SOME PLANNING IS BETTER THAN NO PLANNING

In 2014 Pew charitable trust published a study that showed that fewer Americans are entering into marriage in the first place, fewer than ever before.  Currently the number of people over the age of 25 who were never married is at approximately 20%.  In terms of raw numbers, 42 million Americans have never been married.  The percentage of Americans over the age of 25 married reached a peak in about 1960, with approximately nine percent of Americans never married.  Part and parcel of the same trend is the number of adults who never had children.  Given the fact that it is entirely biologically possible that men could have children but never know it, but for all intents and purposes impossible for the same to be true of women, the statistics only track women who never had a child.  The number of women who never had a child peaked at about 2006 at about 20% of the population.  

The number is, as of 2015 currently at 15%.  So many cultural mores have changed in the last two generations that the pace is historically unprecedented.  The law in America has generally always been responsive to social changes, even if it is too slow for some.  Compared to some nations, American law is downright revolutionary in how progressive it can be.  At the same time, estate planning for the never married does not need new doctrines or a change in the law.  Instead it requires an experienced and forward thinking estate planning attorney to properly document the wishes of the client and to put them into effect through the choice of certain financial tools, trusts or other planning.  Some planning, even if imperfect is better than no planning.

CHANGE IN APPROACH BY IRS BUT STILL SOUND ESTATE PLANNING CONTINGENCY

It is obvious that no one knows when they will shake off their mortal coil and pass from this earthly realm.  The IRS and the law in general consult their own mortality tables to guide certain decisions.  These tables are based on probabilities and generalities, drawn up by bean counting actuarians.  They are undoubtedly reliable enough to warrant an individual to make a decision that may take decades to play out or even by institutions to guide their decision making.  Insurance companies calculate risk by consulting them and Courts sometimes use them to determine future damages.  They can be used by those engaging in estate planning for many things, but, in particular to help calculate a risk premium in a limited set of circumstances.  A self cancelling installment note can be a method and means to transmit wealth to the next generation if properly structured.  A recent Chief Counsel Advisory (CCA) opinion by the IRS called into question one specific means to calculate risk for a self cancelling installment note but did not question the overall appropriateness of the use of a self cancelling installment note.  The self cancelling installment note works by one person selling an asset or loaning a certain sum of money, pursuant to a promissory note, with at least a minimal amount of interest charged.  

In addition, the promissory note acknowledges that in the event that the person who holds the promissory note (the lender) passes away while the note is still being repaid, the remaining balance of both principal and interest is considered paid in full.  The note must incorporate a specific increased interest rate in light of the increased risk that the note holder/lender may not collect the entire amount.  If unfortunately the note holder/lender passes away the money passes outside the estate, without incurring any estate or gift tax liability and without any additional legal obligations for the borrower.

PASSING THE FARM IS LIKE PASSING ON THE FAMILY CORPORATION

There is no doubt that some modern farmers run large multi-million dollar operations right in their backyard.  Maintaining a herd of cows and other grazing stock costs potentially millions to buy or lease (or both) land for the animals to grow on.  In addition, the processing equipment for milking cows, labor costs, insurance, veterinarian costs and any number of other costs can run into the millions each year.  While most farmers are far from millionaires, most work much harder than many millionaires.  Indeed there is more to farming than the land, buildings, equipment, animal stock or orchards and other tangible objects.  Tending to corn fields, wheat, soy, orchards, vineyards, sod, tree farms, et cetera are all specific skill sets that require years of training and no small measure of technological investment.  The same can be said of a family run saw mill or similar type of business.  There is something unique about farmers, however.  

Many families are tied to the land.  John Mellencamp who was raised in farm country and one of the original founders of Farm Aid wrote about the life of the average farmer, growing up on the same farm that his own daddy did on land cleared by his grandpa, walking along the fence while holding his grandfather’s hand and of being tied to land that fed a nation and made him proud.  It is this tie to the land, unique education and training that can start literally while the child is in diapers as well as the emotional bond with families that makes farmers different than most other family run small businesses.  There are also unique legal protections found throughout the law for the benefit of family farmer.  For all of these reasons transferring a family farm from one generation to the next requires special planning.

BEST LAID PLANS DO NOT ALWAYS WORK OUT

A case with an interesting factual background came out of Texas recently. While it was based on Texas law and the case is binding in only Texas, the legal principles discussed by the Court are equally applicable to New York or any other jurisdiction for that matter. More importantly, the set of events that gave rise to the case could happen anywhere. It just so happened that it occured in Texas rather than New York or somewhere else. The Texas Court of Appeals case of Gordon v. Gordon revolved around a trust that took ownership of a specific peace of real estate property and how that transaction related to a will signed subsequent to the trust. More specifically, the Court determined that the act of creating and endorsing a will by the testator subsequent to the transfer of the real estate did not overturn or cancel the previous transfer of the real estate to the trust. The will, however, contained language that by endorsing the will, the testator supersedes all previous transactions indicated in the trust documents, such as annuities or certificates of deposit. It never mentioned the real estate.

In 2009 (Mother) Beverly Gordon and (Father) Patrick Gordon executed a trust document which they funded with personal property and real estate. The very terms of the trust indicated that the trust could only be revoked by either Father or Mother and only by following the specific set of instructions laid out in the trust document, namely by signing and delivering a letter to the trustee. The letter had to indicate that they individually or jointly are going to cancel or revoke the trust. The trust further provided that upon the death of either of them the trust become irrevocable. They funded the trust with personal property and real estate. Soon thereafter, their son John sought to reduce the risk of an estate battle by creating a will that specifically stated that the parties want to cancel the terms of the trust. Neither Mr. Gordon nor Mrs. Gordon did anything to transfer their personal property or real estate out of the trust. Moreover, John did not act to convince his parents to move the property out of the trust. Mr. Gordon passed away within a year of signing the new will.

SUBSTANTIVE PROOF NEEDED

The issue of consent and state of mind touches upon perhaps some of the most personal and human issues imaginable. This blog explored issues related to the capacity necessary for a person to create a will. Passing on the bounty of your work to your loved ones or charity may be a specifically delineated right noted by Thomas Jefferson, James Madison or any other well known political philosopher, but it can only be denied, for all intents and purposes, if that person is legally or medically incapacitated or unable to make key decisions.

This is an extraordinary legal power that is only exercised after an exhaustive review of the facts. To legally deny someone the right to consent to decisions that directly impact them as a patient or client in a legal setting goes to the core of our humanity and, in some circumstances, requires Solomonic wisdom. As noted in different blog posting, Consent is situationally specific. Consent to intimate encounters with your spouse is different than consent to transfer money to a charity, of which little is known. As to the right to create a will and transfer your personal property, real estate and money to family members, what does New York law consider sufficient mental capacity to create a will? There is much case law on this topic as it is a topic that has to be resolved each generation in light of varying societal norms and advances in both psychiatric and general medicine.

HYBRID PLANNING TOOL – COMPOUND INTEREST AND IMMEDIATE PAYOUT

There are some retirement strategies that people engage in that have many benefits one the one hand with a similar amount of disadvantages on the other.  Life is like that, it involves trade offs and often you get what you pay for.  There are exceptions, however, especially in financial planning products.  The only limits are the laws and the creativity of investment managers.  With respect to the laws, the main concern that investors should consider is the tax liability, which can vary depending on what form of investment is generating income with the invested money.

Annuities are investment products that generally either guarantee a specific rate of return and start to pay immediately for a specified period of time, or, the funds are placed in an account where they accumulate tax deferred as an investment and then converted into an annuity and withdrawn in accordance with the annuity plan.  The former type of annuity is called an immediate annuity, while the later is called the deferred annuity.  An immediate annuity is generally taxed up prior to deposit of the funds, while the payout of the annuity is not considered a taxable event.  With respect to the deferred annuity, the payout, minus the principal, is a taxable event.  If the money is withdrawn from the annuity prior to the age 59 1/2, the amount is generally subject to a 10% tax penalty.  A split annuity, however, is a financial product that couples these two types of annuities together.

SOME PEOPLE ARE TRYING TO SIMPLIFY IT

Many people, even in Washington, realize that retirement planning can be a bit complicated at times. There are all kinds of rules about who can do what and when they have to do it and what they have to do it with. Many people have rightfully complained about how the government and bureacracy values form over substance. In an effort to address these issues the Financial Industry Regulatory Authority (FINRA) issued an investor alert on April 7, 2016 to help address some of the larger and more common questions about the law of required minimum distribution (RMD). As such, it is perhaps time to reexamine or address some of these larger issues about RMDs. It is probably best to first explain that a RMD is the legally minimum that the owner of an individual retirement account (IRA) of some sort must take out without incurring a tax penalty. An IRA can be a 401(k), 403(b) or a roth IRA or any number of other retirement investment vehicle that receives preferential tax treatment under the Internal Revenue Code (26 United States Code).

To begin with, the owners of a Roth IRA do not need to take any RMD. Once the owner passes away, his/her spouse or anyone who inherits it must then take RMDs. With respect to non-Roth IRA accounts, the latest that an IRA owner must take his/her first RMD is on April 1st on the year following that they reach 70 and one half years old. So if you reach 70 and a half on January 2, 2016 the latest you must take a distribution is on April 1, 2017.

NOT AS USEFUL BUT STILL GOOD TO HAVE

This blog has explored the issues revolving around an ABC trust in the past and how its previously primary reason for existence is now no longer a consideration for many people. The primary reason for their existence was to ultimately lowering the overall tax liability of the parties by sheltering one spouse’s assets and estate tax liability from the others. With the higher estate tax exemption and exemption portability allowed between spouses, its utility is diminished. For those in New York, however, there is some need to maintain it for New York estate tax purposes. There are other benefits to having such a trust. ABC trusts are known by many names, including a credit shelter trust or a joint spousal trust.

There is little if any difference between the names. Another benefit to such trusts is the step up basis that is accomplished upon the passing of the owner. Whenever title to that asset eventually does pass, the new owner will have a higher basis, so that when they in turn pass title, they will have a lower capital gains tax bill. Indeed under federal estate tax law, the stepped up basis will likely be not be an issue for estate tax liability, given the large federal estate tax exemption and availability of the portable exemption between spouses. New York’s estate tax, however, makes it more likely that a joint spousal trust should be employed, so that the deceased spouse’s original basis can be noted and the surviving spouse can account for any increase in basis for their estate when they pass away, since the surviving spouse gets full stepped up basis of the asset. This can help to possibly reduce the overall tax bill.

GOOD NEWS AND BAD NEWS

Most people are aware that April 15 is tax day. That simply means that you have to have your taxes filed and paid by that date and that the year that those taxes are due for are from January 1st to December 31st of the previous year. New York, however, takes a slightly different approach to estate tax liability. Estate tax liability rates are set from April 1st to March 31st. So, if you are administering an estate, wherein the deceased passed away on March 30, the estate tax liability will be different and lower than if they passed away on April 2 of the same year. As this blog discussed in the past, New York state amended its estate tax in 2014 so that it will be on par with the federal estate tax rate in 2019. Prior to 2014, New York had an estate tax exclusion of one million dollars. As of April 1, 2016 the estate tax exclusion is $4,187,500. As such the good news is that with the passage of the changes to the estate tax laws, more estates will not have to pay any estate tax at all. The bad news is that the majority of the estates that exceed that value will likely have to pay a higher tax rate than before and maybe even more than the federal tax rate.

Starting in 2019, New York’s estate tax rate exclusion will mirror the federal amounts. Since both are pegged to inflation, they will grow year to year. That is where the differences will end. Under the federal estate tax, only the amount above the federal tax exclusion is taxed. So, just to make the example easy, if the federal tax exclusion is $5,000,000 (it is not), an estate worth $6,000,000 would only be taxed by the federal government on $1,000,000. New York’s estate tax requires that if the estate is greater than 105% of the exclusion, the entire estate is taxed. So, with the same example immediately above, the entire estate (6,000,000) would be taxed. If the estate was say $5,249,999 (one dollar less than 105%) instead of 6,000,000, the entire amount would not be taxed, since the estate has to exceed 105%. If the estate was $5,250,001 (one dollar more than 105%), the entire estate would be taxed.

HUGUETTE CLARK AS EXEMPLAR

The last member of the gilded age passed away just a few years ago. Huguette Clark’s life, in some ways, seems to mirror the classic Orson Welles classic

One of the first things that she did to insure an estate battle was to pass the entirety of her estate via a will. While the larger family itself may have created various trusts for family members to pass on the overwhelming wealth, Ms. Clark herself chose to pass her wealth via a will. While it is alleged that Ms. Clark’s attorney and accountant had something to do with these limited and financially irresponsible decisions, Ms. Clark did not create a trust to ensure the passage of her large and very valuable art collection to charity, which included a painting by Monet, valued at at least $25 million as well as a Picasso worth over $31 million.

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