Estate Planning Like a Billionaire

Bloomberg has this fascinating article exploring grantor retained annuity trusts (GRATs) and grantor retained income trusts (GRITs) and how they are used by very wealthy business owners to pass assets to the family without incurring estate or gift taxes. (Longtime readers may recall our discussion of Mitt Romney’s large scale estate planning for his family’s estimated $750 million fortune.) Many estate planning attorneys and accountants make a sport of devising creative methods to help clients save money and pass their wealth on to future generations. The ideas aren’t illegal or unethical, they simply utilize gaps in the IRS Code that Congress and/or the Treasury haven’t solved that yield big savings to clients when multiplied by millions of shares in a given company. Estate planners are careful when practicing on the cutting edge of tax law to gauge how much risk the client is willing to take on (e.g. whether the IRS will void a transaction and send the client a tax bill), how much money is at stake, and how reliable/tested a technique is. While the estate planning techniques discussed in the Bloomberg article have been blessed by various authorities (the IRS, the Tax Court, or others), many advanced trust or tax techniques are in a legal grey area – we know X is illegal and we know Y is OK, but what about something between X and Y?

In law school, the first day of estate planning class with Prof. Martin Dickinson, he told us a story about a family business in a small town where a father gave his wife and each of his 4 children a 20% stake in the family business (worth about $5,000 each at the time, the annual gift tax exemption) in 1953. 60 years later, that family business is called Wal Mart and each 20% stake is worth $20 billion. So $100 billion was transferred without estate or gift tax liability. Sam Walton relates the story in his autobiography Made in America and credits his fraternity brother and banker, R. Crosby Kemper Jr., of UMB Bank with helping him develop the business. Here’s Bloomberg’s visual of some of the tricks of the estate planning world.

Inheriting in trust is better than inheriting money in your individual name, as it protects your inheritance from lawsuits, creditors, and divorcing spouses, among other unpleasant life surprises. Inheriting in trust using a discretionary trust provides asset protection. Asset protection uses a separate entity (e.g. a trust or LLC) to hold an asset and protect it from your creditors, divorcing spouses, spendthrift kids, or others. Asset protection trusts are not allowed under Kansas law (see K.S.A. 33-101), but Kansas and Missouri residents can use a Missouri trust to protect assets for generations. Missouri (unlike Kansas) welcomes dynasty trusts – irrevocable trusts designed to pass wealth across families for generations – and allows them to last indefinitely. For clients who anticipate inheriting over $400,000, we recommend a Missouri inheritor’s trust. An inheritor’s trust allows you to protect the assets and keep them off your balance sheet for tax purposes (so you don’t have to worry about estate, gift, or generation-skipping taxes) while having the assets available for your use and enjoyment.

My firm has experience working with individuals and families to serve their business, estate planning, and nonprofit/charitable/philanthropic needs. I enjoy working with a variety of clients – ranging from single young professionals with minimal assets to multimillionaire business owners with complex trusts. My firm has strong relationships with local and national trust companies to help administer all types and ranges of trusts. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, including a Walton GRAT, a GRIT, or other sophisticated trust planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

IRS CIRCULAR 230 Disclosure: Unless expressly stated otherwise, any U.S. federal tax advice contained in this blog post or links is not intended or written by Johnson Law KC LLC to be used to avoid IRS or other tax penalties, and any tax advice cannot be used to avoid penalties that may be imposed by the IRS.

(c) 2013, Stephen M. Johnson, Esq.

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The Family Bank

CNBC has this interesting article highlighting a trend where wealthy family members give large amounts of cash or other items to family members (children, grandchildren, extended family, etc). While gifts can be a great tool in the estate planning repertoire, they can also create tax issues for gifts over $14,000/year (see this post with advice about gift giving for couples and singles), dependency issues (“These good intentions may be creating generations that are disabled when it comes to financial responsibility” and see The Millionaire Next Door (1998) (recommending not giving children homes in neighborhoods beyond their budget)), and other problems. Instead of giving family members cash, consider paying tuition for college classes, investing in a relative’s small business venture (assuming a well-developed business plan exists), offering to match their IRA/Roth IRA contribution (to promote good savings and retirement planning habits), hiring them to work in your family business (create a job and help them learn the value of hard work and diligence), or making them a trust beneficiary (trusts can include “strings” about beneficiary ages, completion of education, not being addicted to drugs or alcohol/living a risky lifestyle). The biblical book of Proverbs, part of the Wisdom literature of Judaism and Christianity, has much to say about money and wise stewardship, including “lazy hands make a man poor, but diligent hands bring wealth” (Proverbs 10.4), “all hard work brings a profit, but mere talk leads only to poverty” (Proverbs 14.23), “the plans of the diligent lead to profit as surely as haste leads to poverty” (Proverbs 21.5), “the borrower is servant to the lender” (Proverbs 22.7), and “a generous man will himself be blessed, for he shares his food with the poor” (Proverbs 22.9).

My firm has experience working with individuals and families to serve their business, estate planning, and nonprofit/charitable/philanthropic needs. I enjoy working with a variety of clients – ranging from single young professionals with minimal assets to multimillionaire business owners with complex trusts. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

(c) 2013, Stephen M. Johnson, Esq.

Good Estate Planning – How to Prevent Disputes

The WSJ has this helpful article with tips on how to prevent estate disputes. Among their tips:

(1) talk with your family,

(2) write a memorandum,

(3) unequal treatment after death means family discord,

(4) hire a professional executor, and

(5) share your values.

In my practice, I’ve seen each of these techniques work well for individuals or families doing estate planning. I’ve also worked on numerous estate and/or trust litigation cases where major disputes arose because people didn’t communicate (and the only winners in estate or trust litigation are the lawyers who get paid by the hour to go to court). Kansas and Missouri law both include provisions for incorporating a written memorandum into your will or trust (a/k/a a separate personal property list) – see K.S.A. 59-623 and V.A.M.S. 474.333 – and I encourage all my clients to make a written memorandum at their convenience to supplement their will’s instructions to their executor and/or their trust’s directions to their trustee.

My firm has experience working with individuals and families throughout the business and estate planning processes. I’ve enjoyed working with clients ranging from single young professionals who want to plan for the future to business owners with complex trusts and tens of millions in assets. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

(c) 2013, Stephen M. Johnson, Esq.

Supreme Court Applies Valuation Misstatement Penalties

The U.S. Supreme Court unanimously decided this morning, per Justice Antonin Scalia‘s pen, that an IRS penalty applies for misstating a value on property (U.S. v. Gary Woods, 2013), reversing the Texas-based federal 5th Circuit Court of Appeals. Mr Woods and his employer, Mr McCombs, participated in an income-offsetting tax shelter in the 1990s marketed to high income earners. The tax shelter used a complicated series of investments and partnership interests to reduce their income for tax purposes. The district court found their partnership a sham – not surprising, since partnerships or corporations must have a legitimate business purpose, and avoiding taxes isn’t a legitimate business purpose. (Partnerships, corporations, or LLCs with legitimate business purposes are great for streamlining taxes, but the IRS doesn’t allow shams just to lower the tax bill. Lowering your taxes can be the icing, but you need a cake underneath the frosting, not just a pile of frosting you dub a “cake.”) But the courts wrestled with interpreting the IRS Code: the taxpayers had misstated property values. Could the IRS penalize them for misstating property values (e.g. “you lied about the value, and now owe a penalty for your dishonesty”), or would the IRS say “oops, you wrote down the wrong number, just pay us the difference”? The Supreme Court decided 9-0 that the IRS could penalize them for misstating the property value. The moral of Woods is the IRS can exact penalties for misstating property values, so be sure you have accurate appraisals and carefully prepare or review your tax filings. While Woods has some nice statutory interpretation quotes that legal eagles will enjoy (Justice Scalia has strong views on interpreting texts and statutes that often surface in scathing and witty dissents on various cultural issues, and is a lively writer and speaker – see A Matter of Interpretation (1997), Making Your Case (2008), and Reading Law (2012)), it’s not clear that Woods will have much impact beyond deciding that the IRS can penalize misstatements in property value.

My firm has experience working with individuals and families throughout the business and estate planning processes. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

IRS CIRCULAR 230 Disclosure: Unless expressly stated otherwise, any U.S. federal tax advice contained in this blog post or links is not intended or written by Johnson Law KC LLC to be used to avoid IRS or other tax penalties, and any tax advice cannot be used to avoid penalties that may be imposed by the IRS.

(c) 2013, Stephen M. Johnson, Esq.