Kansas & Missouri Estate Planning

Trusts – Better Robust Than Bust!

 

Trusts are like pocket knives, in a way. Even a fairly basic pocket knife can make your life immensely easier, especially in a pinch, but a particularly well built and expansive pocket knife is an actual survival tool. So it is with trusts.

When it comes to trusts, however, why settle for a basic trust when a robust trust can provide essential protection for your loved ones?

An article in this month's issue of Financial Planning Magazine contained a lesson in the robust set of provisions that can be crafted into a single trust. In addition, this article illustrates the difficult space between divorce and the trust (and that's one more area where a robust trust can make all the difference).

Depending on how you've structured it, a trust can last for varying lengths of time and offer the beneficiary/child various ways of accessing those funds. For example, you might use the trust to teach lessons, but don't forget that you're not always planning for the budding child... but also the future adult. Unfortunately, that future adult may have creditors who could attempt an attack on the trust funds.

More likely, however, a divorce and an ex-spouse will come into play, perhaps also children and child-support. How the courts treat your trust depends on numerous factors best considered at its formation and they certainly are worthy of your consideration before it's too late.

For more ideas (and at least one promising court case) read the original article. In the end, as with so many planning devices, everything hinges entirely on you, your family, and your unique circumstances.

Reference: Financial Planning Magazine (February 1, 2012) "Trust, But Verify"

Estate Planning for Same-Sex Couples

Whether marriage will be a financial win depends on a couple’s age, income, assets, debts, where they live, whether they have kids and a raft of still unresolved legal issues. Add to it a same-sex twist and other issues come to the fore.

Representative Barney Frank is getting married.

If you don't know who he is, regardless of your political persuasion, then likely you have been living under a rock (or, perhaps, in Iraq).

Forbes and Deborah L. Jacobs were quick to the punch with this piece on Frank and the legal issues surrounding same-sex marriage. The central point, as many readers will know, is that same-sex marriage exists in a rather awkward nexus of laws. Where it exists, it exists with all the legal weight of marriage, and that means the various financial duties and liabilities.

Of course, even where it does exist, in a very real way it also doesn't. This is because the Defense of Marriage Act of 1996 still rules out same-sex marriage by definition. That statute is what rules the IRS – and it has to enforce those rules – which is especially important in the realm of estate planning, even where there aren't tremendous assets to guard.

That said, though, there still are legal moves to be made and rules to thoroughly understand. Perhaps with another nod to Frank, the Journal of Financial Planning recently offered a piece on the estate planning issues that affect non-married couples and same-sex marriages alike.

Reference: Forbes (January 26, 2012) "Tying the Knot Isn’t All Love and Roses: By Marrying, Barney Frank and His Partner Take on Legal Duties, Too"

                The Journal of Financial Planning (February, 2012) "Estate Planning for Unmarried Couples: What Financial Planners Need to Know"

Of Frozen Embryos... And Estate Planning?

While biomedical science has made some incredible advances over the years (and we can only expect that trend to continue and for science to yield ever more secrets about and tools over the human body), the law, however, has not made such advances.

Indeed, you still find wills written as they were by 18^th century scriveners and sprinkled with language like "party of the first part" and “witnesseth". Frankly, I like such language, but then again, I'm an attorney and such is my craft. On the otherhand, the law itself seems hard-pressed to keep up with other areas of life. For example, now there is such a thing as "posthumous birth" and "post-mortem parenthood," as pointed out in this recent article.

Roughly half a million cryopreserved embryos and untold amounts of genetic material (sperm and ovum donations) line medical facility coolers around the country - and it's not a novelty. An increasing number of couples have made plans to preserve the possibility of a child, either because they were having fertility issues; the financial situation imposed caution while the biological clock imposed haste, or precisely out of fear that one would pass away before there was an opportunity.

It also means that an increasing number of children are being produced to parents who are no longer living, and there remains the ever-increasing possibility for grandchildren of the same nature. How do parents, grandparents, and estate planners at any juncture understand the ramifications?

Frankly, it will require a moment to think about the possibility and to confer with your adult children to find out if it is a possibility that you might have grandchildren who were born after their parent passed away.

In many ways this is a dilemma faced by a number of grandparents already, if they are concerned about future generations. However, unlike the normal situation, there is no longer an intermediary adult child/parent through whom assets can pass. It's a hard situation to define because the law hasn't gotten that far. And, how can it be expected to do so.

You might say that biomedical science can divorce the person from reproduction. Nevertheless, estate law is intrinsically about the person, their property, choices, and family; how do these reconcile?

It requires more than forethought on the part of the planner.

No, it likely requires an imagination rivaling that of the leading science fiction writers.

Reference: US News and World Report (January 25, 2012) "Posthumous Births: An Emerging Estate Challenge"

Estate Taxes - The Only Certainty Is Uncertainty

If you've been following the political saga of the estate tax over the past few years then you know it's coming to a head… again. In fact, the estate tax may very well be amongst the largest and most divisive topics as we sink deeper into the current election cycle.

It's hard to say which way it will fall, or if it will stay there for long, and that just makes estate planning a bit tricky.

Even if it's hard to say what will happen, there still are some fairly likely situations that may occur and with very different consequences. In the military, we called it "situational awareness," but in the civilian world consider it knowing where you are in relation to where the threats are. So, if you are one of the (ever fewer) remaining taxpayers, then here is a recent article laying out the four possibilities.

1. Gridlock. Each party pushes and pulls and yet there is no victor, and so we all lose. That is to say that if the current law isn't extended, updated, or changed, the compromise deal reached in December of 2010 will sunset and the law will revert all the way to pre Bush tax-cuts at a whopping 55% over the $1 million exemption. That's higher than a number of pro-tax advocates care to call for, especially given the inflation of some ten years. That said, Congressman Jim McDermott of Washington has put just such a bill into the works, with those rates and exemption amount indexed for inflation.
2. Stalemate. Perhaps no one will win but no one will want to lose, and receive their self-inflicted pain, either. Instead of failing to pass any measure they can simply extend what we have now. President Obama signed it once already and it's a far better deal than most anti-tax representatives have seen before or since the lapse in 2010.
3. Democrat control. In many ways it's fairly difficult to say what this would amount to since there are more pro-tax representatives amongst Democrats but few that are so concerned as to return to steep taxation. To take President Obama as a cue, it may mean a return to a higher rate (somewhere between the current 35% and 55%) to add a bit more edge, but also a higher exemption amount to cut into fewer estates.
4. Republican control. Especially if there is a Republican in the White House sometime soon, there's renewed possibility of dropping rates and exemptions or even a lapse of the tax entirely. Of course, even with most of the legislative and executive branches there is a growing political furor over the taxation of wealth – even certain potential Republican candidates are voicing these concerns – and the estate tax is an easy target.

In the end, 2012 will be about keeping one eye on the ebb and flow of politics, even if it is a particularly rapid current these days, and intelligently planning. After all, having plans in place won't hurt if the estate tax does pass on into legislative history, but the other way around can bring some pain. For that matter, the estate tax isn't the only impetus for a solid plan for the distribution of wealth.

Bottom line: As long as there is a Congress in session and an occupant in the White House, no man's wallet is safe, whether he or she be living or dead. Just my two cents.

Reference: Producers Web (January 17, 2012) "4 potential scenarios for the future of the estate tax"

Estate (Tax) Planning Perspectives

Don't be lulled into a false sense of security when it comes to estate law. That's the lesson from a recent article out of Investment News... a gentle reminder that the estate law trap may be closing soon.

Tax changes that President Obama and Congress hammered out in the final days of 2010 discouraged clients from seeking estate-planning advice last year, even though estate lawyers argue there are many planning opportunities that shouldn't be missed.

As many taxpayers are well aware, the current laws related to wealth transfers (i.e., the estate tax, the gift tax, and the generation-skipping transfer (GST) tax) were set just over a year ago in the final days of December. Those laws offered fairly generous policies, effective rates, and exemption amounts, generous enough to surprise even the experts and to calm the thousands of families just spared from the estate tax. According to a Trusts & Estates magazine survey of legal and financial advisors, over the past year tax avoidance dropped from the primary concern of many to the fourth place concern.

The gentle reminder, gentle readers: The laws are only good until 2013 and, barring any sudden outburst of non-partisan productivity at Capitol Hill, are set to expire within a year's time.

Snap, the tax trap shuts!

While tax avoidance need not be your primary concern when it comes to planning, it's likely to be a very important factor for purely economic reasons and, since estate planning is about the long haul in the first place, you can’t base it on short-term laws.

Of course, however you rate the importance of tax avoidance when it comes to estate planning; it is rarely the sole concern. This lull in the taxes also can help clarify your goals in other areas.

If tax avoidance dropped from number 1 to number 4, what did people start thinking about? According to the survey, people began planning in earnest to avoid chaos and discord among beneficiaries, to avoid probate, and to protect children from mismanaging their inheritance.

Reference: Investment News (January 15, 2012) "Estate tax lull may trap wealthy"

Capital Gain Conundrums

Schedule D is so Last Year! You were used to reporting capital gains and losses on Schedule D. Now, in most cases, use new Form 8949 to report capital gain and loss transactions.

A new tax season and a new tax reporting rule for capital gains. It's not a big change but, as Robert Wood writing for Forbes reminds us, any change to something as important as the capital gains tax is worth noting, especially with tax season upon us. From the IRS news release:

New Way to Report Capital Gains and Losses

In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer's basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details.

If nothing else, let this practical change remind you of the very practical reality of capital gains and losses, and what they mean to your estate planning strategies. Your goal, after all, is to leave your assets to your loved ones. However, depending on how you manage your planning, you also may be incurring unnecessary gift or estate taxes on your end… and inheritance or capital gains taxes on the recipient's end. Accordingly, bearing this in mind can allow more precise footwork with your overall wealth transfer planning (especially when it comes to the taxable basis of the assets).

Reference: Forbes (January 11, 2012) "New Capital Gains Tax Reporting For 2011 Returns"; IRS.GOV news (January 2012) "2011 Changes Offer Tax Benefits to Almost Everyone; Special Tax Payment and Reporting Requirements Apply to Many"

Avoiding Vacation Home Vexations

A few lucky readers and their families may be stuck in the snow, but have a vacation somewhere warm in the works. Even better still, some of our them may have a family vacation home to visit in that warmer venue. 

On the other hand, perhaps you're stuck in the snow and dreaming of the upcoming summer trip to your getaway place. Regardless where you find yourself, if you have a vacation home for your family to cherish, then I have a question for you: How will you leave your vacation home to your family?

 Bequeathing vacation homes is often an important after-thought when it comes to most estate plans. How about yours? Typically, such real estate is wrapped in memories, but when it comes to dollars and cents, the vacation home is overshadowed by the family home itself.

The Wall Street Journal recently published an article on the topic to remind us of the importance of this issue, the possibilities, and the problems that can arise.

The central point in planning, whether for a vacation home or other matter, is to know your family and the available estate planning options. In all likelihood, the vacation home is not an asset you would want to give to just one child, especially if it was where everyone spent their summers together. Is giving the home to one person the same as giving it to everyone? Perhaps not.

Maybe you need to think even bigger and consider multiple generations by moving the home, not to a person, but to an entity like a Limited Liability Company (LLC) or a trust. A particularly powerful tool to bear in mind, in the right circumstances, is the Qualified Personal Residence Trust (QPRT).

There are, of course, a number of practical considerations to make – like, can so-and-so take care of the home and will so-and-so be living too far away to make use of it?  

For a few more ideas you can take a look at the original article. In the end, whether your vacation plans are for escaping the snow now or waiting until summer, it's important to start thinking about your estate plans for your vacation home sooner rather than later.

Reference: The Wall Street Journal (January 7, 2012) "Who Gets The Vacation Home?"

Your Portfolio And Your Estate Planning

Your portfolio can be thought of a machine, with many moving parts all working and buzzing away on their own. If you direct your own investments, however, your portfolio is more likely to resemble a well-tended garden that responds to the care and direction of you, the caretaker.

What happens to the portfolio when you pass away? This is a very real question in need of an answer, especially when you are both the caretaker and the family financial mind. Just as with any other matter, how you want your finances to be tended is important information you ought to share with your loved ones sooner rather than later.

Unfortunately, you can plan it out and hold family meetings on the subject but there is always the very real – and perhaps also, likely – possibility that your advice won't be heeded. Surprise.

Spouses can forget or be persuaded otherwise, and adult children may think they know best and make the same mistakes as a novice. To make matters worse still, an expensive and mediocre advisor might get called in instead.

This is the message of a recent Forbes article on the topic. If this matter is a concern for you, then there are ways to plan around it.

For some, proper planning will entail establishing relations with an advisor and handing over some of the reins early.  In terms of your portfolio and its role in your estate plans as a whole, you might consider a trust and a faithful trustee to do the work you know needs to be done.

Clearly, your investments are important to you and your family, and so they also are important to your estate plan.

Reference: Forbes (January 5, 2012) "'My Spouse Will Call You When I’m Dead"

Surprise: “Family” Is Key To Family Business Success

Legacy companies – those incredible companies that have lasted for generations within a family, some 100 to 150 years, and continue to grow – occupy a special place in the American imagination and even more so in the hearts of entrepreneurs.

In fact, for most thinking people, there is a special appreciation for the care and planning necessary to start a company and keep it going for a short time, never mind for entire generations. In Kansas City, one of these success stories is the Hall family of Hallmark Cards, Inc.

Indeed, Legacy companies are a rare breed. Many family companies will simply never get there. Fortunately, there is heartening news in a recent study that suggests that the duration of a family company is not quite so important, for all its branding glory, as the duration of the family itself.

As related in Family Business Magazine, the Family Firm Institute – a global association of researchers and advisers – has conducted a three year study: the "FFI/Goodman Longevity Study," completed in 2010. By surveying some 500 senior family-firm executives they discovered that just 10.6 percent of family enterprises owned just one business. The average is actually closer to 3.4 businesses, with 21.3  percent controlling five or more businesses, and an average of 6.1 companies over a family history. What does all of this mean?

Simply put, single companies are not the measure of enterprise, especially not in a family. The family itself is the asset and the drive that moves matters forward across time, generations, and changing markets.

As you plan for your business - and for your family - this may be an essential thought to bear in mind, and one to foster in others. As noted in the original article:

"Families with a transgenerational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take."

 Reference: Family Business (November 2011) "Family Business Longevity Examined in a New Light"

Family Limited Partnerships – The Mega-Wealth Tranfer Tool For 2012?

There are a number of incredibly powerful estate planning tools available for leveraging intergenerational wealth transfers. Naturally, the appropriateness of a given tool hinges on the assets your family controls.

For some, one of those tools worthy of serious consideration is the Family Limited Partnership (FLP). However, you must take care to get it right.

As a testament to the power of the FLP and the costs of failing to use them correctly, Peter Reilly at Forbes has assembled the six developments of 2011. I commend them to your reading. When FLPs work, they work. Consider the cases of Natale Giustina and Anne Y. Petter. However, since we so rarely learn our best lessons from our successes, there are four developments to instruct us regarding what not to do: LINTON v. U.S, Axel Adler, Jorgensen v. Comm’r. 107 AFTR 2011,and Paul H. Liljestrand.

The Forbes article gives a "moral of the story" of sort regarding each case. In the end, the overall moral to the FLP - as we head into 2012 and ever closer to the unknown tax laws of 2013, and an election year no less - is that this may be your last year to fully leverage the wealth transfer power of the FLP.

Making use of the FLP tool requires dedication to the process and setting it up now (rather than later) may guarantee your ability to make use of the current laws.

Regardless, 2012 may be the year for a mega-gift.

For more on planning through Family Limited Partnerships, be sure to read last month's issue of our newsletter. Feel free to subscribe to this complimentary newsletter, too.

Reference: Forbes (December 30, 2011) "6 Family Limited Partnership Developments In 2011"