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Seven Trust-Based Asset Protection Strategies for You and Your Family

Posted on October 1, 2014

You don’t have to make your family’s assets easy for creditors to reach. Protecting your hard-earned assets for the benefit of yourself and your family can be accomplished through careful planning. These seven trust-based asset protection strategies can put significant (and often insurmountable) obstacles in the way of a creditor.

In this newsletter you will learn about seven trust-based asset protection strategies and how they can:

Protect your assets from creditors, predators, and lawsuits.
Protect assets gifted to, or inherited by, your spouse, children, or other beneficiaries.

If you have questions or would like to discuss your options for trust-based asset protection, please call our office now.

Four Types of Lifetime Asset Protection Trusts – Having Your Cake and Eating it Too

A Lifetime Asset Protection Trust is an irrevocable trust created during your lifetime that can be used to accomplish several goals.

1.      A Medicaid Planning Trust may qualify you or your spouse for Medicaid while preserving an income stream for the well spouse and protecting the trust assets from estate recovery after death.

2.      A Lifetime QTIP Trust is a lifetime trust for your spouse’s benefit using the gift tax marital deduction. This can provide asset protection plus a reduction in overall estate taxes.

3.      A Family Bank Trust, also known as Spousal Lifetime Access Trust (“SLAT”) is a lifetime trust for your spouse’s benefit using annual exclusion gifts and the lifetime gift tax exemption. Again, these trusts can provide asset protection plus a reduction in overall estate taxes.

4.      A Domestic Asset Protection Trust (“DAPT”) is a lifetime trust for your benefit, primarily providing asset protection.

1. Medicaid Planning Trusts

Medicaid Planning Trusts may help you and your spouse (if you’re married):

Qualify for Medicaid while protecting an income stream for the benefit of the well spouse.
Avoid estate recovery. Assets held in this trust will pass to your heirs protected from the government’s estate recovery, which would otherwise require paying back Medicaid benefits that were received during your lifetime.

Planning Tip: Medicaid is jointly funded by the federal and state governments, so each state sets its own rules and guidelines for Medicaid eligibility and estate recovery. Therefore, a Medicaid Planning Trust must be tailored to the laws of your state of residence. Trusts may also be subject to a look-back period (NOT “disqualification period”) of five years. Medicaid Planning usually works best if done as early as possible, so please call our office now if you have Medicaid planning questions.

2. Lifetime QTIP Trusts

When one spouse is significantly wealthier than the other spouse, a Lifetime QTIP Trust offers the following benefits:

Makes use of the less wealthy spouse’s federal estate tax exemption.
Provides a lifetime, asset-protected trust for the benefit of the wealthier spouse if the less wealthy spouse dies first. (Subject to state law.)
Insures that assets left in the trust (after both spouses die) get distributed according to the wealthier spouse’s wishes.

Planning Tip: Lifetime QTIP Trusts offer a great deal of flexibility when spouses have lopsided estates. During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive principal. If the less wealthy spouse dies first, then the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption. Although some of the estate tax savings might be obtainable with “portability,” the asset protection aspects are only available with a Lifetime QTIP.

Depending on applicable state law, the remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit. These trust funds will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed according to the wealthier spouse’s wishes.

3. Spousal Lifetime Access Trusts

SLATs or “Family Bank Trusts” became popular for married couples in 2012 when it was anticipated that we would go over the proverbial “fiscal cliff.” They still remain popular today as an estate tax reduction and asset protection strategy.

This trust is sometimes also referred to as a “Lifetime Bypass Trust” since it is funded with lifetime gifts that are held for the benefit of you or your spouse. As with a Bypass Trust created after the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose.

Planning Tip: SLATs are useful if you live in a state that does not collect a state gift tax but collects a state estate tax and the state exemption is expected to remain significantly lower than the federal exemption (e.g., Maine, Massachusetts, Minnesota, New Jersey, Oregon, Vermont and Washington).

4. Domestic Asset Protection Trusts

The goals of a DAPT are to allow you to fund the trust with your own property, maintain some degree of interest in the trust as a beneficiary, and protect the trust’s assets from your creditors. Currently 16 U.S. states permit creation of DAPTs and the number will likely continue to grow, although laws vary widely from state to state.

Planning Tip: The laws governing DAPTs are relatively new and still evolving. In addition, U.S. courts have been limited in interpreting them. Aside from this, bankruptcy laws allow trust assets to remain exposed to the claims of your creditors for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right person.

Three Types of Testamentary Asset Protection Trusts – Ruling from the Grave

A Testamentary Asset Protection Trust is an irrevocable trust created after your death and used for a variety of reasons.

1.      Irrevocable Life Insurance Trusts (“ILITs”) protect life insurance proceeds for the benefit of your heirs.

2.      Standalone Retirement Trusts protect retirement accounts for the benefit of your heirs.

3.      Discretionary Trusts protect other assets for the benefit of your heirs.

1. Irrevocable Life Insurance Trusts

An ILIT is a powerful tool for leveraging generation-skipping planning and protecting insurance proceeds for the benefit of your intended beneficiaries. In addition to asset protection, an ILIT can remove life insurance proceeds from your estate for estate tax purposes and, with proper planning, provide much-needed liquidity for owners of illiquid assets, like farms, closely held businesses, or real estate.

2. Standalone Retirement Trusts

Because of the recent U.S. Supreme Court decision in Clark v. Rameker (which held that an IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors), the Standalone Retirement Trust has become an important vehicle for protecting retirement accounts from the creditors of your beneficiaries.

Planning Tip: If you have more than $200,000 in a retirement account and you have named your children as primary beneficiaries of the account, then please call our office now to discuss how a Standalone Retirement Trust can be used to protect the account from your children’s creditors after death.

3. Discretionary Trusts

A Discretionary Trust is an Irrevocable Trust that can be built into an ILIT and is an integral part of a Standalone Retirement Trust. You can also include a Discretionary Trust for each of your beneficiaries in your Revocable Living Trust to protect other assets.

Planning Tip: If you are concerned about an heir who is (or may become) a spendthrift, married to an overreaching spouse, bad at managing money, in a high-risk profession, or worried about being sued, we can help you incorporate Discretionary Trusts into all of the testamentary trusts created in your estate plan.

Trust-Based Asset Protection Planning – The Bottom Line

Although asset protection trusts must be irrevocable to safeguard the trust property, they still offer a great deal of flexibility and protection for your own property as well as property gifted to, or inherited by, your loved ones.

This type of planning can become complicated and should not be attempted without the assistance and counseling of an experienced attorney. We are here to answer your questions about trust-based asset protection strategies and advise you on planning options. Please feel free to call our office now.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Asset Protection Planning for the Modern Client

Posted on September 1, 2014

Only the very wealthy and those in high-risk professions need asset protection planning, right?

That’s a myth.

In reality, we all need asset protection. Why? Because we all can be sued and lose everything we have. A car accident, business failure, foreclosure, medical crisis, or injured tenant can result in a monetary judgment that will decimate your client’s finances.

This month our goal is to provide an overview of asset protection planning fundamentals to illustrate how planning can benefit all of your clients, not just the wealthy and not just doctors, lawyers, and real estate investors.

What Exactly is Asset Protection Planning?
In its most basic form, asset protection planning is the process of taking assets that are vulnerable to creditors, predators, and lawsuits and positioning or repositioning them as assets that are less vulnerable or, ideally, are not vulnerable at all.

Planning Tip: Invite Your Clients to Work with an Experienced Advisory Team

At first glance asset protection planning may appear to be straightforward; however, asset protection strategies hold traps for novice planners.

·         When done correctly, an asset protection plan serves as a valuable bargaining chip.

·         When done incorrectly, the plan can be unwound and assets seized, with clients (and potentially planners) held in contempt or even thrown in jail.

Therefore, it is imperative that clients work with an advisory team, specializing in asset protection strategies. Each client’s individual risks and benefits must be fully assessed and clients assured that the plan they ultimately put in place will work.

Basic, Everyday Asset Protection Planning
Many of your clients may already be taking advantage of basic asset protection strategies and not even realize it.

For example, the first line of defense against liability is insurance, including homeowner’s, automobile, business, professional, malpractice, long-term care, and umbrella policies.

Clients need to review their insurance policies on an annual basis to confirm that coverage is sufficient and important benefits have not been stripped from their policies to maintain premiums.

Another type of basic planning, available in some states, is a joint ownership between married couples called “tenants by the entirety” (TBE). A creditor of just one spouse cannot attach a judgment to the couple’s TBE property.

The rules for creating TBE ownership vary widely among the states that recognize it.

·         In some states, TBE titling is applicable to real estate only; while in other states, it can be used for both real estate and personal property. In Indiana, a couple can even have real estate titled in separate trusts, or a joint trust, and have it treated as TBE but special provisions are needed in the deed and the trust documents.

·         As a team, we can assure that your clients’ property is correctly titled.

Because TBE benefits will be wiped out if a judgment is entered against both spouses or if one spouse dies, this type of ownership should not be the centerpiece of a married couple’s asset protection plan.

Another type of basic planning clients are probably already taking advantage of is holding a portion of their assets in a 401(k) or IRA.

·         Under federal law, tax-favored retirement accounts (excluding inherited IRAs) are protected from creditors in bankruptcy (with certain limitations).

·         Federal law also protects part of the equity in a primary residence in bankruptcy.

·         Some states have passed laws that expand protection for IRAs and the equity in a primary residence and also offer protection for annuities and the cash value of life insurance.

Planning Tip: Know Your State’s Asset Protection Rules

Be knowledgeable about which assets are and are not protected from creditors. This knowledge will help you move the needle forward on asset protection planning discussions with clients who are already taking advantage of basic strategies but really need a more sophisticated plan.

Sophisticated Asset Protection Planning
Clients who need to go beyond basic asset protection planning must understand that sophisticated planning involves more give than take.

·         Clients must give up some, or even all, control and ownership of the property to be protected.

·         Ideally, the spouse, children, and grandchildren will also lack control, but may maintain a beneficial interest in the property, such as the right to income and principal for health, education, and maintenance.

To make property untouchable, or, at the very least, more difficult for creditors to seize, sophisticated asset protection planning will often involve a layering of multiple techniques, including:

·         Beneficiary Trusts

·         Domestic or foreign limited liability business entities (Limited Liability Partnerships or Limited Liability Companies)

·         Irrevocable Trusts, including Domestic Asset Protection Trusts (DAPTs)

·         Asset Protection Trusts outside of the U.S.

Planning Tip: Since the laws governing limited liability business entities and irrevocable trusts vary from state to state and country to country and these laws are constantly in flux, the use of advanced strategies requires the expertise of legal advisors who understand all of the applicable laws of fraudulent transfers and specialize in the implementation and maintenance of sophisticated asset protection plans.

The Bottom Line on Asset Protection Planning
First, clients require your assistance so they are aware they need asset protection planning.

Second, they must understand that, to be effective, an asset protection plan must be put in place before a lawsuit arises. An asset protection plan is not a quick fix for existing legal problems.

In fact, there may a period of time before an asset protection plan becomes effective (these time frames vary from jurisdiction to jurisdiction), and under bankruptcy laws there is a 10-year look back for transfers into certain types of trusts.

For professionals’ use only. Not for use with the general public.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Yes, Your Family Needs Asset Protection Planning

Posted on September 1, 2014

If you’re like most people, when you hear “estate planning” or “asset protection planning,” you think of someone like JR Ewing of the 1978 show Dallas, Bill Gates, or the Kennedys.

WARNING: Common Misconception

A very common misconception is only wealthy families and people in high-risk professions need asset protection planning.

But in reality, anyone can be sued and lose all of his or her assets.

A car accident, foreclosure, job loss, medical crisis, business failure, or an injured tenant can result in a huge monetary judgment, decimating your finances.

The goal of this newsletter is to provide you with a quick overview of asset protection strategies. 0

What Exactly is Asset Protection Planning?

Asset protection planning is the process of taking property currently vulnerable to seizure by creditors, predators, and lawsuits and positioning it in a way to discourage lawsuits, provide a valuable bargaining chip if a lawsuit arises, and minimize loss.

Basic, Every Day Asset Protection Planning

It may surprise you to know that you are likely taking advantage of basic asset protection strategies without knowing it.

For example, the first line of defense against liability is insurance, including homeowner’s, renter’s, automobile, business, professional, malpractice, long-term care, and umbrella policies.

Planning Tip: We suggest you check your insurance policies to determine if your policy limits are in line with current assets and net worth; make adjustments as appropriate. Then, be sure to review your policies on an annual basis to confirm that the coverage is still adequate and benefits have not been stripped to keep premiums the same.

For example, Randi owned a rental property near the state university. A balcony collapsed when too many college students gathered for a party. Randi was sued and ultimately settled the case for $950,000, just under her umbrella liability policy of $1 million. Randi’s personal and business assets were protected.

Planning Tip: In some states, married couples are afforded asset protection in the form of “tenants by the entirety” (TBE). With this type of ownership, the creditor of one spouse cannot attach a judgment to the couple’s TBE property.

For example, Bob and Sue are married and own their home as TBE. Bob goes through a red light and crashes into a school bus. Many children are injured. He is sued and the jury determines Bob is liable and must pay out $1 million dollars. Though other assets might be taken, the home cannot be seized because it’s owned as tenants by the entirety.

Planning Tip: Another type of basic planning 401(k) or IRA investment. Under federal law, 401(k)s and IRAs (excluding inherited IRAs*) are protected from creditors in bankruptcy (with certain limitations).

Maximizing contributions to your 401(k) if you still are working will not only increase your retirement savings, but will also keep the investments away from creditors, predators and lawsuits.

For example, Andrea lost her job and went bankrupt. She was sued and lost many assets; however, the law protected her retirement plan.

*If you want to assure retirement plans are protected when they pass to your loved ones, we can show you how to do that as well.

Sophisticated Asset Protection Planning

If you are a landlord, real estate investor, business owner, work in a high-risk profession, or have accumulated or inherited a significant amount of unprotected property, we recommend you consider sophisticated asset protection planning.

Please note that sophisticated planning will usually require giving up some or all control and, perhaps, ownership of the property.

We would like to help you determine whether sophisticated asset protection planning is required in your individual situation. The use of advanced asset protection strategies requires the expertise of a legal advisor who understands all of the applicable laws and specializes in the implementation, and, just as important, the maintenance, of sophisticated asset protection plans.

WARNING: You Must Plan Ahead

To protect your assets, you must plan ahead. Asset protection planning cannot be done as a quick fix for your existing legal problems.

Your plan must be in place before a lawsuit arises. And, in some situations, a significant period of time must pass before the asset protection plan is effective (up to 10 years in some cases).

The bottom line is that everyone needs some form of asset protection in place.

How to Protect Inherited IRAs After the Clark v. Rameker Decision

Posted on August 1, 2014

In a landmark, unanimous decision handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not “retirement funds.”

This ruling is important to you and your family because it means you need to take action to insure your retirement funds are protected when they pass to the next generation – and, perhaps, even to your spouse.

Here’s what happened in the Clark case:

Ruth Heffron created an IRA, naming her daughter, Heidi Heffron-Clark, as beneficiary. After Ruth died, Heidi transferred the IRA assets (approximately $300,000) into an “Inherited IRA.”

Some nine years later, Heidi and her husband, Brandon, filed bankruptcy and sought to protect the Inherited IRA from their creditors. The couple argued the inherited IRA assets were protected retirement funds. Both the bankruptcy trustee and the judgment creditors objected.

The case went all the way to the Supreme Court, which ruled that funds held within an inherited IRA are not “retirement funds.” And, as a result, those funds have no protection as retirement funds and can be seized to pay off debt.

The Court reached its conclusion using three elements, which differentiate an inherited IRA from a participant-owned IRA:

1.      The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.

2.      The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 ½.

3.      The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty-free distributions.

This simple analysis has sent shock waves through the estate planning and financial advisory worlds. The logic is easily extended to all inherited defined contribution retirement plan accounts, so inherited 401(k) and 403(b) accounts are also affected.

What Can Be Done to Protect Inherited IRAs from Creditors?
In light of the Clark decision, clients must thoughtfully reconsider any outright beneficiary designations. By far the best option for protecting an inherited IRA is to create a Standalone Retirement Trust. If properly drafted, this trust offers the following advantages:

·         Protects the inherited IRA from beneficiaries’ creditors as well as predators and lawsuits
·         Insures that the inherited IRA remains in the family bloodline and out of the hands of a beneficiary’s spouse, or soon-to-be ex-spouse
·         Allows for experienced investment management and oversight of the IRA assets by a professional trustee
·         Prevents the beneficiary from gambling away the inherited IRA or blowing it all on exotic vacations, expensive jewelry, designer shoes, and fast cars
·         Enables proper planning for a special needs beneficiary
·         Permits minor beneficiaries such as grandchildren to be immediate beneficiaries of the inherited IRA without the need for a court-supervised guardianship
·         Facilitates generation-skipping transfer tax planning to insure that estate taxes are minimized or even eliminated at each generation

Could State Law Still Protect Inherited IRAs?
A handful of states – including Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas – have either passed laws or had favorable court decisions that specifically protect inherited IRAs under state bankruptcy statutes. If the IRA beneficiary is lucky enough to live in one of these states, then that beneficiary may very well be able to protect their inherited retirement funds by claiming the state law exemption instead of the federal law exemption.

Caution: Caution should be used in relying on state law to protect a beneficiary’s inherited IRA. In general, people are more mobile than ever and your beneficiary may need to move from state to state to find work, pursue educational goals, or be closer to family members. In addition, federal bankruptcy laws now require a debtor to reside in a state for at least 730 days to use state bankruptcy exemptions. Therefore, long-term planning should not rely on a specific state law but instead should take a broad approach.

The Bottom Line
If you have retirement funds and are interested in how you can better protect these assets for children or other beneficiaries, give our office a call. We can show you how to protect your assets from your beneficiaries’ bankruptcy creditors, divorcing spouses, frivolous lawsuits, medical crises, and bad decisions and discuss adding a standalone retirement trust to your estate plan.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

How to Avoid a Basis Management Disaster

Posted on July 1, 2014

Many of us in the legal, financial and accounting worlds discover our new clients’ well-intentioned, yet disastrous, plans after the fact. The widow has already transferred her house into her children’s names or an inherited IRA is drained to pay for a Porsche. Observing the lost planning opportunity and the financial fallout is universally gut wrenching.

To help get the message out and to illustrate the transformation you provide to clients, you are welcome to use the below facts and scenarios in your own educational materials, presentations and conversations. Consider this a “red flag” list of income tax pitfalls and opportunities so you can be your clients’ (and their beneficiaries’) basis management hero.

Quick Review:
Many of your clients probably don’t understand: how basis is determined, the step-up in basis at death for both separate and community property assets, and the consequences and opportunities associated with low basis assets. They certainly don’t understand the rules governing when basis applies to IRAs and when it doesn’t, or how to transform separate property into community property to get a full step-up of basis at the death of the first spouse.

Fortunately, there are numerous opportunities to avoid the huge and instant tax bill associated with selling low basis assets outright and for making the most of tax basis rules. Charitable Remainder Trusts, Family Limited Partnerships, Family Foundations, Installment Sales, or trust structures may be appropriate to dispose of highly appreciated assets, lowering the tax bill with reduced tax rates and charitable deductions.

Be sure to ask your clients lots of questions during your counseling interviews so you carefully understand their situation and avoid costly mistakes. If you’re just collecting data via email or a five minute phone call, you’re likely missing planning opportunities and costing your clients significant tax dollars.

Key Takeaways:
1.      A step-up in basis is a wonderful thing. Assets get a step-up in basis at death; so, the mom, who wants to makes things simple for her children and avoid her state’s inheritance or estate tax by giving away the family home, is likely creating a huge tax bill.

2.      Tax deferred growth is a wonderful thing. Educating beneficiaries before they inherit can keep more money in their pockets in the long run (and their foot off a Porsche’s gas pedal).

3.      Tax minimization is also a wonderful thing. Use tools such as the Charitable Remainder Trust (CRT) to dispose of low-basis, highly appreciated assets without setting off the IRS’s alarms and collection agents.

4.      Counter intuitively, income tax returns are also a wonderful thing. Always review income tax returns annually. They provide a wealth of information that your clients may not know is valuable to basis management. We have found that if the return is not reviewed and basis questions are not asked, carry over basis and loss carry forwards are never mentioned. Thus, tax planning opportunities are lost. Don’t miss Wall Street corporate takeovers, rental property, and mutual fund red flags.

5.      Team work is a beautiful thing as well. Make sure that basis step-up opportunities are always examined. Step-up opportunities will generally require an estate planning attorney’s input.

What You Need to Know:
First and foremost, stock or property needs to be held for longer than one year to avoid gains being taxed at ordinary rates for high-income payers. This is only an issue for those with marginal rates greater than 15%. In other words, if the marginal rate is equal to the gains rate — 15% — there is no practical impact.

Be sure to determine the capital gains tax impact if an asset is sold. Tax planning looks at future years in which income may be reduced (e.g., at the onset of retirement) allowing for a more opportune asset disposition of low-basis stock or property.

The capital gains rate is 20% for income subject to the
highest marginal rate of 39.6%; otherwise, it is 15%.

And then there’s the 3.8% Medicare surtax, effectively jumping capital gains
from 15% to 18.8% (at $250k AGI married) or 23.8% ($450k AGI married).

Low-basis stock or property that has high appreciation is a wonderful thing from a wealth standpoint, but can produce very high capital gains taxes.

·         If the stock or property is to be sold, then you must have the client set aside the tax payment from the proceeds.

·         If it is not set aside and the full proceeds are spent, when taxes are due, this could require pulling cash from future uses to the present (this is very inefficient and an example of poor execution).

Many of your clients likely own their own homes. Residential real estate has a $250,000 (single) and $500,000 (married) profit exemption from the capital gains tax with the main proviso that the home has been owned and used as a primary residence for at least 24 months.

And then there’s rental property to consider. Rental property may be entitled to a step-up in basis at the death of one of the spouses. Clients often overlook this benefit.

Installment sales can be used to spread the gains on sales of businesses and rental properties such that gains are spread over a number of years to avoid running up the AGI ladder.

Community Property Trusts for married couples in separate property states are an effective way to get a double step-up in all assets owed by the couple no matter how titled. For larger estates, million of dollars in capital gains taxes can be avoided with this relatively simple trust structure.

In addition, low-basis stock or real property are ideal assets for Charitable Remainder Trust (CRT) funding because the property passes to the trust at full value and without immediate capital gains tax implications.

·         The CRT then can sell the property (after it’s owned by trust) and monetize the proceeds back to the grantor in the form of income.

·         The income stream is four-tiered (return of principle, capital gains, tax-free income, and ordinary income) so the effective tax rate is lower than the ordinary income tax rate.

·         The net is higher inside the trust than outside because the charitable exemption allows for the full proceeds to be available for the trust’s assets.

·         The donor can take a charitable deduction for the donation to the trust, which can be especially valuable in high-income years (such as the last few years of earning employment compensation).

·         The CRT income stream can be used to fund a significant life insurance policy (inside an Irrevocable Life Insurance Trust if your clients’ estate is federally taxable).

In addition, low-basis stock can also be gifted to Family Limited Partnerships (FLPs) and Family Foundations.

Using the FLP discount, the gift tax hit for the distribution is reduced. Of course, this mostly applies only to those families with wealth greater than the unified gift and estate tax credit (i.e., $11 million for a married couple).

Moreover, so long as the surviving spouse is an American citizen, the marital exemption allows unlimited low basis stock and property to be passed tax free upon the owner’s death to that spouse. (Lifetime transfers to an American citizen spouse are also unlimited.)

If these assets do pass through a marital transfer, it is vital that the advisor/estate planning attorney team execute a plan to address the surviving spouse’s estate/gift tax exposure.

And, keep in mind that often times, low-basis property or stock has emotional connections (e.g., a family business, a home or vacation home with sentimental value, or a treasured collection).

·         Beyond the tax implications, it is important for parents to have not only the asset-disposition plan in place, but to have a family meeting to discuss the broader meanings of the stock and/or property.

·         Parents may not want property they gifted to be sold, but the kids may be tempted to do so. If this is a concern, then a trust (with a non-family member as trustee) can be used to carry out parental intent.

·         The tax implications for the beneficiaries can be handled by a number of trust structures to ease these worries.

·         Property to be shared by siblings (e.g., a vacation home) needs to be discussed and the usage plan and rights be well documented to avoid conflicts before parents become incapacitated or die.

Assets get a step-up in basis at death, but most clients aren’t aware of that benefit; so, the mom who gives away the family home or other assets is likely creating a huge tax bill as well as subjecting her home to the creditors and bad acts of her children. In addition, she will be disinheriting any children who are not the recipients of the transfer as to that asset.

Lastly, remember that Porsche? An IRA’s basis is the after-tax balance formed by nondeductible IRA contributions as well as rollovers (after-tax amounts). Earnings on IRA contributions are tax-deferred.

Actions to Consider:
1.      Include adult children and other beneficiaries in your counseling sessions, so they know the benefits of basis management and the disasters of mismanagement.

2.      Offer beneficiary preparation workshops jointly with our office.

3.      Invite your clients to come in for an update and 1040 analysis to identify additional planning opportunities.

4.      Call our office to create a customized action plan to better protect your clients and their beneficiaries from themselves, keep more assets under management, be the hero, and reduce the number of gut-wrenching basis management disasters you’re forced to witness.

5.      Explore whether a Charitable Remainder Trust, Family Limited Partnership, Family Foundation, trust structure, or installment sale is appropriate to dispose of highly appreciated assets. We’d be happy to assist you with this analysis.

6.      If your client is the beneficiary or trustee of a non-grantor trust, ask us to analyze the trust to determine whether that trust can be recanted to grant the beneficiary a general power of appointment, bringing trust assets into his or her estate and using up any available federal estate tax exemption.

For professionals’ use only. Not for use with the general public.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Three Key Strategies for Helping Clients Navigate Aging Plans

Posted on May 1, 2014

Many of your clients are baby boomers (now ages 50-68) moving into retirement and dealing with all the issues related to aging: elderly parents, kids in college, saving enough to last a lifetime and protecting what they have. With a dizzying array of financial instruments to choose from, complex federal and state laws governing estates, and the crisis in health and long-term care, your clients need your help more than ever to develop an effective plan for their senior years.

By 2050, the U.S. Census Bureau predicts there will be 86.7 million citizens age 65 and older living in the U.S., and they will comprise 21% of the total population. It predicts the number of people in the 65 and older age group will grow by 147% between 2000 and 2050, compared to 49% growth in the population as whole.

Waiting to plan for the “golden years” is no longer a viable option. Your clients need to look far into the future and develop an estate plan that will help them maintain their desired lifestyle and protect assets from a variety of risks, including the rising costs of care. We have identified three key strategies that can help your clients navigate the minefield of aging, and focus on a successful retirement.

Establishing Future Cash Flow and Determining Adequate Resources
The number one long-term concern of most clients is running out of cash as they age. No one wants to outlive their assets, but without pre-planning that could easily happen, especially if there is a medical crisis or chronic illness. Clients need to take care of themselves first, ensuring their income throughout retirement before worrying about the distribution of their estate. On an airliner, passengers are instructed that if the yellow oxygen masks drop, they must first put their own mask on and only then assist others. Only when your client is breathing comfortably about the future can plans be made to transition wealth to beneficiaries.

Having a list of questions to ask your clients at the beginning of a discussion about their estate plan will help establish the outline and direction of the plan. Some of the basic questions to ask are:
·         What are your sources of income in retirement, and if married, do they continue for your spouse?
·         Do you plan to stay in your current home?
·         If so, do you have enough funds to do that?
·         If not, where do you plan/want to live?
·         Will you have any dependents living with you (parents, special needs children)?
·         What would put your plan at risk?
·         What about a medical crisis?
·         Who will take care of you?
·         How will you pay for it?

Answering these questions gives both you and your client a starting place to discuss creating the right estate plan. It is also an excellent place for financial advisors and estate planning attorneys to work together to ensure that income and assets are properly structured and protected.

Regular Planning for Tax Liabilities and Protecting Assets
With the increased focus on income tax issues, CPAs are integral in capturing business opportunities to help clients protect their assets, smoothly transition estates and reduce tax liabilities. It used to be that tax laws didn’t change very often, and established estate plans didn’t need to change year over year. However, since 2000 the federal estate and gift tax exemptions have changed almost yearly. Other federal and state laws governing income, estate and gift taxes have changed as well, with increased income and capital gains tax rates imposed on January 1, 2013.

While on the surface it appears that we have entered a period of stability, at least for federal estate and gift taxes, given their history and the federal deficit, it seems likely that the tax laws are only going to get more complicated, burdensome and complex. Diligent advisors offer guidance and educate clients regularly about any changes to the laws that could impact their estate plans and tax liabilities, and “best practices” include a team approach.

What a client might need in an estate plan when they are in their 50s and 60s can be very different from what they need in their 80s and 90s. Although accountants and financial advisors meet regularly with clients, most attorneys do not. As laws governing Revocable and Irrevocable Trusts, taxes, Medicaid, VA benefits and health care change over time, and your client has personal changes that could seriously jeopardize his or her estate plan, ongoing counseling is required. For estate planners, setting up an annual maintenance program with your clients, and working with an interdisciplinary team that includes a financial planner, CPA and attorney, keeps you up to date on best practices and ensures that your clients’ estate plans are current. The Like Law Group has created our unique Client Care Membership Program as an option for clients who value knowing their plan stays up to date with the laws and their goals. If you would like to learn more about this program please give me a call.

Planning for Medical Crises and Long-Term Care
No one plans to have a medical crisis, but without a solid estate plan in place before a crisis happens, a medical issue can destroy financial security in short order. The need for long-term care is a looming prospect that gets ever harder to deal with as clients age, with uncovered long-term care exposure creating an insolvency risk for most seniors. With Medicare all but out of the long-term care (LTC) space, and LTC costs escalating, for 95% of the retiring population the greatest risk to financial security is uncovered medical expenses. People are living longer, and often those added years are unhealthy. Consequently, the “elephant in the living room” for retirees is paying for medical care without exhausting assets.

A Long-Term Care insurance policy is still the best weapon against a financial disaster caused by a chronic illness or aging. Such policies are not accessible to everyone, however, due to cost, pre-existing conditions and other circumstances. LTC coverage is not guaranteed available by the Affordable Care Act or any other legislation. Moreover, although premiums are “level” they are not fixed, and careful planning is required to tailor coverage and premium to fit the client’s plan. Those able to afford the premiums are well advised to purchase a policy for needed coverage. The cost of assisted living and nursing home care is skyrocketing, and without a LTC plan, a client can be faced with losing all assets acquired through his or her lifetime. Often, for those uninsured, the burden of care falls on a loved one, and because of the complexities and pitfalls of Medicaid, such as the 5 year look-back and penalty provisions, paying privately can result in complete impoverishment.

There are many LTC products and options to choose from, like traditional LTC insurance, LTC/life insurance hybrids or life insurance with an LTC rider. You can help your clients find one that fits their needs and enhance your position as one of their trusted advisors – one who helps plan effectively without a focus on selling products, but rather implementing a plan. With increased volatility in the LTCI markets, carrier issues and rising premiums, it is imperative that LTC policies be reviewed regularly and that the policy fine print is understood. When your client is most vulnerable or unable to manage his or her affairs is not the time to find out that a LTC policy has a problem!

What if your client can’t afford the LTC premiums or has been denied coverage? Without a LTC insurance plan, it is even more important to consult with an attorney on other ways to protect assets from the poverty requirements of Medicaid and the Veterans Administration. The attorneys in our office can construct a plan to create a Medicaid Asset Protection Trust or Veterans Asset Protection Trust, as well as make plans to protect the estate, even if home care, assisted living or nursing home care becomes necessary. The collaboration between LTC insurance agents and attorneys is key, and the opportunities for mutual referral and joint marketing are abundant.

Summary: Identifying the Need to Plan Now Rather than Later
As our clients grow older, their medical, financial and legal needs change. For many, instead of worrying about growing their net worth, the new worry is not running out of money before they die. Working in tandem with an interdisciplinary team of professionals — financial planner, accountant and attorney — provides the expertise needed to create strategic estate plans for your clients.

In spite of deep experience in their field, no member of the advisor team, whether CPA or financial advisor or attorney, can know all the nuances of estate planning. Each brings specialized expertise to the table.

By working together on behalf of the client, the combined knowledge of this interdisciplinary team provides the best possible planning options to protect the client’s estate into the future. And, each team member has the added benefit of gaining referral opportunities to continue to build their own businesses.

For professionals’ use only. Not for use with the general public.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances

These Four Childfree Prospect Tips Will Grow Your Business – And They’re Not What You Think

Posted on May 1, 2014

Childfree individuals and couples often face choices, decisions, and questions, which you are uniquely qualified to address. Like many allied financial professionals, you may focus on helping clients pass the maximum amount of wealth to their beloved children.

Along with buying a house and doing better than your parents, handing down your accumulated wealth to your children is a long-held tradition that many consider the cornerstone of the American dream. But what about those individuals who do not have direct descendants?

For a myriad of reasons, childfree individuals and couples are a steadily growing percentage of those seeking planning and financial services today. You may assume that counseling and guiding childfree clients has less opportunity or is more difficult than working with clients who are parents. If so, you’re not alone.

However, in actuality, childfree clients are not so different than your parenting clients. And, the fact that most professionals think they’re different creates your opportunity. The opportunity is to market directly to your ideal childfree client, make her feel important, and communicate that you are uniquely qualified to empower her.

Four Key Takeaways
Childfree individuals and couples are often left out of marketing conversations and made to feel as if they’re second best. By ignoring them and focusing solely on parent clients, marketing messages send notice that something is wrong with being childfree.

To grow your business, keep in mind:

1.      Being childfree is not second best. There is absolutely nothing wrong with not having children and it’s none of your business why a client doesn’t have children. Don’t ask.

2.      Childfree clients may have had children who have predeceased them. Be sensitive to that fact.

3.      Childfree clients likely have someone they love and would like to benefit, such as grandchildren, nieces, nephews, siblings, friends, partners, and pets.

4.      Childfree clients have many of the same goals and fears that your parent clients have. Those goals and fears may or may not have the same emphasis and priority and, thus, create your opportunity to distinguish yourself through counseling and service.

Dealing with childfree clients is more about positioning than substance. Unless your client cares about no one and doesn’t want to stay in control of his or her finances, health care, and life, she needs an estate plan, financial plan, insurances, and tax advice just as parent clients do.

What You Need to Know:
Childfree clients may need all of the services their parenting counterparts need and when you acknowledge them as valuable, worthwhile, and important, you, your planning team, and your clients all win.

Actions to Consider:
1.      Add a marketing message, speaking directly to childfree prospects.

2.      Don’t assume that your childfree client isn’t interested in planning traditionally sought by parent clients, such as educational planning, educational trusts, 529 plans, life insurance, and beneficiary trusts.

3.      Show your client how you, along with your allied professional team, can help to ensure that she can:

o   Create and build her ideal business
o   Create, equalize, or liquidize an estate
o   Avoid running out of money, even if she gets sick
o   Get the health care she needs
o   Appoint trusted helpers, empowered to make good decisions
o   Reduce the risk of audit
o   Minimize or eliminate assets lost to taxation and lawsuits
o   Fund the buy-sell agreement for her business
o   Gift to charities she believes in
o   Protect her assets both during her lifetime and after they pass to beneficiaries
o   Care for those whom she loves
o   Live with peace of mind, while raving about you and your team to her friends and family

There is no shortage of insurance, financial, tax, charitable, asset protection, disability, long-term care, pet, and estate planning for childfree clients. Your business will grow when you pull your team together and let childfree individuals and couples know that they are important to you, while showing how you can empower them with smart planning.

For professionals’ use only. Not for use with the general public.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Wills vs. Trusts: In Plain English

Posted on April 1, 2014

Lance D. Like is a Certified Specialist in Estate Planning & Administration. He is the founder of the Like Law Group LLC, a Bloomington, Indiana law firm. Practice areas include estate and Medicaid planning, elder law, probate, trust administration, and business planning.

Herald Times Readers’ Choice Awards
Greetings! It is that time of year again for the Herald Times Readers’ Choice Awards. This is a great opportunity to recognize local businesses in our community for their great products or service. I encourage you to take a few minutes to vote for your favorite local businesses. A paper ballot can be found in the Herald Times Newspaper if you prefer. However, an online ballot is available. Here is a link that will take you directly to the “service” section category:
http://hoosiertimes.secondstreetapp.com/l/2016-HeraldTimes-Readers-Choice-Voting/Ballot/Services

If you believe my firm has earned your vote I would be honored if you would take the time to vote for my firm in the “Law Office” category. Simply type in “Like Law Group” in that field. Make sure you vote for all of your other favorites as well. Voting ends Friday March 11, 2016 at 5 p.m.

Now, on to this month’s article titled Wills vs. Trusts:
Everyone has heard of wills and trusts. Most articles written on these topics, however, often presume that everyone knows the basics of these important documents. But, in reality, many of us don’t – and with good reason – as they’re rooted in complicated, centuries-old law.

Let’s face it, if you’re not an estate planning attorney, these concepts tend to remain merely that – concepts. So, if you’re “fuzzy” about wills and trusts, know that you are not alone. After we show you the difference between these two documents, we’ll tell you why a trust is often (but not necessarily always) the better choice.

Wills vs. Trusts: Defined
Let’s take a minute and define both “will” and “trust”:

Will. A will is a written document that is signed and witnessed. A will is considered a “death” document as it only goes into effect when you die.

A will:
• provides for the distribution of assets owned by you, but not assets directed to others through beneficiary designations (e.g. life insurance or retirement benefits)
• sends assets in your individual name or payable to your estate through the probate process
• allows you to appoint permanent guardians for your minor children
• names the person you wish to settle your estate (e.g. executor or personal representative)
• doesn’t always include protective trusts for beneficiaries and tax planning because many wills are simple 2-3 page documents
• permits you to revoke or amend your instructions during your lifetime
• tends to cost less than a trust on the outset but costs more to settle during court proceedings after death
Trust. A trust is a legal document, signed and (depending upon state law it may also have to be witnessed), and effective during your lifetime, during any period of disability, and after death. Because the trust is effective during your lifetime and you can change it, it’s referred to as a “living” document.

A trust:
• has lifetime benefits
• provides for the distribution of your assets
• avoids probate if fully funded
• provides for a successor trustee upon your death or incapacity
• allows for the management of your property – even if you’re incapacitated
• can address appointing disability guardians for minor children
• often includes protective trusts for beneficiaries and tax planning
• permits you to revoke or amend your wishes during your lifetime
• costs more than a simple will on the outset but much less upon administration, while typically providing significantly more value

The Probate Process: A Key Element in Deciding Between a Will and Trust

One key element in deciding between a will and a trust is understanding the probate process. The term “probate” – which literally means “proving” – refers to the process wherein a decedent’s will must be authenticated, outstanding legitimate debts paid, and assets transferred to the beneficiaries. State law dictates how this process plays out. Part of the process includes publishing notice to creditors in a newspaper and there are certain mandatory waiting times in the probate process that must be followed.

The downside is that probate can take a long time – even years – it’s expensive in many places and the entire process is completely public, meaning your nosey neighbor Nancy and evil predator Paul both know exactly who got your assets how to contact them. In virtually all cases, the only upside of probate is that creditor claims are cut off.

Now, in Indiana probate is often times not as onerous as it is in other states. Most probates my firm handles are done so through what is referred to as “unsupervised” probate administration which typically is less costly to handle than a “supervised” probate.

• Probate Guaranteed with a Will. If you use a will as your primary estate planning tool, you own property in your individual name, or property is made payable to your estate, probate is guaranteed.
• Probate Avoided with a Trust. If you use a fully-funded trust as your estate planning tool, probate is avoided – saving your family time and money.
The Bottom Line on Wills vs. Trusts

HOW TO DECIDE: As everyone’s situation is different, it’s important to analyze every aspect of your situation – and what the future may hold – so that you can determine what’s right for you and whether probate avoidance, incapacity planning, and trust protections have value to you and those you love. Many people receive the greatest overall benefit from having a trust. Although I prepare trusts for many clients each situation is different. That is why the counseling is important to make sure the client understand all the options and then can make an educated decision about the structure of their plan.

ACT NOW: Without an estate plan in place, whether a will based plan or a trust based plan, you and your family are left completely unprotected. Call our office now and we’ll help you determine whether a will or a trust makes sense for your situation. You don’t have to make these decisions alone.

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Three Simple Ways to Sell Complex Solutions

Posted on April 1, 2014

When it comes to financial and wealth planning issues, more often than not, people go to a professional they trust. They may be working with a financial planner, CPA, agent, or banker, but when trust and estate concerns arise, clients need their trusted advisor to listen to their needs and to explain things clearly. Trust and estate concerns are often technical issues, and this can lead to three common mistakes on the part of the professional:

1)    Using terminology that is too technical
2)    Not listening to what the client is saying
3)    Failing to connect a trust and estate plan’s benefits to the value the client receives

Here are three winning techniques to help deliver information and communicate more effectively.

1. Plain language
When conveying a complex concept, speak in plain language and in an understandable format. De-emphasize the technical jargon; if it gets too technical the client will shut down. Practitioners can develop a way to convey need-to-know features by using believable stories, real life scenarios, diagrams, and case studies.

For example: advisors know the differences between a taxable retirement instrument and an IRA, but explaining the strategy of using a retirement trust can lose the client in a heartbeat. However, when the same concept is explained in simple terms, the client will listen and understand. To illustrate: consider a discussion with a client on how to protect the heir from him or herself.

“If the funds are in a properly managed qualified trust structure, your son will avoid big income tax bills and have a protected asset that provides income for years to come. If the funds are in an IRA, your son could cash it out right away, pay a huge tax penalty and then spend the funds, depleting his inheritance immediately.”

This simple explanation illustrates the benefits that are readily understandable without ever mentioning any jargon or acronyms.

When in the office, practitioners can use whiteboards and markers to draw diagrams and charts, to better illustrate a complex point. This personal attention and focus will appeal to clients. They can see the solution unfolding visually in their own terms; people buy benefits they understand. They don’t really care about the technical features or abstract concepts; they want to understand the value it brings to them specifically.

Also, assess the type of client and use specific language that resonates with them. You might use different language when speaking to an engineer compared to a small business owner or a corporate executive.

2. Listening
Listen carefully to what the client is saying. Everyone has different estate planning needs; some estates are very straightforward while others can be remarkably complex. The role of a trusted advisor is to listen closely, understand the underlying fears and concerns, and develop tailored solutions. Open communication means putting the information a client needs to know in the proper context of his or her circumstances and needs. Doing so leads to making an informed decision.

Sometimes a client can tell you exactly what is needed, but, more frequently, clients don’t know what they don’t know. A practitioner can develop a guided Q&A structure to identify potential problems and hidden risks. With a complete inventory, the practitioner can explain the possible solutions. Your ability to listen compassionately to their needs first and then effectively outline strategies that will meet those needs will lead to client satisfaction. Clients don’t care how much you know until they know how much you care.

3. Connection to Value
If a practitioner just focuses on product or service features without explaining the benefits of creating a long-term, tailored, and need-based solution, the practitioner does the client a great disservice. People work hard to earn the assets they have and they want to be sure they are managed and protected in the best possible way. Professionals can offer a comprehensive solution as a team, and communicate the benefits delivered to the client. This encourages the client to build a team of trusted advisors with which to work. An added advantage to providing informed guidance as a team to clients is a strong foundation for more favorable reaction to fees. Professional fees can run into thousands, perhaps tens of thousands, of dollars depending on the complexity of an estate. This link of benefits to fees connects to far greater value in the long run than other options the client would consider independently.

Collaboration Is the Key
One of the best ways for non-attorney practitioners to learn and better understand the complexity of legal strategies is to collaborate with respected trust and estate attorneys. Regularly meeting as a group of like-minded specialists and sharing information, case studies and scenarios will both support and enrich each participant’s knowledge base. Each specialist in the collaborative team will be better prepared and able to provide context to help his or her clients. For instance, if a client has a special needs child, there are distinct provisions, trust structures, and a process to manage assets in a qualified plan to protect the child. What if the client wants to know about Medicaid benefits and is worried about doing something that results in the child not qualifying for those benefits? By collaborating with trust and estate attorneys and learning more about this issue, the advisor is better able to lead the client and offer assurances about an optimal solution.

Like a sports team, every player in the client’s financial life has a specific role to play. When they do it well, it results in a formidable winning combination. When the issues a client has are identified and understood, non-attorney practitioners can help the client take the first step in an estate planning strategy.

What is important to a client is important to you. By helping educate and create informed consumers, clients are better able to understand their needs, solutions, and the value received. Each practitioner on the team (e.g., the financial advisor and the estate planning attorney) can provide specific and understandable guidance.

For professionals’ use only. Not for use with the general public.

Warning: What You Don’t Know About Income Tax Basis Could Hit Your Bottom Line

Posted on April 1, 2014

Income tax basis may not be the most exciting topic to read about. However, it is a critically important topic to anyone who owns significant assets. Gaining an understanding of the basics of basis is a way to avoid costly mistakes.

The Real Meaning of Basis
According to IRS Tax Topic 703, your basis “is generally the amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.”

In plain English, basis means the cost you paid for an asset, plus any amount you paid to improve the asset, less any deductions you have taken against the asset. This means that your basis is used to determine the amount of capital gain or loss to report on your income tax return when the asset is sold.

Lifetime Gifts: A Basis Disaster Waiting to Happen
Thoughtful estate planning requires an understanding of when and how basis can change. You should always consider that the benefit of giving away assets during your lifetime may be offset by the carryover basis that your donee will receive. For example, if you decide to gift to your daughter that low basis AT&T stock or a lake house that has been in the family for years, then that gifted property will retain its low basis in your daughter’s hands. In other words, your basis is transferred to your daughter and becomes her basis. Unfortunately, this also means that there will likely be significant capital gains when your daughter sells the property you gave her.

Bottom line: Gifting low basis property during your lifetime may not be the most tax efficient way to place the property into your daughter’s hands. In the alternative, passing the property to your daughter after you die will give her a “step up” in basis to its fair market value as of the date of your death. This makes sense if your estate isn’t taxable for state or federal purposes and your heirs are likely to sell the inherited property shortly after your death instead of holding on to it for years into the future. Of course, you will have to consider whether your estate is likely to grow in value to become subject to estate tax at your death, or if there is any possibility that the estate tax exemption (presently $5,340,000) will become less significant in the future due to inflation or legislative action.

To avoid a basis disaster, if you’re considering gifting that low basis stock or house to your children or other beneficiaries, please contact us before you do.

AB Trusts – Do You Need to Get Rid of Yours?
For married couples, basis has become more important now that portability of the federal estate tax exemption has been made permanent. In simple terms, “portability” means that when the first spouse dies, the surviving spouse can claim the deceased spouse’s unused federal estate tax exemption and add it to his or her own exemption.

For example, if Fred dies in 2014 and none of his $5.34 million exemption is used, then his wife, June, can add Fred’s $5.34 million exemption to her $5.34 million exemption so that June now has an exemption equal to $10.68 million. All property passing to June from Fred’s estate, revocable trust, or by right of survivorship will receive a full step up in basis to the fair market values as of Fred’s date of death. Subsequently, when June dies her beneficiaries receive a full, second step up in basis to the full fair market value as of June’s date of death.

Let’s consider another possibility. What if Fred and June have a typical 1990s estate plan, which uses “AB Trusts” (also called “Marital and Family Trusts” or “QTIP” and “Bypass Trusts”) to ensure full use of both spouses’ federal estate tax exemptions?

Back in 1999, the federal estate tax exemption was only $650,000. Using our scenario with Fred and June, if Fred and June were lax and neglected to update their estate plan and Fred dies in 2014, then not only will June be stuck with AB Trusts that were drafted using decades old planning priorities, but their heirs won’t receive a step up in basis for the assets remaining in the B Trust when June dies. Instead, they will inherit the B Trust assets with the basis calculated as of Fred’s 2014 date of death. In some cases, the lack of a step up for the B Trust assets may not make a big difference due to stagnant asset values or the enhanced asset protection opportunities that may be available for B Trust assets.

If you are married and your estate plan is more than a few years old, please give us a call so that together we can determine if an AB Trust plan still makes sense for you and your family. We may be able to revise your existing estate plan to take advantage of the good features of AB Trust planning while gaining the benefits of an additional step up in basis.

Beyond the Basics – Advanced Basis Planning Opportunities
Moving beyond the basics to some advanced planning opportunities, if you have low basis stock or other property that you are eager to sell, but would prefer not to take the immediate tax hit, here are some options to consider:

You can enter into an installment sale for the low basis property which spreads the gain over a number of years and avoids running your income up the AGI ladder
You can fund a Charitable Remainder Trust (CRT) with low basis property which achieves the following:

Perhaps you have some low basis property with sentimental value (example, that AT&T stock or lake house you inherited from Aunt Betty). If you’re concerned about gifting such property directly to your children or other beneficiaries because you fear they may not share your personal interest in the property and will sell it rather than keep it, then a number of different trust structures can be used (preferably with a non-family member as the trustee) to ensure that your wishes will be carried out.

The Bottom Line on Basis
While it’s not a particularly glamorous concept and it can be confusing at times, basis remains a critical factor in any estate plan. Failing to update one’s estate plan or ignoring a low cost basis when property is gifted or sold can lead to disastrous tax consequences. So before you gift or sell that AT&T stock you inherited from Aunt Betty, give us a call first. We are here to answer all your questions.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.