Dynasty Trusts: A Great Estate Planning Tool

The WSJ has this useful perspective on dynasty trusts and inheriting in trust. Dynasty trusts enable families to take care of future generations and ensure their philanthropic and business legacy while protecting hard-earned wealth from creditors, divorcing spouses, and other potential money drains. My firm counsels Kansas and Missouri clients to use Missouri dynasty trusts to help achieve their estate planning goals.

My law firmJohnson Law KC LLC, has experience working with individuals and families to serve their business and estate planning. 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 advising on trustee removal or other fiduciary litigation, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

(c) 2014, Stephen M. Johnson, Esq.

 

 

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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.

Settling Large Estates

The NY Times has this interesting article about an estate and trust litigation settlement that has been reached in the Huguette Clark case in New York. Ms. Clark, who died in 2011 at age 104, leaving behind a roughly $300-500 million estate, elected to be a recluse for much of her adult life. Her story is told sympathetically and even-handedly by the recent book Empty Mansions (2013). (The title comes from a series of news stories about her mansions in Santa Barbara, CA, New York, and Connecticut which were left untouched and sat vacant for decades) Settling the estate was a wise decision by the various parties involved: ”Both the family and the beneficiaries had reasons to settle. Rolling the dice at a trial can mean losing everything. Both sides had already spent a great deal on pretrial research and legal fees. And a trial would be an exhausting endeavor, expensive for everyone, last weeks or months.” Empty Mansions, 345

 

The legal dispute over Clark’s estate arose because she executed 2 wills a few weeks apart in 2005: 1 Will left most of her estate to her surviving relatives (distant cousins, nieces, nephews), and another Will created a foundation in the Santa Barbara mansion and left large gifts to her healthcare providers, attorney, accountant, and mostly excluded her family. The distant relatives weren’t as concerned about inheriting part of her fortune as they were about the apparent manipulation of her by doctors, nurses, accountants, attorneys, and others, who took advantage of her generosity for private lucre. (More about those issues in future posts.) Still by all accounts, Ms. Clark ”lived a surprisingly rich life of love and loss, of creatively and quiet charity, of art and imagination. Though the platitude – money can’t buy happiness – may be comforting to those who are less than well heeled, great wealth doesn’t ensure sadness either.” Empty Mansions, 353.

Huguette was a daughter and an heir of Sen. W.A. Clark, a copper baron of the Gilded Age whose wealth was of a similar magnitude to Rockefeller, Carnegie, Mellon, and other Gilded Age business owners. Unlike his Gilded Age contemporaries, Sen. Clark did not due smart estate or business succession planning: ”The W.A. Clark business empire was not built for longevity, collapsing soon after its founder handed it to his children. While his Gilded Age contemporaries typically operated through hierarchies of executives and managers, creating vast corporate entities, W.A. ran his companies as essentially sole proprietorships, which he ruled autocratically. Having attended to every detail of his companies personally W.A. failed in succession planning.” Empty Mansions, 142.

One of her distant relatives summed up the issues she faced as the steward of a large estate: ”I think having such wealth can lead some people to have a lack of self-worth because of not having developed a lucrative career of their own or even having investigated their own potential. Having an overabundance of wealth can make people insecure around others who have far less than they do, since the former might wonder if potential partners or even friends are ‘only’ after them for their money. Well-meaning people of excessive wealth can feel anxious about the lack of perfection of charities they support, and about the fact that even as willing patrons they are powerless to obliterate suffering – all the while knowing that any small amount of money that they might spend on themselves is still enough to change or even save some lives. Wealth can lead to guilt over the unfairness of people working endlessly for them who have never been included fully into the family. In sum, having immense wealth can lead one to feel isolated and to have a false sense of being special.” Empty Mansions, 328 – 329.

Look for more posts soon on the Huguette Clark saga and lessons we can all learn from her story. In the meantime, if you need an experienced attorney to serve your estate planning needs (anything from a simple will, living will, and power of attorney, to complex business and tax planning with dynasty trusts for multiple generations), call my firm (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient, free consultation. My firm is also experienced handling probate and trust administration – ensuring your Will proceeds smoothly through probate, or that your Trust works seamlessly to avoid probate and ensure your legacy for your family, business, and favorite charities. My law firm, Johnson Law KC LLC, can serve you or your family’s estate planningasset protectionelder law, or business needs, . My firm looks forward to serving you and your family with reliable, friendly experience and counsel at an affordable cost. One valuable lesson for us all from Huguette Clark’s life is don’t leave your legacy and your family’s inheritance at the mercy of a court settlement.

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

Is New York “Offshore?”

The NY Times has this fascinating article about the recent corporate tax controversy of large global companies parking money in international holding companies that have domestic bank accounts or investments. But poof (now you see it; now you don’t) – by tax accounting magic, the money’s held internationally. America has the highest corporate tax rate in the developed world –  35%. Some other countries, like Ireland, have much lower tax rates, so having the money held by an Irish subsidiary in a New York bank account yields a substantially lower (say 13%) tax rate.

While offshore bank accounts (for individuals or corporations) are often discussed in political terms, they’re a bipartisan issue. While companies some might view as conservative do it (like oil and gas companies), so do seemingly more moderate or even liberal giants like Microsoft, Google, and Apple. (A few months back, Apple passed ExxonMobil as the biggest company by market cap – all those iPhones, iPads, and iPods everybody loves fueled its rise to the coolest big business on the planet.) And wealthy folks of all political stripes like Mitt Romney, Al Gore, Terry McAuliffe, and Penny Pritzer have offshore accounts or investments. Why? Lower tax bills. Whether you think offshore holdings are great or terrible, the math tells the story.

The unfortunate moral of the story is the obscene complexity of America’s tax law – call it the lawyers’ and accountants’ full employment act. Most Americans, whether conservative or liberal, favor a less complex IRS Code. Meanwhile, if my law firm, Johnson Law KC LLC, can help you or your family with your personal estate planning or small business needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com) for a free consultation.

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

Marriage and Taxes

You’ve probably seen news stories about the Supreme Court arguments this Tuesday and Wednesday in the gay marriage cases, Hollingsworth v. Perry and Windsor v. United States. This blog doesn’t take political positions, but the Windsor case presents an interesting marriage and tax question. Windsor involves a lesbian couple who were legally married in New York, where one of the spouses died, and the surviving spouse tried to claim a marital deduction for estate tax purposes. One of the federal tax benefits to being married is that the surviving spouse can claim a marital deduction on the estate tax. The government denied the marriage tax benefit in Windsor because under federal law (the Defense of Marriage Act (1996) (“DOMA”)), marriage is defined as between 1 man and 1 woman, so a lesbian couple isn’t married under federal law. So Ms. Windsor, the elderly widow from New York, doesn’t get the marriage tax benefit, even though she was legally married under New York law (marriage is a state law issue, and New York allows same-sex marriage). Ms. Windsor sued the government, arguing that DOMA is unconstitutional, because it prevents her from receiving the tax benefit she would get if federal law recognized her as legally married (like New York’s law did).

So does Ms. Windsor get her tax benefit, does DOMA’s marriage definition fall, or will something else happen? We will know by the end of June, when the Court issues its opinions. Ms. Windsor’s case may well join the annals of tax law stories.

If my office, Johnson Law KC LLC, can help you navigate the complex labyrinth of tax law and estate planning, give me a call (913-707-9220) or email (steve@johnsonlawkc.com) for a convenient free consult.

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

Gift Tax Traps

The WSJ has this helpful article, entitled “Gift Taxes: What Your CPA Doesn’t Know” about potential gift tax traps. The article helpfully recommends having your CPA and your attorney collaborate on gift tax returns. Specifically, the article zeroes in on reporting large gifts of real estate, business interests, or other non-routine gifts of stocks and bonds.

The gift tax and generation-skipping transfer (GST) tax are complex estate planning issues. If my office, Johnson Law KC LLC, can help you or your family navigate these challenges this tax season, or work with your CPA to review returns, call (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient free consult.

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

Preparing Your Kids for an Inheritance

The WSJ/Barron’s has this fascinating article about the new $5.25 million per person lifetime gift tax exemption that Congress passed as part of the deal to avert the fiscal cliff. But the question that arises, especially as some young, wealthy heirs and heiresses’ antics grace the tabloid and Internet headlines: can a child properly handle their inheritance? If you give your child $5 million, will they save and invest it wisely, or will they spend it frivolously and waste your hard-earned wealth and financial legacy to them? This age-old issue is nothing new – there’s a non-tax reason that custodian bank accounts exist for minors, that trusts are popular, that savings bonds, CDs, and 529 college savings accounts exist – parents and grandparents need to be able to shepherd the money their children and grandchildren will receive. Yes, a gift is giving away money without formal strings attached – not reserving some right to take it back if a financial rainy day comes along, if your child wastes the money on things you don’t approve of, or if the child turns out not to have any financial or investing sense. But legal techniques exist to help protect the gift while your child learns how to work with their inheritance.

If the economic downtown hit your portfolio like high tide hitting a beautifully crafted sand castle on the beach (as it impacted most people’s hard-earned investments, savings, and home equity), or if you’re still working to build up wealth as the economy slowly recovers, you may be looking at smaller gifts for family members. Maybe  you anticipate giving tens or hundreds of thousands to loved ones, not millions. The same principle still applies – can you child or grandchild handle getting a check for $5,000, $10,000, $100,000?

Parents and grandparents need to talk with their children and grandchildren about money, investing, saving, and inheritances. It may not be an easy or fun talk and it might be awkward at first, but it’s a lot easier to discuss now than when you’re gravely ill or when your family is trying to clean up a messy estate after you’ve died. Look for some tips on how to inherit and handling an inheritance soon on this blog. In the meantime, if I can help you or your family with your estate planning, small business, or asset protection needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com). At Johnson Law KC LLC, we’re here to serve your needs – now and for many years to come.

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

Happy New Year: The “Fiscal Cliff,” Your Taxes and Estate Planning

Happy New Year! While the nation technically went over the “fiscal cliff” at 12:01 am Tuesday morning, the U.S. Congress has reached a deal to retroactively avert the fiscal cliff crisis and the bill has passed the House and Senate. Here’s the scoop:

  • Portability survives – you can use your deceased spouse’s unused estate tax exemption. Using portability requires filing an federal estate tax return (even if no estate tax is owed) and careful tax planning with your attorney.
  • Estate and gift tax exemptions are $5.25 million per person (inflated adjusted). Using portability, a married couple can give their children $10.50 million. The maximum estate tax rate is 40% on estates over $5.25 million. See Sec. 101 (c)(2) (page 11) of the Senate bill for exact estate tax rates. See Sec. 101(c)(3)(A) (estate and gift transfers after 12/31/2012).
  • Annual gift tax exclusion is now $14,000 per person/year ($28,000 per couple/year), as the IRS announced an inflation adjustment in November 2012.
  • Generation skipping tax exemption is $5.25 million per person. See Sec. 101(c)(3)(A) (generation skipping transfers after 12/31/2012).
  • Grantor income tax trust rules the same. So intentionally defective grantor and beneficiary defective trusts (IDGTs and BDITs) are legal wealth transfer techniques for estate and business planning. These trusts allow parents to transfer wealth, businesses, farms, and other assets to their families without the assets being included in the parents’ estates, while being income taxable to the grantor or the beneficiary, depending on the trust’s design.

The fiscal cliff deal also includes new income tax rates, capital gain tax rates, and other tax provisions of interest to individuals, couples, small business owners, farmers, and ranchers. Individuals earning more than $400,000 per year, or couples earning more than $450,000 per year, should contact their accountant immediately on these issues. Forbes has this helpful article on how the fiscal cliff deal affects various taxes, IRAs, charitable deductions, and other planning considerations.

If I can help you or your family with estate planning or small business or family farm transfer planning, please contact our office, Johnson Law KC LLC – call us at (913) 707-9220 or email us at steve@johnsonlawkc.com.

In reaching the fiscal cliff deal, Congress delayed until March dealing with the massive spending cuts that are required by law as part of the last budget deal (the sequestration cuts). While it seems unlikely, it’s possible that Congress will revisit some of these rules in March or add additional restrictions to existing estate planning techniques. If Congress did change these rules in March, there’s a small probability of having 2 estate tax regimes (as we did in 2010, where an estate could elect a stepped-up basis and pay estate tax, or use a carryover basis without owing estate tax).

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

To Plan or Not to Plan: Rip Van Taxes

Happy Thanksgiving! Yahoo Finance has this article about the coming “fiscal cliff” and some people’s race to do year-end estate and tax planning, while others are brushing off the tax planning opportunity and waiting to see what, if anything, Congress will do.  While the estate, gift, and generation-skipping tax exemptions are likely to be at the highest point in our lifetimes and the rates are probably at historic lows, the article  points out that maxing out your exemptions may only really matter if you’ve got $10 million of spare assets to give away in trusts. Anecdotally, many estate planning attorneys are seeing clients with $5 million+ estates setting up irrevocable trusts this year, but many middle class clients aren’t as concerned about looming tax increases. The article correctly notes that the estate tax “is not a tax on everyone, it’s a tax on people [with substantial assets] who aren’t paying attention.” Whatever you’re stance on the fiscal cliff and taxes, don’t be caught unprepared for the changes ahead like Rip Van Winkle.

So if you don’t have $5 million+ in assets, why bother with estate planning? Well, if you’re a high risk professional (accountant, architect, attorney, doctor, executive), asset protection is an issue. Maybe you’ve recently gotten married, divorced, or had a child. Or maybe you’re like most clients we work with who want to ensure their family’s taken care of and a surviving spouse and children don’t have to deal with a legal and financial mess after a loved one’s passing.

Whatever your estate planning motivations or needs, we can help. Our office, Johnson Law KC LLC, has years of collective experience doing estate planning, ranging from simple wills for individuals and young couples to complex dynasty trusts and advising on how best to transition the farm or family business. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) and we’ll schedule a convenient appointment to serve your estate planning needs.

(c) 2012, Stephen M. Johnson, Esq.

“It’s Beginning to Look a Lot Like Christmas”: Give $10.24 Million to Your Family, Tax Free

The NYT has this interesting article profiling Jonathan Blattmachr and his wife, Betsy, and their estate planning strategy. Blattmachr is one of the nation’s most preeminent estate planning attorneys and a tax law expert than many attorneys, accountants, and others read for advice on navigating the complex labyrinth that is the IRS Code. He’s a classic example of the Type A personality who immerses himself in the materials of a particular topic and then declares with certainty (often to others’ bemusement) that he’s absolutely certain if you do X, Y will occur. Most attorneys, accountants, and other estate planning professionals are smart, analytical, and risk averse; Blattmachr is the proverbial smartest guy in the room who believes (and often convinces others) that he’s devised a solution so ingenious that despite the critics’ howls and groans, it’s flawless and incontrovertible. And he’s usually right: his work holds up well under IRS attack.

Estate planning attorneys across America have been encouraging affluent clients to max out their $5.12 million lifetime gift tax exemptions before Dec 31, 2012 (since the exemption falls back to $1 million on Jan 1, 2013) (pardon the cheesy title, but clients are well-advised to take advantage of these historically high exemptions). And because of a(n IRS approved) technique called “split gifting,” if you’re married, your $5.12 million individual exemption is actually $10.24 million. So far so good, right? Well, as the article mentions, there’s an old tax law ghoul called the reciprocal trust doctrine. And the reciprocal trust doctrine says if a husband and wife set up trusts with identical terms that make each other beneficiaries and trustees, the IRS can step in and pull the plug, and tell the couple that their clever estate planning is undone and the $10.24 million gift (designed to remove assets from their estates) is now back in their estates (and taxable at the 45%+ estate tax rate). The reciprocal trust doctrine prohibits the wink wink nod nod, quid pro quo, I’ll scratch your back if you scratch mine estate planning strategy in irrevocable trusts. But there are ways around the reciprocal trust doctrine.

To avoid the reciprocal trust doctrine, attorneys vary the terms of the trusts. We (1) set them up at different times, (2) name different beneficiaries, (3) name different trustees, and otherwise vary the terms to make them materially different.

If you’re looking to set up trusts for your family and descendants, sell or transition your small business, or do other estate planning before 2013, time’s running out. Our firm, Johnson Law KC LLC, has experience advising individuals, families, small business owners, and entrepreneurs in all facets of estate planning – whether simple or complex – and we can handle your other legal needs as well. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) if we can be of service to you.

(c) 2012, Stephen M. Johnson, Esq.