Articles Posted in Asset Protection

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.

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.

NAMING A TRUST AS AN IRA BENEFICIARY IN YOUR WILL

Recently this blog touched on some of the issues related to leaving an individual retirement account to your heirs in a will, as found here. There are many options that people have to leave their IRA to others in a will. If you are leaving your IRA to heirs in your will but want to also put some protections in place regarding that IRA, leaving the IRA to a trust may be the best option. You may want to leave the IRA to a minor or to insure that the benefits of your IRA are not able to be attached by creditors. Even if your intended heir is not in need of spendthrift protections, there may still be a need to protect the IRA (and other money or property in the will) from creditors of the heir just the same.

While inherited property is generally excluded from equitable distribution in a divorce, it can still be considered income for purposes of alimony. Certain protections in the form of allowing a trustee to cut off the flow of money from the trust will insure that the beneficiary will not have to worry about this issue. Trusts are very flexible, which can allow you to build certain protections into the trust, such as choosing the trustee and giving them a free hand on distributions. If you leave the money to your heir in a will, unless the heir is a minor, in which case you will likely leave the money to a guardian, you have limited ability to insure that there will be protections put into place, since a will passes property or money outright, while a trust insures that there will be rules in place to protect the distribution of that money or liquidation of the property.

SOMETIMES MAY BE BETTER TO DISTRIBUTE THAN HOLD ON

Most trustees know that they have to make an accounting and pay taxes on at least a quarterly basis. While accounting itself may seem like a relatively simple theoretical proposition, the truth is much different. The devil is in the details. Allocation of each line of income to specific taxes, each with its own tax forms, requires that the trustee account for every penny that comes in, how it is earned, how it is treated under both federal and state tax laws and how it is distributed is a full time job to say the least. Once a trust is funded, it generally does not act simply as a bank account simply holding the money for later distribution.

Often the money is invested in a diverse portfolio of stocks, bonds and other financial instruments. It is not uncommon for a trust to include ownership of real estate assets that produce income in the form of rent or mineral royalties or perhaps even intellectual property which can produce a different source of income. Whatever the source, most trusts are now subject to a 3.8% net investment income tax on any undistributed income that is not distributed to beneficiaries or given to charities. While this figure may be low it is a consideration that needs to be taken into account when determining whether to pay out certain monies to beneficiaries, from what source that money comes from, whether it is from principal, capital gains or dividends.

INTELLECTUAL PROPERTY IN ESTATE PLANNING

This blog explored the generic topic of intellectual property in estate planning in the recent past, which is worth reading for a discussion on the larger topic. Estate planning for the artist or even the art collector is certainly related but worthy of its own discussion. With respect to intellectual property, copyrights are provided to protect in an original work of authorship fixed in any tangible medium of expression, which can be replicated, perceived or communicated. To put that in plain english, the law protects those an artist who creates new forms of expression in established media, whether it be paintings, sculpture (including welded sculptures), photography, writing literature, screenplays or plays, music and even choreography. Artists such as Christo certainly make classification of art more difficult, but that is probably the point of the art. What happens, however, when an artist or art collector passes away and they have a substantial amount of artwork. Transferring a recording of a song is not the same as transferring the copyright to that song. Transfer of intellectual property must be in writing.

CREATING AN INVENTORY, DECIDING WHO GETS WHAT OBJECTS AND WHO GETS WHAT INTELLECTUAL PROPERTY RIGHTS

MONEY LEFT IN IRA AT TIME OF PASSING NOT SUBJECT TO NORMAL IRA RULES

This blog previously discussed the Supreme Court case of Clark v. Rameker and the legal implications of money remaining in an IRA at death, that is in turn left to the heirs of an estate. Putting aside the potential tax implications, if any, with passing on an account with an easily ascertainable value, passing on an IRA can strip the IRA of its legal protections, such keeping it from the reach of judgment creditors. It should be noted that this discussion does not include leaving money in an IRA to a spouse, which the law allows special treatment for, by allowing the spouse to roll it over into a regular IRA account upon the death of the owner of the IRA and treat it as if it were his/her own IRA.

With respect to all other types of heirs, with an inherited IRA, the owner can withdraw from the IRA prior to reaching the age of 59 and one half years old. If the IRA is not inherited the owner would normally face a ten percent penalty if did this. In addition, the owner of an inherited IRA must withdraw the entire balance within five years of the original owner’s passing or take annual minimum distributions, allowing the bulk of the money to sit in the account and grow tax free. The money is only taxed to the recipient upon withdrawal. Most importantly, the owner cannot add funds to the IRA account. To maintain certain protections, such as keeping the money in the IRA out of the hands of judgment creditors and to minimize the tax liability, it may be wise for the testator to leave the money in the IRA to an IRA trust or conduit trust.

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