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Personal Wealth Advisors: The Longview

Estate Planning for Same-Sex Couples and Unmarried Couples After Obergefell: Detriment or Opportunity?

(Heckerling 2016) Permanent link

January 15, 2016

Talibi_Barbara newBy Barbara Taibi, CPA

The 50th annual Heckerling Institute on Estate Planning recently convened in Orlando, Florida. Heckerling is the largest and most prestigious estate planning conference in the nation. Several EisnerAmper professionals attended this year’s Institute and blogged about current hot topics. Following is a summary of some of the discussions:

  • Estate Planning for Same-Sex Couples and Unmarried Couples After Obergefell: Detriment or Opportunity? 
  • The Nuts and Bolts of Charitable Remainder and Charitable Lead Trusts 
  • Special Needs--Special Trusts: What You Do Not Know Can Hurt Your Clients and You! 
  • Navigating the Shoals of Nonprofit Board Service: The Legal and Ethical Issues that Can Take You Off Course 
  • A Fine Tasting Opinion: The Art of Reviewing an Appraisal, Ethically Protecting Privileges and Popping the Cork off of Kovel 
  • Don't Be Afraid of the Dark--Navigating Trusts Through NIIT 
  • Planning for Clients with Diminished Capacity

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning 

Joshua S. Rubenstein of Katten Muchin and Rosenman LLP and William P. LaPiana from New York Law School presented a very informative session on estate planning for same-sex and unmarried couples under the current environment. It provided several income tax and estate planning scenarios where the decision requires attention to estate plans in effect and income tax planning for 2015 and forward.

As a brief summary of where we stand now, on June 26, 2015, the U.S. Supreme Court ruled that a state ban on same sex marriage is unconstitutional, in violation of the equal protection clause of the Fourteenth Amendment. This landmark ruling in the combined cases known as Obergefell v. Hodges struck down every state ban on same-sex marriage in the  country, and by virtue of this ruling, Section 2 of DOMA was also struck down, which declared that states have the right to deny same-sex marriages licensed in other states.  In 2015, all states now follow federal law so for the very first time we are finally in a position where all married couples – same-sex or not – are treated equally for tax purposes.

For estate tax purposes, it is important that same-sex couples who may have done planning prior to marrying or prior to their marriage being recognized re-visit their estate plan.  Mr. Rubenstein provided some planning opportunities; the following outlines a few to consider: 

  • Get married to take advantage of the unlimited marital deduction.  Now that same-sex marriage is legal in all 50 states and Washington DC, those couples who have been holding off getting married or who have entered into civil unions or domestic partnerships should get married if they desire to take advantage of the federal benefits afforded to married couples, such as the unlimited marital deduction from federal estate and gift tax.
  • Review current estate planning documents to ensure that the amount and structure of any spousal bequests remain appropriate. Existing estate planning documents may have been prepared under the assumption that any gift or bequest to a spouse of the same sex couple over and above the individual’s Applicable Exclusion Amount would be subject to federal estate tax (currently at a rate of 40%). However, that assumption is no longer true, and such gifts and bequests, if properly structured, are now entitled to the unlimited marital deduction. Accordingly, a married same-sex couple may wish to modify their estate planning documents to provide that any assets included in their estates in excess of the Applicable Exclusion Amounts will pass to the surviving spouse, either outright or in a properly structured marital trust for the spouse’s benefit, thus deferring all federal estate taxes until the death of the surviving spouse.
  • Review retirement account beneficiary designations and joint and survivor annuity elections to ensure that they remain appropriate.  A surviving spouse is entitled to roll over a decedent spouse’s retirement account into the surviving spouse’s retirement account without being required to take minimum distributions or lump sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (usually upon attaining age 70½). Since this benefit is now available to married same-sex couples, spouses should consider naming each other as the beneficiary of his or her retirement accounts in order to defer income tax recognition as long as possible.
  • Consider replacing individual life insurance policies with survivor policies. Many same-sex spouses previously purchased individual life insurance policies of which the other spouse is the beneficiary in order to provide the surviving spouse with sufficient liquid assets that may be used to pay federal estate taxes due upon the death of the first to die. With the unlimited marital deduction and DSUE available to married same-sex couples, there may be no need for such liquidity upon the death of the first spouse to die. Thus, a married same-sex couple should consider whether such policies should be maintained or replaced with so-called “second-to-die” policies that pay benefits only upon the death of the surviving spouse. Such policies provide liquidity to children or other beneficiaries of the married same-sex couple, and are generally less expensive than individual policies having the same death benefits.
  • Consider splitting gifts between spouses.  Until now, each spouse could make gifts only up  to the  annual exclusion amount from federal gift tax and federal generation-skipping transfer tax (the “Annual Gift Tax Exclusion Amount”  and the “Annual  GST  Exclusion  Amount,” respectively – each  currently $14,000) without  using  any  portion  of  his  or  her  Applicable Exclusion Amount. Going forward, however, each spouse may now make gifts from his or her own  assets and, with the other spouse’s consent, have such gifts deemed to have been made one-half by the other spouse for purposes of federal gift tax and GST tax laws. This way, both spouses currently may give up to $28,000 to any individual without using any portion of either spouse’s Applicable Exclusion Amount.  

While these are just a few suggestions that should be looked at immediately there are many reasons that married same-sex couples should be speaking to their attorney and accountant immediately.  

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here

Trends & Developments - March 2016

The Nuts and Bolts of Charitable Remainder and Charitable Lead Trusts

(Heckerling 2016) Permanent link

January 15, 2016

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Michele A.W. McKinnon of McGuireWoods LLP and Richard L. Fox of Dilworth Paxson LLP led an in-depth discussion of the intricacies of charitable remainder trusts (“CRTs”) and charitable lead trusts (“CLTs”). Both of these planning techniques provide benefits to high-net-worth individuals that are seeking either income or estate tax planning, coupled with charitable intent. Both CRTs and CLTs can be structured as annuity trusts where the annual payments are based on a fixed percentage of the initial trust value or dollar amount, or as a unitrust where the annual payments are based on a percentage of the value of the trust principal (as valued each year).  

The basic function of a CRT is to enable a taxpayer to transfer property to an irrevocable trust, which in turn will return a stream of payments over a fixed period of time to a non-charitable beneficiary (either to the original settlor, or some other individual). At the end of the fixed term, the remainder of the trust property must pass to one or more qualified charitable organizations, or continue to be held in trust for those charities.  

A CRT is generally seen as an income tax planning technique ideal for individuals with highly appreciated capital gain property, since the sale of that property (once placed in the CRT) will escape capital gains tax and other associated taxes on investment income (including NII tax, state income tax, or even increased tax rates on collectibles). Although the payments to non-charitable beneficiaries will be subject to income tax on an annual basis, the ability to sell an appreciated asset without income tax at the trust level can provide for increased cash flow and asset diversification. If the CRT is established during the lifetime of the individual, the donor (or settlor of the CRT) will receive a current income tax and gift tax deduction based on the remainder interest passing to the charity. If the CRT is established at death, an estate will receive a charitable estate tax deduction instead.  

A CLT is used more frequently for estate tax planning purposes and is generally seen as the reverse of a CRT. In a CLT, income is paid to a charity for a specified term and upon the term end, the assets pass to non-charitable beneficiaries. If established during a donor’s life, a CLT is effective at removing appreciating assets from an estate, without limits on charitable deductions. If established upon death, the estate will be able to claim a charitable deduction for the income payable to the charity. Both inter-vivos and testamentary deductions are based on the present value of the income payments made to the charitable organization over the term of the CLT. The assets used to fund a CLT would ideally appreciate over the term of the trust, so as to provide sufficient income for annual charitable payments, and provide increased value in the remainder assets passing to the non-charitable beneficiaries.

As with CRTs, the rules surrounding qualified CLTs are intricate, and require a skilled advisor to help navigate both drafting and administration. Unlike a CRT, the charitable beneficiaries are often unnamed in the trust document, and trustees or other responsible parties are granted broad discretion for these distributions. The speakers cautioned against the grantor’s retained rights to participate in any of these decisions, as it could cause an unintended inclusion in the grantor’s estate under IRC § 2036.  

In each case, practitioners and clients are advised to give careful consideration to the establishment of a charitable trust. They should contemplate their own philanthropic intentions and family commitments, along with monetary concerns, such as cash flow needs, income tax, and estate tax in conjunction with their overall planning goals.   

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here


Special Needs--Special Trusts: What You Do Not Know Can Hurt Your Clients and You!

(Heckerling 2016) Permanent link

January 14, 2016

Hines StephanieBy Stephanie Hines, CPA

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Bernard A. Krooks of Littman Krooks LLP provided the attendees of the Heckerling Institute on Estate Planning an overview of special needs planning and special needs trusts (“SNTs”). One of the primary goals of special needs planning is to allow an individual with a disability to qualify for government benefits, while maintaining a source of additional funds to pay for expenses not covered by such benefits. This goal sets a certain standard for special needs planners and advisors who should have a working knowledge of not only tax law, but trusts and estates, public benefits and various state laws.

The primary government benefit available to an individual with a disability is Medicaid. Medicaid is a jointly funded, federal and state program that will generally pay for medical expenses, including long-term care. Another benefit available for an individual with a disability is Supplemental Security Income (SSI). SSI is not social security; it is a federal program which pays a monthly stipend to the individuals that qualify. In addition to food and shelter, SSI may also cover expenses related to the cost of group homes or other residences. Both the Medicaid and SSI programs are “means-based” which means that to qualify, an individual must not exceed certain income levels and asset requirements. This is where SNTs become relevant.

To achieve the goal of qualifying for government benefits, there are 3 entities that can be established. Two entities are SNTs; first-party SNTs and third-party SNTs, with the principal difference being the source of funding. First-party SNTs are funded by assets owned by the individual with a disability, whereas third-party SNTs are funded by assets owned by individuals other than the individual with a disability. The third entity is a pooled trust. Pooled trusts are similar to first-party SNTs, as they are funded with assets owned by an individual with a disability, with the difference being that pooled funds are managed/operated by a not-for-profit. Each of the above entities requires certain provisions to be met in order for the individual to qualify for government benefits, otherwise Medicaid concerns become a reality.

The ABLE (Achieving a Better Life Experience) Act , signed into law during December 2014, established Section 529A of the IRC. These accounts are modelled after Section 529 plans, in that they grow income tax-free; however, they are structured in order for individuals to fund a separate account in the name of an individual with a disability (the beneficiary). In addition, if certain requirements are satisfied, these accounts will not disqualify the individual beneficiary from qualifying for government benefits.

There have been a number of common considerations and errors that have generated Medicaid concern or, even further, disqualified an individual with a disability from receiving government benefits, such as:

  1. Not providing flexibility in drafting
  2. Not creating third-party SNTs for individuals age 65 or over
  3. Creating a first-party SNT for an individual age 65 or over
  4. Requiring mandatory distributions
  5. Spending assets in a-third party SNT prior to a first-party SNT

….and these are to name just a few.

The bottom line, as suggested by Mr. Krooks, is to work with the appropriate service providers whose niche is in the area of special needs planning. “What you don’t know can hurt your clients and you.”

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here.

Navigating the Shoals of Nonprofit Board Service: The Legal and Ethical Issues that Can Take You Off Course

(Heckerling 2016) Permanent link

January 14, 2016

Arrigo_MarieBy Marie Arrigo, CPA, MBA 
Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Kathryn W. Miree of Kathryn W. Miree &Associates, Inc. spoke on how important not-for-profit board service is in our country. Board members serve a critical role in the complex network of not-for-profits that provide vital services to our communities. They have the critical skills, expertise, and funds to enable philanthropy. Charitable organizations in the U.S. contribute substantially to the quality of life in the U.S. In 2012, more than 1.4 million not-for-profits contributed $88.73 billion to the U.S.  economy (5.47% of the nation's GDP). These charities generated revenue of $1.65 trillion and held assets of $2.99 trillion. Not-for-profits employ 10.1% of the workforce.

Today's board members serve in an era of increased scrutiny from state attorneys general, federal agencies, watchdogs and donors. To serve effectively as a board member and avoid the personal impact of poor legal and ethical decisions require a clear understanding of applicable laws and the board member's fiduciary role. The fiduciary role focuses on exercising a high standard of care in managing the charity's assets. The board is responsible for setting the strategic direction for the organization and for thinking strategically as it makes decisions for the organization.

The key fiduciary responsibilities, which are largely codified in state statutes, are:

1. Duty of care, which requires a board member to participate in the activities of governance and provide operational and policy oversight. Directors must exercise a reasonable level of care in making decisions on behalf of the organization. This would include participating in board and committee meetings and reviewing the charity's budget, fundraising results, audited financial statements and investment returns. Directors are not generally liable for bad decisions, as long as the decisions were made in good faith and without a conflict of interest.

2. Duty of loyalty, which says that the director must place the interests of the charity above his/her personal interests. The focus is on disclosure, confidentiality and avoiding conflicts of interest.

3. Duty of obedience, which requires a board director to ensure that the charity carries out the organization’s mission, as defined in its governing documents. The director must comply with all applicable laws.

Ms. Miree also discussed several practical duties as detailed by the BoardSource publication, The Ten Responsibilities of Nonprofit Boards. These responsibilities include selecting, supporting, and evaluating the chief executive officer, monitoring and strengthening programs and services, and ensuring adequate financial oversight.

The IRS is the chief federal regulatory agency for not-for-profits. Charities apply for exempt status by filing the Form 1023. Charities annually file a Form 990 with the IRS. Directors have a responsibility to review the Form 990 prior to submission to the IRS. Also, after the Pension Protection Act of 2006, the IRS can now share information with the states. The role of the attorney general is to represent and protect the charitable interests in the state as well as enforcing the laws applicable to charitable organizations in the state.

In conclusion, board service plays a critical role in our society, and is often a rewarding personal experience. It is also important to note that there are responsibilities that come with being a board director. 

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here

A Fine Tasting Opinion: The Art of Reviewing an Appraisal, Ethically Protecting Privileges and Popping the Cork off of Kovel

(Heckerling 2016) Permanent link

January 14, 2016

Duva_JoanBy Joan D’Uva, CPA, ASA, CFE 
Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Stephanie Loomis-Price of Winstead, PC and Louis S. Harrison of Harrison, Held, Carroll and Wall, LLP provided guidance to advisors in reading and commenting on valuation reports. The emphasis was on the defensibility of preparing transfer tax returns and privileges in hiring appraisers. The focus was on business appraisal reports used to support values used in transfer tax returns.

Ms. Loomis-Price suggests selecting a qualified independent appraiser; look for credentials. Some of the credentialing organizations include the American Society of Appraisers, the Institute of Business Appraisers and the National Association of Certified Valuation Analysts. Without valuation credentials, the appraisal report may be disregarded by the courts. Have a methodology as to how to review the appraisal report. Ask questions rather than making edits to report in order to preserve the appraiser’s independent opinion. Details are important! Review grammar and look for typos. Be sure to check quotes and cites. Checking math may seem basic but is necessary. Ask yourself, does the valuation opinion pass the smell test? Is the conclusion logical and are the facts correct? Courts look for thoroughness, integrity and logic. Be sure that the appraisal takes into account Revenue Ruling 59-60 which sets forth the factors to consider in the valuation of a small closely-held company.

Mr. Harrison talked about the many methods of valuing a business. The basics are that all methodologies will fall into one of three approaches: income, market or asset. Income approaches that are based on projected income or cash flows involve determining a discount rate. Generally, income streams or cash flow streams used in the income approach will be tax-effected for C corporations. There is some debate as to whether such income streams or cash flow streams should be tax-effected for S corporations. Recently, the courts have taken the position that S corporation income should not be tax-effected. This results in a higher value. Many appraisers disagree with not tax-effecting the income or cash flows.

Market approaches involve determining a multiple. A favored methodology which is a market approach is a multiple of EBITDA (Earnings Before Income Taxes, Depreciation and Amortization). Determining the market multiple of EBITDA starts with a search for comparable or guideline public companies. Calculations are performed to determine the price to earnings or EBITDA. Typically, the mean or median is selected. Mr. Harrison warned to be careful in enumerating the reasons for the selection of the multiple to support the multiple selected to apply to the company being valued. Such factors may include competition, number of customers, quality of workforce, compressed margins and size of company. Mr. Harrison favors the market approach and in particular the multiple of EBITDA method for S corporations because tax effects are very subtle. 

The asset approach is typically used to value family limited partnership interests. The assets of the family limited partnership such as marketable securities are valued as if they are being liquidated. This approach is less complex than the income and market approaches and is not often used for operating entities.

Appraisals can be very complex and detailed so it is important to review them carefully yet allow the appraiser to maintain his or her objectivity. Ms. Loomis-Price and Mr. Harrison warn that the client should review the report before it is finalized to be sure that the facts are correct and the appropriate comparable companies have been selected. All of the points discussed will help to refine the appraisal and make sure that transfer tax returns are prepared most defensibly!

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here

Don't Be Afraid of the Dark--Navigating Trusts Through NIIT

(Heckerling 2016) Permanent link

January 14, 2016

Goldberg, KarenBy Karen Goldberg, JD, LLM 
Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Robert Romanoff of Levenfeld Pearlstein, LLC discussed the implications of the net investment income tax (“NIIT”) on the design, creation and administration of trusts and suggested that trusts should be designed and administered with a focus on minimizing the NIIT to the extent consistent with the grantor’s intent.

In the case of trusts primarily consisting of investment assets, this tax can impede the growth of the trust assets. Most strategies to reduce a trust’s exposure to NIIT involve the current distribution of income to beneficiaries who won’t be subject to the NIIT, something that may be contrary to the grantor’s objective of creating a long-term generation-skipping trust to minimize the exposure of the assets to estate tax.  

Mr. Romanoff suggested that a single trust for the collective benefit of a group of beneficiaries (a “one-pot trust”) is better from a NIIT perspective than separate trusts for each beneficiary. This is because with a one-pot trust, the trustee can time distributions and allocate income among beneficiaries who may not be subject to NIIT, whereas with a separate trust for each beneficiary that opportunity would be limited. In addition, he suggested that distributions to younger family members, rather than their parents, can be attractive from a tax perspective because even though the kiddie tax would apply to the distribution, it would not be subject to the NIIT unless the minor had a significant amount of net investment income which in most cases would be unlikely.

Mr. Romanoff also suggested that practitioners should consider changing how they draft distribution standards. The use of an ascertainable standard, even though attractive for other reasons, may not allow for planning to minimize the NIIT. With such a standard, the trustee may not have discretion to make distributions to beneficiaries in an effort to reduce the trust’s NIIT. To give a trustee greater flexibility with respect to distributions, Mr. Romanoff suggested a non-ascertainable “best interests” standard for distributions.   

Finally, Mr. Romanoff addressed the importance of the selection of trustees, especially if the trust holds a business interest. The choice of trustee in the case of a non-grantor trust will control whether the income/loss from a business interest is passive or not. This is because whether the trust materially participates in an activity depends upon the trustee’s level of participation.  

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here

Planning for Clients with Diminished Capacity

(Heckerling 2016) Permanent link

January 14, 2015

Jacaruso, JamesBy James Jacaruso, EA

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Disability, as defined by the Americans with Disability Act, is an individual's physical or mental impairment that substantially limits one or more major activities of that individual. Studies have shown that disability rates rise with age and longer life expectancies. The number of people with a disability has increased at a staggering rate.  

Practitioners should consider drafting documents that provide flexibility to avoid an adversarial guardianship. Thoughtful estate planning documents may survive a guardianship or, at a minimum, memorialize the individuals' wishes. Consider succession provisions in any document designed to take effect when an individual is "unable to act," "incapacitated" or "incompetent."  

The documents should: 

1. Provide successors to themselves on estate documents and give successors the authority to name additional successors.

2. Set forth the individual's wishes by listing their values and desires to ensure coordination of the financial and health care wishes of the incapacitated.

3. Coordinate that all documents are consistent with the incapacitated person's desire, but allow amendments for unforeseen circumstances.

4. Anticipate the potential for family conflicts and include resolution provisions.

5. Include instructions for hypothetical health (care) issues.

In addition, the practitioner and the individual should:

1. Consider if ongoing estate planning should be addressed. 

2. Consider preparing documents in the most favorable state where a home may be owned.

3. Determine which individuals should have access to HIPAA codes.

Protecting the assets of an incapacitated individual from imprudence or abuse is of the utmost importance to implement and sustain the individual's action plan and preserve the estate plan.  

These are challenging initiatives that should be undertaken and communicated with family members and health care providers.

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here 


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EisnerAmper is an independent member of EisnerAmper Global.