Estate Planning Article from Bloomberg.com

Estate Trust Strategy May Save Taxes on Asset Gains (Update2)

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By Margaret Collins and Alexis Leondis

Dec. 2 (Bloomberg) -- Individuals who want to transfer wealth to their children may have a limited opportunity to put some assets in trusts that let them give the money tax-free.

Grantor-retained annuity trusts, known as GRATs, or irrevocable, intentionally defective grantor trusts allow the appreciation of certain assets to pass to heirs free of estate and gift taxes, said Brittney Saks, a partner in New York-based PriceWaterhouseCoopers’s Private Company Services.

Stock and real estate values “have taken a pounding,” interest rates are low and Congress may soon change tax laws, said Stan Miller, senior shareholder at Miller & Schrader, a law firm based in Little Rock, Arkansas. “Those three factors combined have created what we think is the perfect storm for estate planning,” Miller said.

Current federal law taxes estates exceeding $3.5 million for an individual or $7 million for a married couple, at as much as 45 percent. Any gift to an individual above $13,000 this year may also be taxed as much as 45 percent with a $1 million lifetime limit per donor, according to the Internal Revenue Service.

Next year the estate tax is scheduled to disappear under a phase-out Congress approved in 2001. It’s due to reappear in 2011 taxing estates valued at more than $1 million at 55 percent.

Less Opportunity

Wealthy taxpayers are anticipating higher taxes and worrying that their children will have less opportunity to accumulate money, said Roy Ballentine, president and chief executive officer of Ballentine Finn, a wealth management firm with offices in Wolfeboro, New Hampshire and Waltham, Massachusetts. That’s created a sense of urgency to take advantage of opportunities now to transfer a lot of money with minimal tax consequences.

Here’s how a GRAT works. Taxpayers transfer assets such as stock to the trust and the value of the assets are repaid to them over a set period of time through a fixed annuity. Appreciation of the initial contribution above an interest rate set by the IRS transfers to beneficiaries tax-free.

As an example, an employee with a stake in social- networking site Facebook Inc. could transfer $200,000 -- 10,000 shares valued at $20 -- to a two-year GRAT, with his children as beneficiaries, said Jonathan Mintz, chief executive officer of WealthCounsel, an organization based in Madison, Wisconsin that advises estate planning attorneys. If the company went public and the shares rose to $100 by the end of the two-year term, the value transferred to the GRAT would total $1 million.

10-Year Term

The shareholder would get back the initial $200,000 plus 3.2 percent interest in annuity payments over the two years. The interest rate for a GRAT created in December is 3.2 percent, according to the IRS. The IRS rates are low because they are tied to the federal funds rate, which is near zero.

The remaining appreciation of about $800,000 would transfer to his children estate and gift tax-free, said Mintz.

Those who want to dictate how the appreciated assets are spent can keep them in the trust instead of distributing them when the GRAT’s term ends, said Mintz. They can specify the conditions for how the money can be used, such as for college or a first home, he said.

President Barack Obama’s 2010 revenue proposals include requiring a minimum 10-year term for GRATs. That limit may make these wealth-transfer tools less beneficial, said Scott Ditman, a tax partner specializing in trust and estates at New York- based Berdon LLP.

$10,000 Cost

That’s because a longer-term GRAT means a better chance of the trust’s creator dying before the term’s end, Ditman said. If the person who created the trust dies before the term ends, assets revert back to the estate.

GRATs may be inappropriate for investors who have a net worth less than $10 million because of the $10,000 or more cost associated with setting them up, according to Deborah L. Jacobs, author of “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide,” which comes out in December. The trusts are irrevocable and creators should only set up GRATs if they don’t need to use the money locked up in the trust immediately and can afford to give away the appreciation on the assets in the trust, she said.

An irrevocable, intentionally defective grantor trust may appeal to taxpayers with family businesses or depreciated assets such as real estate, said Miller, of the Arkansas law firm whose clients range from Wal-Mart investors to family business owners.

Upswing in Value

“You’re taking an asset value at a time when it’s depressed and shifting that asset to a trust for a family member so that when the value rebounds, all of that upswing in value is not included in the client’s estate when the client dies,” he said.

These trusts are more flexible than GRATs on the timing of the original investment repayment and may avoid another tax the IRS levies on wealth transfers to grandchildren, said Ballentine of Ballentine Finn.

With this strategy you may sell an asset to a trust, unlike with a GRAT, so it’s important to consider the consequences if the assets don’t appreciate, said Ballentine, whose clients have on average $66 million in assets.

“If assets in a GRAT fail to appreciate as expected, the GRAT automatically unwinds and you simply start over,” he said. With a defective trust, which is often financed by taking on debt, if the assets don’t appreciate, additional money put in the trust may be subject to the gift tax, Ballentine said.

Consult Attorney

Taxpayers considering trusts should consult an attorney, accountant and financial planner to comply with tax laws, which are in flux, said Ken Kilday, a wealth manager with San Antonio- based USAA Financial Planning Services.

Tax proceeds from estates this year will generate an estimated $11.8 billion, according to the Joint Committee on Taxation, a Washington-based, nonpartisan congressional committee.

The House of Representatives may vote as early as tomorrow on passing a permanent estate-tax law to prevent the current rules from expiring, said Katie Grant, spokeswoman for Majority Leader Steny Hoyer, a Maryland Democrat, in an e-mail. The bill would extend the 2009 threshold of $3.5 million, and wouldn’t be adjusted for inflation, she said.

“I can’t imagine they’ll go a year without” reinstating the estate tax, said Dan Yu, a director at Eisner LLP, a New York-based accounting and advisory firm.

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

Last Updated: December 2, 2009 18:38 EST


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Eighteen and Alone: The Legal Risks of Independence

Your child has just turned 6,570 days old, and on the surface nothing seems to have changed. He still mixes the reds with the whites in the wash—she drove off with her book bag on the roof of her car again. But, disconcerting as it may be, for all legal purposes, turning 18 makes your child an adult.

Even more disturbing is the fact that without proper legal safeguards, you may no longer have any say in their medical care or financial matters. Should something terrible befall your child, you would be powerless to help them.

Each year, approximately 20,000 college-age kids die in the United States. What sets this population apart from the rest of the country is that almost half of these deaths are accident-related. In general, our kids are not having heart attacks or getting lung cancer—instead they are more likely to be crashing cars or suffering other accidents.

I know it’s difficult to even consider the possibility of something bad happening to your child. No one sits around imagining such scenarios. But the unpleasant truth is that no matter how responsible, how healthy, or how young your child is, they are at risk.

We all protect the things we value. You buy homeowners insurance to protect your house from natural disasters, fire, and other catastrophes. The odds are pretty slim that your house will be destroyed by lightning, but because your home is important to you, you protect it. Well, the same logic applies to your children. You have every expectation that they’ll be safe at college, but because you love and care about them, protecting them in case the unexpected happens just makes sense.

Here’s why you need to act: On April 14, 2003, the privacy rule of HIPAA (Heath Insurance Portability and Accountability Act) went into effect. The intent of this act is to prevent anyone from accessing and abusing an individual’s personal medical information.

Fortunately and unfortunately, this privacy applies to your 18-year-old as well. The downside, of course, is that if your son or daughter has an accident or is incapacitated in some way, you may not even be able to discuss their medical situation with a doctor because it may violate HIPAA. In order to prevent this, you need your child’s legal consent to access their medical records and make decisions for them, based on their own wishes, in the event of an emergency. Specifically, you need a HIPAA Authorization Form and a Health Care Directive completed for them.

Another important legal safeguard is a Property Power of Attorney. This is especially helpful if your child travels abroad. It allows you to handle any unforeseen issues that may arise with your child’s car, apartment, student loans, etc.

To be clear, these documents and safeguards do not in any way allow the designated agent to “interfere” with their child’s medical care or financial decisions. These are simply emergency measures to protect the interests of your newly-minted “adult” child.

Becoming an adult is an exciting rite-of-passage for every young person, but with independence comes an important set of responsibilities. Getting these legal matters sorted out may be the most important birthday present you ever give to your child.

Lawyer Joke

A stingy old lawyer who had been diagnosed with a terminal illness was determined to prove wrong the saying, "You can’t take it with you."
After much thought and consideration, the old ambulance-chaser finally figured out how to take at least some of his money with him when he died. He instructed his wife to go to the bank and withdraw enough money to fill two pillow cases. He then directed her to take the bags of money to the attic and leave them directly above his bed.
His plan: When he passed away, he would reach out and grab the bags on his way to heaven.
Several weeks after the funeral, the deceased lawyer’s wife, up in the attic cleaning, came upon the two forgotten pillow cases stuffed with cash. "Oh, that darned old fool," she exclaimed. "I knew he should have had me put the money in the basement."

Family Photo Fest

Michael Jackson's Death - Why YOU Need Your Estate Planning Documents in Order

The sudden death of Michael Jackson serves as a reminder to everyone that, no matter your age, you need to have your estate planning in order. The pop superstar died on Thursday, June 25th at 50 years old. The media is speculating as to how his estate will be handled and the future of his young children. No public statement has been made in regard to his personal planning and the media and the nation will wait anxiously to see how this unfolds. If Michael Jackson prepared a Trust the public will most likely never know the details as it will be held private, however, if he had a Will it becomes part of public record. In the state of California, a Will needs to be presented within 30 days. Jackson's assets, royalties and the amount of debt he had accumulated most likely will lead to lengthy battles over his estate.
Steve Hartnett, Associate Director of Education for the American Academy of Estate Planning Attorneys, was quoted in the Associated Press' article Jackson May Be 'Worth More Dead Than Alive' explaining some of the options that Michael Jackson had to protect his family. "Jackson might have shielded some of his estate from creditors and ensured that his children were taken care of by placing a life insurance policy and other assets in an irrevocable trust."