value of your home and retirement accounts. Depending on the specifics of your life insurance policy, the proceeds of this policy may be counted as well.

To further complicate matters, eight states – including New Jersey – impose inheritance taxes as well as estate taxes. Often, seniors consider state death taxes when determining which state they would like to retire in. Many senior citizens choose to retire in Florida, Arizona, and Texas, because these three states do not impose estate or inheritance taxes.

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Estate Planning May Assist Retail Investors

Retail investors who have investable assets amounting to less than $100,000 often overlook an important aspect of financial planning. As a recent article explains, this part of financial planning is creating an estate plan.

According to attorney Michael Brennan, “The mistake these folks are making is assuming that an estate must consist of millions of dollars. But, the truth is that nearly everyone has an ‘estate’ for purposes of estate planning.” According to Brennan, pieces of an estate include personal residences, insurance policies, various accounts, and personal possessions. Often, these assets can add up to a sizable estate. Estate planning is further important to high net worth investors, because such investors are more sensitive to the changing tax and estate laws than the average American.

The many benefits of creating an estate plan include ensuring that assets are divided according to the owner’s wishes, as well as reducing the eventual estate tax burden. Although there are many benefits to estate planning, the article reports that 56 percent of retail investors die without any estate plan in place. In comparison, of investors with $5 million or more in investible assets, only 6% die without an estate plan.

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Advantages Of An Irrevocable Life Insurance Trust

Many Americans may be unaware of what an irrevocable life insurance trust (“ILIT”) is, let alone the benefits it may provide to them. A recent article discusses several of the benefits offered by ILITs.

Typically, life insurance policy proceeds are not subject to income taxation. However, they are included in the calculation of a person’s gross taxable estate. This is where the ILIT comes in. If a person puts their life insurance policy into an ILIT, the proceeds of the policy are kept out of his or her taxable estate. The proceeds will therefore be available to his or her heirs free of income and estate tax.

Additionally, ILITs are a great way to provide cash to help pay for the taxes that will be levied on your estate. Beneficiaries of your ILIT can use some of the proceeds to pay the taxes owed on your estate. By doing this, your actual estate is kept in tact. This strategy is especially beneficial to those whose estate consists largely of illiquid assets such as a business or real estate. Through setting up an ILIT, you can ensure that your family will not have to sell the illiquid assets in your estate in order to satisfy the estate taxes.

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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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