Articles Posted in Estate Planning

In the recent Tax Court case of Estate of Marie P. Frappolli v. Director, Division of Taxation, a domestic partnership lost estate tax benefits because they did not register as a couple with the state. As an alternative to marriage equality, New Jersey had introduced the option to register as a domestic partnership. Ms. Frappolli and her partner, Ms. Dorothea Angelou, qualified under the requirements for a domestic partnership in New Jersey, but they never filed with the state to make it official.

Marie Frappolli passed away, leaving her estate to Ms. Angelou. In addition, the couple lived in Ms. Frappolli’s home that was transferred to a joint tenancy with the right of survivorship in 1993. The tax division argued that because the couple never registered with the state the entire estate could be taxed. Furthermore, the value of the home could be added to the total value of the estate when determining tax liability. As a result, Ms. Angelou was hit with a transfer tax bill by the state for $178,845.57.

Legal Arguments Over the Estate

It was recently reported that prior to his death, Philip Seymour Hoffman rejected the advice of both his attorneys and accountant when planning his estate. Instead of leaving his estate to his children, Hoffman left his entire $34 million estate to his long-term girlfriend and mother of his kids. He told his accountant that the reason behind this was that he did not want to have “trust fund kids” or the stigma that goes along with it. Sadly, his poor estate planning decisions leave his estate open to a massive tax bill and other potential problems in later years.

Additionally, Sting also made news in the estate planning world recently when he announced that he did not want his six children to have trust funds, either. He told a reporter that he felt like a trust fund would be “an albatross around their necks.” Sting said that if they needed financial help he would give it to them, but he wanted them to have their own work ethic.

While both Hoffman and Sting had good intentions regarding their wealth and children, both superstars perpetrated common myths held about trust funds that simply are not true. There are many different types of trusts, each with their own rules and standards that you can set for them. Here are some of the most common misconceptions that people have about trust funds and estate planning:

A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client’s death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.

However, today’s rules for trusts and estate tax exemptions are different. A deceased spouse’s portion of the estate tax exemption passes automatically to their surviving spouse. Additionally, the tax exemption level has risen from $1 million to $5.3 million per person. As a result, a lot less people need to worry about a part of their estate being taxed upon their death, and dynasty trusts have mostly fallen out of use.

Benefits of Dynasty Trusts

America currently has 72 million people from the Baby Boomer generation, the oldest of which are turning sixty-eight this year. That is also the average age when people decide to create charitable remainder trusts. Estate planning attorneys are expecting a big increase in the number of charitable trusts set up over the next twenty years as the rest of the Baby Boomer generation begins the estate planning process.

Charitable Remainder Trusts

A charitable remainder trust is a trust that provides a distribution, usually annually, to one or more beneficiaries where at least one is not a charity. The distributions can be made over a period of years or for the life of the beneficiaries, but an irrevocable remainder interest is held for the benefit of one or more charitable institutions.

In an interesting twist of events this week, court documents show that the late Phillip Seymour Hoffman left his entire estate to his girlfriend, Mimi O’Donnell. Hoffman died earlier this year at the age of forty-six of a heroin overdose at his home in New York City. He left behind his long-term girlfriend, O’Donnell, and three children. Cooper (ten), Tallulah (seven), and Willa (five) were all children of Hoffman and O’Donnell.

Hoffman’s accountant stated in court documents that he saw Hoffman treating O’Donnell like a spouse and not a girlfriend. Although they had been together for well over a decade, Hoffman never married her because he simply did not believe in marriage. However, he did fully believe that his girlfriend would fully support and take care of their children. O’Donnell was named as one of the executors of his estate which was estimated at around thirty-five million dollars earlier this year. She already held multiple joint financial accounts with Hoffman that held substantial assets when he died.

Reason for Exclusion

Most people feel a sense of accomplishment after drafting and executing an estate plan. Afterwards, it is commonplace to file away the paperwork and promptly forget about the documents. The issue in this is that most people’s lives change between the creation of an estate plan, and it will need to be updated accordingly. In fact, recent studies have shown that people at all levels of wealth, including the very rich, have estate plans that are routinely more than five years old.

As some estate planning attorneys have noted, an estate plan is not like a time capsule that should only be opened at a future time. An estate plan needs to be routinely updated as life events occur. You should plan on regularly updating your estate plan every three to five years; however, it should occur more often if major events happen. In some cases, estate plans that have not been updated have led to large, public disputes between family members. These fights have destroyed families as well as the inheritances that they were supposed to have. These situations are even more unfortunate because the vast majority of these disputes could have been avoided if the estate plan was up to date.

Common Excuses Why an Estate Plan is Not Updated

In late 2012, the government threatened to make steep cuts in the levels of exemption for gift and estate taxes. At the time, the gift tax exemption was set to drop from $5.1 million to $1 million, and the top tax rate was to rise from 35% to 55%. As a result, many families hurried to create trusts that would protect their assets from the cuts and did so very hastily. This is because assets placed in certain types of trusts are not affected by gift and estate taxes. However, Congress prevented these cuts, but by that time many trusts had been created with cook cutter documents in order to be executed quickly. Now, many creators of these trusts are going back and trying to provide more detail to the trustees about how they want the trusts to benefit their heirs.

Letter of Wishes

The trust creators are using “letters of wishes” which have long been around in the world of trusts and estates. These letters are not binding, but they typically reflect the intention of the trust creators in more detail than what was written when the trust was first formed. These intentions are usually in regard to priorities for doling out distributions, for example like getting for education or a new home.

Parents who are now at retirement age think that they have done a great job discussing finances and estate plans with their children. However, their children think the exact opposite about the situation. According to a new study done by the Fidelity Investments Intra-Family Generational Finance Study, this is the new generation gap.

The key point in the study is that many parents are failing to have critical conversations about their finances and estate plans with their grown, adult children. For the baby boomer generation, money and estate planning are taboo subjects. However, the same study showed that having this important conversation with their children gave parents an increased peace of mind and reduced anxiety.

Key Findings in Study

The late lead singer and guitarist of The Velvet Underground, who later had a decades-long successful solo career, was the man who famously sang “Hey babe, let’s take a walk on the wild side.” He seemed to take that lyric to heart when it came to his estate planning, and his estate is worth more than $30 million.

Lou Reed passed away from liver disease on Oct. 27, 2013 at the age of 71. Recent filings in probate court in Manhattan show that since his death less than a year ago his estate has already earned another $20.3 million. This income has come from his copyright, publishing, and performance royalties as well as other deals that were put together by his longtime manager, Robert Gotterer. Mr. Gotterer is also one of the co-executors of Lou Reed’s estate.

Details of Lou Reed’s Estate

People entering retirement age are now facing an unexpected hurdle – dealing with the pitfalls from their parents’ reverse mortgage. The same loans that were supposed to be helping their elderly parents stay in their homes are now pushing the children out of them. In fact, the same situation is playing out all across the United States, where the retirement age children of elderly borrowers are discovering that their parents’ reverse mortgages are now threatening their own inheritances.

Reverse Mortgage Schemes

A reverse mortgage is a financial tool that allows people age 62 and older to borrow money against the value of their homes. This money does not need to be paid back until they move out of the home or die. Unfortunately, many children of parents who invested in reverse mortgages are discovering the issues that arise with them.