Not so fast, says an article in the WSJ, (June 22, Getting Personal: Think Twice Before Buying Your Children A Home, writer: Shelley Banjo).
The article discusses the scenario, which is fitting in the current economic situation, where the parents feel they may get a double benefit for buying their children a house: 1) moving assets out of their estate and 2) getting a great deal on a home.
The fear, the writer points out, is that if the high net worth clients have income producing assets, namely securities or a business, and if gifted instead, have a better long-term estate benefit for the folks. Therefore, asset for asset, these income producing assets make better gifts then a house on getting the maximum out of the parent's estate into the hands of the next generation.
If getting the kids into a house is the objective, the article mentions two approaches: 1) give the $13,000 per person gift allowance (between mom and dad, daughter and husband this can be up to $52,000/year). Now, no lifetime gift tax exclusion is utilized yet funds are being transferred out of the one estate to the next. The daughter can now take out a mortgage and use the $52,000 towards a home purchase, annually. The next option, 2) is to loan the daughter the funds for the house. While this doesn't move assets out of the estate, gifting the income producing assets mentioned above can provide an income stream for the child to repay the loan. The loan could even be forgiven down the road but that can be decided much later. Regardless, don't forget the current first-time home buyer credit. This makes buying the house even more affordable.
The article next mentions the QPRT. If parents want to move their primary or secondary residence to their children, this is a great option, especially for depreciating houses. More on QPRTs in another blog entry but suffice it to say that parents get to pass the house to the kids and continue to live in the home.
Great ideas.
Tuesday, June 23, 2009
Wednesday, June 17, 2009
The Estate Tax
I don't mean to hit this topic so soon but I noticed something in the papers. There seems to be more newspaper and magazine articles citing an increased interest in keeping the estate tax. This is far different from a few years ago when it was the opposite. All we heard about is the large number of small businesses and farmers being slammed by the estate tax (factually untrue but symbolically worked like a charm for repeal proponents).
The one article that I read recently, which is similar to others, ("Keeping the nation's estate tax in place", Pub. June 8, 2009 in the Concord Monitor) basically is saying that with the mess in the economy and the mounting deficit, the tax is one of the more "harmless" taxes proposed to deal with the nation's situation. This article, as you can imagine, seems to have a pro-estate tax bent. What I like about the article, however, is the history of the issue that it provided. It talks about how 18 of the very wealthy families contributed to a couple of organizations that were part of that successful campaign against what they called the "death tax". Again, this was a few years ago.
So, where are we on the tax? In April, the senate voted to increase the exemption and reduce the rate to 35%. I believe the House is still voting to leave the tax at its current 2011 level, 1 million per person. We will likely see something soon. My point though is how during hard times, people's opinions change and the public may not be as cavalier about a tax and may be thinking "it's better them then me", especially since the very wealthy are not a sympathetic group when the rest of the public is struggling.
The one article that I read recently, which is similar to others, ("Keeping the nation's estate tax in place", Pub. June 8, 2009 in the Concord Monitor) basically is saying that with the mess in the economy and the mounting deficit, the tax is one of the more "harmless" taxes proposed to deal with the nation's situation. This article, as you can imagine, seems to have a pro-estate tax bent. What I like about the article, however, is the history of the issue that it provided. It talks about how 18 of the very wealthy families contributed to a couple of organizations that were part of that successful campaign against what they called the "death tax". Again, this was a few years ago.
So, where are we on the tax? In April, the senate voted to increase the exemption and reduce the rate to 35%. I believe the House is still voting to leave the tax at its current 2011 level, 1 million per person. We will likely see something soon. My point though is how during hard times, people's opinions change and the public may not be as cavalier about a tax and may be thinking "it's better them then me", especially since the very wealthy are not a sympathetic group when the rest of the public is struggling.
Monday, June 8, 2009
Scary Stuff
I recently attended a seminar put on by the American Bankers Assn. and learned some cringe-producing lessons that attorneys have perpetrated over the years. Most of the problems arise when attorneys who are not well versed in estate planning and tax matters mess up. One issue: the practitioner did not satisfy all the statutory requirements to obtain a marital or charitable deduction. For example, in a trust, the surviving spouse was given the income from the trust until her death or remarriage. Because her income interest could terminate upon her remarriage, it was considered a terminal interest trust and therefore did not qualify for the marital deduction. Ouch. Big tax bill.
In another case the attorney did not make a proper allocation of the tax apportionment clauses and used a boilerplate provision stating that the residue would pay the taxes. When it was later discovered that significant assets had passed outside of the trust and will, the residual estate beneficiaries bore a greater portion of the taxes. Unfortunately, the residual estate would have qualified for the marital deduction. That was a double whammy. Not only were the taxes increased but the marital deduction was reduced, and hence the tax burden was increased accordingly.
Other examples include cases where individuals have tried to increase the annual gift exclusion by making gifts to individuals who in turn make gifts back to individuals children. This may seem like a great idea until you get caught. Another case involved a litigator who was asked to draft an irrevocable life insurance trust yet had no estate planning experience. This litigator used a form book and did not have a clue about using Crummey powers. The net result was that the IRS pulled back into the estate all of the gifts for tax purposes because Crummey letter had not been prepared.
In another case the attorney did not make a proper allocation of the tax apportionment clauses and used a boilerplate provision stating that the residue would pay the taxes. When it was later discovered that significant assets had passed outside of the trust and will, the residual estate beneficiaries bore a greater portion of the taxes. Unfortunately, the residual estate would have qualified for the marital deduction. That was a double whammy. Not only were the taxes increased but the marital deduction was reduced, and hence the tax burden was increased accordingly.
Other examples include cases where individuals have tried to increase the annual gift exclusion by making gifts to individuals who in turn make gifts back to individuals children. This may seem like a great idea until you get caught. Another case involved a litigator who was asked to draft an irrevocable life insurance trust yet had no estate planning experience. This litigator used a form book and did not have a clue about using Crummey powers. The net result was that the IRS pulled back into the estate all of the gifts for tax purposes because Crummey letter had not been prepared.
Tuesday, June 2, 2009
Second Article: "Divorce, remarriage can make estate planning especially challenging"
(May 29, 2009 Pittsburgh Post-Gazette. Tim Grant writer).
As mentioned yesterday, I found two good articles I wanted to touch upon. Yesterday dealt with passwords to accounts that should be left with someone so that upon your passing, access can be made by your executor. As I mentioned, that issue covers a plethora of information that should be "passed along" in the event of our demise.
As you can see above, the other article deals with divorce. Since there is so much good information in this article, I would like to summarize its contents here.
The writer uses a family example of a spouse from a 15-year second marriage who discovers that her husband's 1 million dollar IRA is completely under his control. Up to that point, only his children were the beneficiaries in the event of his death and the spouse's children would receive nothing. You get a sense of helplessness from the standpoint of the spouse in this article.
The story continues with the couple meeting with a lawyer who set up the IRA to pay into a trust, that provides for the spouse during her lifetime but apparently all kids share in the amount left over after both deaths. What the article didn't say, but may have been put into place, was that the IRA proceeds in trust could also provide for the children for their life expectancy, a type of spend-thrift trust, that would protect the proceeds from the children's creditors and possible divorcing spouses. (Of course the IRA would not continue for the children's lives but likely the life expectancy of the spouse. The amount paid out however, would be held in trust for their benefit).
The article further discusses the need for estate planning to resolve Blended Family estate planning issues. It quotes a trust officer with a bank in Pennsylvania commenting that relying on a verbal understanding between spouses may not be the best approach, especially if one spouse survives for a number of years after the other and the fact that sometimes things and thinking just changes.
This is a hard one but I believe she is correct. There is that part of me that says that marriage or other committed relationships are meant to have a higher level of trust and not lowered to the trust level of an arms-length business agreement. However, one spouse has just as much right as the other to feel that upon their passing, at least their share of the estate or an agreed upon division of the estate, will go to their children after the eventual passing of their loved one. In my practice, I very often see the surviving spouse changing the original verbal intent of the couple after the first one has died. I don't see any mean spiritedness about this but it has a lot to do with the dual allegiance to both the lost spouse and the surviving spouse's own children. Add the potential for family strife and suspicion and the situation becomes more difficult.
One other tool mentioned is a QTIP trust which provides for the surviving spouse, without a tax on the first death, and the remainder proceeds going to each side's family as mutually decided upon by the couple.
As the article points out, and I completely agree, Blended Families are typically very emotional meetings between the couple and their estate planners. Very often there have been heated discussions between the couple prior to seeking advice with a seemingly impasse hit by both of them. How to balance competing interests and expectations is almost a no-win situation. The advise and guidance of a good advisor can make all the difference with options being discussed that both find acceptable and satisfactory.
As mentioned yesterday, I found two good articles I wanted to touch upon. Yesterday dealt with passwords to accounts that should be left with someone so that upon your passing, access can be made by your executor. As I mentioned, that issue covers a plethora of information that should be "passed along" in the event of our demise.
As you can see above, the other article deals with divorce. Since there is so much good information in this article, I would like to summarize its contents here.
The writer uses a family example of a spouse from a 15-year second marriage who discovers that her husband's 1 million dollar IRA is completely under his control. Up to that point, only his children were the beneficiaries in the event of his death and the spouse's children would receive nothing. You get a sense of helplessness from the standpoint of the spouse in this article.
The story continues with the couple meeting with a lawyer who set up the IRA to pay into a trust, that provides for the spouse during her lifetime but apparently all kids share in the amount left over after both deaths. What the article didn't say, but may have been put into place, was that the IRA proceeds in trust could also provide for the children for their life expectancy, a type of spend-thrift trust, that would protect the proceeds from the children's creditors and possible divorcing spouses. (Of course the IRA would not continue for the children's lives but likely the life expectancy of the spouse. The amount paid out however, would be held in trust for their benefit).
The article further discusses the need for estate planning to resolve Blended Family estate planning issues. It quotes a trust officer with a bank in Pennsylvania commenting that relying on a verbal understanding between spouses may not be the best approach, especially if one spouse survives for a number of years after the other and the fact that sometimes things and thinking just changes.
This is a hard one but I believe she is correct. There is that part of me that says that marriage or other committed relationships are meant to have a higher level of trust and not lowered to the trust level of an arms-length business agreement. However, one spouse has just as much right as the other to feel that upon their passing, at least their share of the estate or an agreed upon division of the estate, will go to their children after the eventual passing of their loved one. In my practice, I very often see the surviving spouse changing the original verbal intent of the couple after the first one has died. I don't see any mean spiritedness about this but it has a lot to do with the dual allegiance to both the lost spouse and the surviving spouse's own children. Add the potential for family strife and suspicion and the situation becomes more difficult.
One other tool mentioned is a QTIP trust which provides for the surviving spouse, without a tax on the first death, and the remainder proceeds going to each side's family as mutually decided upon by the couple.
As the article points out, and I completely agree, Blended Families are typically very emotional meetings between the couple and their estate planners. Very often there have been heated discussions between the couple prior to seeking advice with a seemingly impasse hit by both of them. How to balance competing interests and expectations is almost a no-win situation. The advise and guidance of a good advisor can make all the difference with options being discussed that both find acceptable and satisfactory.
Monday, June 1, 2009
Article in Tampa Bay Newspaper
I came across two great articles. I will cover one of these today and another in tomorrow's Blog.
The title of the Article is "A cyber afterlife plan." Basically, the article discussed an online service that protects your passwords to your various online accounts and permits those beneficiaries listed with the service to access these passcodes after your passing.
I don't think I need to comment on this article other than saying that this raises a great point and concern. What I did want to comment on was the larger issue this raises. There are lots of information we retain that may get lost upon our passing. Very often in meetings with surviving family members I will hear "I know my dad had a ____ but I cannot find where he put it or remember what he said about it." This blank can be many things, a safe deposit box, assets in other states, personal property items of value, where you have a pre-paid cemetery lot, banking passwords and the like. Privacy concerns causes us to be more guarded and secretive, this in turn raises the likelihood that if we are not around, this information will be hard, possibly impossible, to recover.
At our office we try to advise our clients on some of these issues but the responsibility of passing this information along falls on the individual to keep good records, keep them in a safe place, but most importantly, remember to tell your designated family member or friend where this information is safeguarded.
The title of the Article is "A cyber afterlife plan." Basically, the article discussed an online service that protects your passwords to your various online accounts and permits those beneficiaries listed with the service to access these passcodes after your passing.
I don't think I need to comment on this article other than saying that this raises a great point and concern. What I did want to comment on was the larger issue this raises. There are lots of information we retain that may get lost upon our passing. Very often in meetings with surviving family members I will hear "I know my dad had a ____ but I cannot find where he put it or remember what he said about it." This blank can be many things, a safe deposit box, assets in other states, personal property items of value, where you have a pre-paid cemetery lot, banking passwords and the like. Privacy concerns causes us to be more guarded and secretive, this in turn raises the likelihood that if we are not around, this information will be hard, possibly impossible, to recover.
At our office we try to advise our clients on some of these issues but the responsibility of passing this information along falls on the individual to keep good records, keep them in a safe place, but most importantly, remember to tell your designated family member or friend where this information is safeguarded.
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