Out With the Old (Tax Plan), In With the New

President-Elect Biden’s tax plan for 2021 should affect your estate planning in 2020.

President-Elect Biden’s tax proposals, as they relate to estate taxes, could have a huge impact on the estates of high net worth individuals. The current federal rules allow individuals to gift or bequeath up to $11.58 million in assets ($23.16 million for spouses) without incurring gift or estate tax. However, President-Elect Biden’s tax proposal reduces this exemption amount as low as $3.5 million for individuals. If this proposal becomes law, it could be applied retroactively to January 1, 2021.

If you (or your clients) fall into the high net worth category, now is the time to review your estate plan and consider making gifts to irrevocable trusts, adult children, etc. to take advantage of the current historically high exemption amount before it disappears. Assets such as real estate, artwork, life insurance and stock are ideal for gifting, and these gifts can be structured in such as way as to fulfill your overall estate planning goals.

President-Elect Biden’s tax proposals also include an increase in the long-term capital gains tax, so if you are considering selling real estate, artwork or any other asset that may have a low basis, you should discuss the timing of such sales with your tax advisor.

An Open Letter to ... Kristin & Jay

Dear Kristin & Jay,

Hey, listen, we get it, every relationship has its ups and downs, and sometimes divorce is the best option for the family as a whole.

While you undoubtedly have a prenuptial agreement that will determine how your assets are to be divided, there’s a good chance that it is silent as to what happens to your estates in the event that one of you dies before the divorce is finalized.  Let’s talk about that.

In most states, including Tennessee where you both live, a divorce will nullify any testamentary provision for the benefit of an ex-spouse, including the nomination of the ex-spouse as an executor or other fiduciary.  The laws of most states also revoke any beneficiary designations on securities, life insurance policies and retirement plans in favor of an ex-spouse.

However, these laws only cut off a spouse’s right to inherit when the divorce has been finalized — not while it is pending.  Which means that if either of you were to die before your divorce is finalized, the other would inherit the deceased spouse’s assets to the extent that he/she provided before filing for divorce, i.e., when you both still liked each other.  It is unlikely that either of you would want the other to inherit the bulk of your assets at this point — you probably would want them to be held in trust for your children, out of reach of your ex and any subsequent spouse he or she may have in the future.  While you cannot disinherit your spouse completely, here are some things you can do:

(1) Update your estate planning documents.

·  Remove your soon-to-be-ex and any of his/her family members as fiduciaries of your estate.  You should each remove the other executor of your estate under your Last Will and Testament, and update the trustees of the trusts for the benefit of your children as well.

·  Revoke any health care proxies and powers of attorney in favor of your soon-to-be-ex.

·  Update the guardianship provisions of your Wills.  If you no longer want your children to be raised by your ex-sister-in-law, now is the time to make the change.

·  Update beneficiary designations.  For some accounts, such as 401(k)s, you may need your spouse’s consent to remove him/her as a beneficiary, but for other accounts, such as non-retirement brokerage accounts, you can change the beneficiary to whomever you like. 

(2)  Be strategic.  In most states, including Tennessee, you cannot disinherit your spouse; even if you do not provide for each other in your Wills, the surviving spouse will still be entitled to a portion of your estate.  But there are still some things you can do to minimize your ex’s rights to your estate:

·  Joint assets often count against the portion the survivor is entitled to.  If what you own together is valued at an amount equal to or greater than what your spouse would get under the law, you can leave all assets owned in your individual name to whomever you like.

·  Cherry-pick your assets.  If you own assets that are more valuable, desirable or appreciable than others, make sure that those go to your kids and designate less desirable assets towards your spouse’s portion.

·  Waive your rights in the other’s estate.  Under Tennessee law, you cannot disinherit each other — unless one or both of you agree to be disinherited.  Depending on the balance of assets between you,   maybe you don’t care if you are disinherited by the other, especially if the deceased spouse’s assets will be held in trust for your kids anyway.

(3) Extend your plan to the next generation.  If your ex inherits your assets upon the death of one of your descendants, then you haven’t really cut him/her out of your estate plan.  For example, if a child were to post-decease you, unmarried and without children, and his/her trust provided that any property was to be distributed to his/her “next-of-kin”, then that property will end up with your ex.  Ensure that the trusts for your descendants provide that all trust funds stay in you line of descent.      

Although reality TV may be scripted, divorce is about as real as it gets.  Make sure that your divorce plan contemplates your estate plan! 

Yours truly,

Lori & Cassandra

This article represents a hypothetical for educational purposes only. Douglass Law does not purport to represent Kristin Cavalleri and/or Jay Cutler, nor does Douglass Law represent that Kristin Cavalleri and/or Jay Cutler endorses Douglass Rademacher LLP in any capacity.

An Open Letter to ... Cardi B

Dear Cardi B,

2019 has come to an end, and what a year it was for you!  Coachella, a Grammy win, a role in Hustlers and an endorsement deal with Pepsi – amazing!

With all this success, let’s take a moment to chat about your estate plan.

Your current net worth is reported at $8 million – a sweet spot in estate planning because it is below the current federal estate tax exemption amount of $11.58 million, but substantial enough to achieve other estate planning goals.  Offset is successful in his own right, so your estate plan should focus on providing for your daughter, Kulture, and anyone else you currently support or would like to take care of.

1.       Life insurance.  Think of life insurance as income replacement – in the event that you pass while you are still earning income, the life insurance proceeds will make up for what your family could have expected you to bring home.  Precisely because you are young and healthy and unlikely to die any time soon, now is the time to purchase life insurance.

2.       Trusts.  Trusts are the ideal vehicle for passing on an inheritance and creating generational wealth because they provide the beneficiaries with the benefit of the trust assets while protecting those assets from misuse by the beneficiaries or attachment by the beneficiaries’ creditors.

3.       Charitable planning.  A charitable remainder trust is a great option for ensuring that your assets are able to support certain family members as well as the charities you sponsor.  The assets in a charitable remainder trust can be used for the benefit of your family members during their lives, and any remaining assets would later be distributed to the charities of your choice.

4.       Asset Protection.  People in certain professions are more susceptible to civil lawsuits and given your run-ins with the law in the past few years, you may want to take advantage of asset protection devices, such as irrevocable trusts and/or limited liability companies.  While you cannot move assets out of the reach of current or expected creditors, you can certainly engage in asset protection planning during those times when you have no known creditors on the horizon as a legitimate estate planning measure.

5.       Guardianship.  Making sure that your estate plan provides for your family after your passing is important, but the most critical piece of your estate plan, as a parent, is nominating a guardian to care for Kulture in the event that Offset is not able to upon your death.  If you would like Hennessey, for example, to care for Kulture after your death, then you should specifically appoint her as the guardian now.

While we agree that there ain’t no runnin’ up on you, we want to make sure that there ain’t no runnin’ up on your estate plan – so let’s get it done!

Yours truly,

Lori & Cassandra

This article represents a hypothetical for educational purposes only. Douglass Law does not purport to represent Cardi B, nor does Douglass Law represent that Cardi B endorses Douglass Law in any capacity.

The Best Inheritance Parents Can Give a Child Is Their Time (and a Competent Estate Plan)

Many people consider their own estate planning for the first time when they become parents.  And while having a child certainly is not a prerequisite for estate planning, it does add a level of urgency to the process as new parents fret over how to ensure that their children are properly cared for in the event that one or both parents are not able to do so. 

However, the importance of parents having an estate plan does not diminish once one’s children reach adulthood.  The estate planning goals simply shift, from providing for the child’s immediate needs to enhancing the child’s own assets, or even setting the stage for generational wealth.

Understanding these different estate planning goals can help parents to determine the best estate plan for their needs.  

Estate Planning for Parents of Young Children

The primary estate planning goal for parents with young children is ensuring that the children will be cared for in the event that one or both parents die before the children reach adulthood.

The best way to accomplish this goal is by working with an experienced estate planner to prepare a Will that names a guardian for minor children and that provides for any inheritance to pass in a manner that is practical and protective.

Appointing a Guardian

Appointing a guardian for minor children is arguably the most important estate planning measure that parents can take.  A guardian is the person who will be responsible for raising minor children in the event that both parents die (or in the event that one parent dies and the other is unable to care for the children).  If one does not appoint a guardian for minor children, then the court will appoint someone as the guardian – and this person may or may not be the person the parent would have preferred, or even chosen at all. 

Therefore, choosing a guardian is necessary, but it is not always easy.  Indeed, choosing a guardian can be difficult, but there are certain considerations that can help parents determine the guardian who would be most appropriate:

1. Do you want your child to be raised with certain social, cultural or religious values?

2. Do you want your child to be raised in a certain geographic location?

3. Do you want your child to be raised among family members from either or both sides of the family?

4. Does the proposed guardian have the emotional and financial wherewithal to care for your child?

5. With whom would your child feel most comfortable?

6. If your first choice of a guardian is unable to serve, who would you want to serve as successor guardian?

7. Is there anyone you specifically would want to exclude as a potential guardian in the event that the individuals you name cannot serve?

The appointment of a guardian can be conditional.  For example, one could appoint Person A as guardian, but only if Person A resides in a certain geographical area, or only if Person A practices a certain religion, etc.  If Person A fails to meet these conditions, then Person B will step in as successor guardian.

Uncertainty over who to appoint as a guardian can cause delays in the estate planning process, but parents should not let indecision over a guardian derail the process altogether.  Although parents understandably feel pressure to choose the “perfect” person as guardian, they should do their best to move forward with the person who best meets their criteria at this time – they can always amend their Wills if they change their minds later.

Trusts

Determining the most appropriate structure for passing assets to children is another important step.  If one does not create a plan for how their assets will pass upon their death (via a Last Will and Testament), then state law dictates how and to whom the assets will pass. 

In New York, if you are married with children at the time of your death and you die without a Will, your assets will generally be distributed as follows: the first $50,000 will be distributed to your spouse, and the remainder will be split equally between your spouse and your children.  This distribution scheme may be problematic for many reasons. 

First, most people want their spouse to inherit all of their property, especially if the children are young or if all of their children are children of that relationship. 

Second, the law provides for children to receive their inheritance outright if they are over the age of 18, or upon attaining the age of 18.  While an 18 year old is technically an adult, most parents would agree that even the most mature 18 year old is probably too young to responsibly handle even a modest inheritance. 

Third, property will be distributed based on value, not type.  This means that your property may be distributed among your heirs in a manner that you would not have intended – for example, your jewelry may be distributed to your son, not your daughter, or family heirlooms from your relatives may be distributed to your spouse, not your children.  This also means that your heirs may become joint owners of your property – for example, your spouse may end up owning ½ of the marital home, with your children (who may not be your spouse’s children) owning the other ½.

While there is no one-size-fits-all plan, it is often advisable to include trusts for the benefit of children.  A trust is a relationship between two people whereby one person, the trustee, agrees to hold property for the benefit of a third party, the beneficiary.  Assets that are held in a trust for the benefit of children can be managed by an adult or an institution (e.g. a bank or trust company) and used to pay the child’s expenses.  When the child reaches adulthood, the remaining assets can be turned over to the adult child, or they can be held in continuing trust for the adult child’s lifetime.

Trusts for children can also be combined with bequests to a spouse.  For example, a common estate planning structure for parents who are married or in a committed relationship is for each parent to leave everything to the surviving parent in a trust for the benefit of the surviving parent and the children.  The surviving parent can use the assets from the predeceased parent to cover household expenses, including expenses related to the care of their children, and when the surviving parent passes, the remaining assets of the predeceased parent are distributed to trusts for the benefit of the children.

The value of the trusts in this example is twofold.  First, by leaving assets to the surviving spouse in trust, rather than outright, the predeceased spouse can safeguard these assets for the children’s later inheritance by (a) protecting the assets from the surviving spouse’s creditors, (b) preventing the surviving spouse from unreasonably spending down the assets and (c) ensuring that the surviving spouse does not disinherit the children from the remainder of the deceased spouse’s estate (this is particularly relevant when the predeceased spouse’s children are not also the children of the surviving spouse).  Second, by arranging for the predeceased parent’s assets to pass to the children in trust, the children will not only get the benefit of creditor protection, they will also get the benefit of the trustee’s skill in managing the trust assets.

Life Insurance

Term life insurance is a good idea for all families who rely on the earnings income of one or both parents to meet their expenses – which is most families.  Term life insurance can, at a minimum, provide income replacement for families in the event that an income earner dies unexpectedly.  Term life insurance can also provide for more than income replacement – if a family has the means to pay increased premiums for a larger death benefit, life insurance can be used to ensure that there are funds available to pay for college education, to pay off a home mortgage, or to relieve the surviving spouse from the burden of working outside the home altogether.

While many people will purchase a term life insurance policy for the parent who is a wage earner, it is important to recognize that stay-at-home parents also provide a valuable service to the family and, if they die while their children are minors, the surviving spouse will likely incur additional expenses to replace these services.  For example, a surviving spouse will have to pay for childcare, housekeeping and home management services that had previously been performed by the deceased spouse, putting an extra burden on the surviving spouse’s income.  Therefore, for some families, it may make sense to purchase term life insurance for a non-wage earner spouse as well to cover the value of the services that spouse provides to the family for free.     

Estate Planning for Parents of Adult Children

While parents of adult children do not necessarily have to consider the immediate needs of their children in crafting their estate plan, it is still important that parents consider an estate plan that complements their own unique family dynamics.

Trusts, Again

Many of the estate planning vehicles that are relevant to new parents are also relevant to parents of adult children, such as trusts.  Third party trusts, such as those discussed above, are an excellent way of leaving assets to adult children because they can protect the adult child’s inheritance from the claims of creditors.  This is particularly beneficial to adult children because, by the time the parent dies, the adult child is more likely than a minor (or even young adult) to have creditors (e.g. in the form of student loans, or an ex-spouse), or to be employed in a profession where malpractice liability is a fact of life (such as an anesthesiologist).  By placing the adult child’s inheritance in trust, the parent can ensure that inherited assets can be preserved for generations to come.

Trusts are also a key estate planning device for parents with adult children who are disabled or suffer from addiction, or who are receiving (or may in the future receive) government benefits.  First, it is a reality that not all adult children are able to handle the responsibility of even a modest inheritance – whether it is due to a physical, mental or emotional impairment, or a condition such as drug or alcohol addiction – and a trust can provide the adult children with the oversight required to ensure that an inheritance is not mismanaged or squandered.  The trustee of the trust for the adult child can be an institution, such as a bank or trust company, or an individual, such as a relative or family friend, and can work with the adult child or at their own discretion to make sure that trust assets are properly managed for the benefit of the adult child.

Second, if an adult child is receiving, or is likely to receive, government benefits, a trust is absolutely necessary to ensure that the child does not lose his or her eligibility for these benefits.  A supplemental needs trust is one kind of trust that parents can utilize.  It provides that trust assets can be used for the benefit of the adult child, but in a way that will not disrupt his or her eligibility for government benefits.     

Equality v. Fairness

For parents with young children, equal and fair are usually the same thing – to treat children fairly, assets are divided among them equally.  However, by the time children have reached adulthood, fair and equal are not necessarily the same thing.

For example, siblings from the same family may find themselves, as adults, in vastly different financial positions.  One child may be in a very comfortable financial position, while the other struggles to make ends meet.  For these siblings, is an equal inheritance a fair inheritance?  Or siblings may find themselves similarly situated in terms of finances, but one sibling has had the benefit of financial support from their parents throughout adulthood while the other has “made it” on his or her own.  Is an equal inheritance a fair inheritance in this situation?  While there is no “right” answer to the question of equality v. fairness, it is something that parents should consider when preparing their estate plan. 

The distribution of real property among adult children often implicates the tension between equality and fairness.  While the inheritance of an interest in real property may be desirable for some, it may be burdensome for others.  For example, assume that parents left a Martha’s Vineyard vacation home, in equal shares, to their two children – a daughter who lives in New York and a son who lives in California.  While the property would be very valuable to the daughter, who could easily drive up on the weekends, it may be impracticable for the son to use the vacation home with any regularity, given that he lives so far away.  The son may want the daughter to buy out his interest, but if she does not have the liquidity to do so, the son would be stuck with his inheritance tied up in the vacation home – unless he brought a partition proceeding and forced the sale of the property.  With proper planning, parents can avoid these types of problems that can arise after their deaths.

The bottom line is, estate planning is important for parents, and it is doubly important that they consult with a qualified estate planning attorney who can guide them through all the issues that can crop up, whether one’s children are young or adults.  

Is Your Estate Plan SECURE?

The SECURE Act became effective on January 1, 2020 and proposes to strengthen retirement savings by making it easier for employees to participate in retirement savings plans and to contribute to these plans for a longer period of time.

Specifically, the SECURE Act:

• Repealed the maximum age for traditional IRA contributions (previously 70 ½), provided that the contributor is still working

• Increased the age for required minimum distributions from 70 ½ to 72

• Allows long-term, part-time workers to participate in 401(k) plans

• Offers more options for lifetime income strategies

  • Raised the cap for auto enrollment contributions in employer-sponsored retirement plans from 10% of pay to 15% of pay – so if your plan at work provides auto enrollment, the amount withheld for your retirement savings could go up every year until you’re contributing 15% of your pay to your retirement savings plan

  • Allows “lifetime income investment” to be distributed from your workplace retirement plan, i.e., to another 401(k) or IRA

  • Requires “lifetime income disclosure statements” showing how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity

• Provides small business owners with incentives for starting retirement plans and makes it easier for them to do so

• Permits parents to withdraw up to $5,000 from retirement accounts, penalty-free, within a year of birth or adoption for qualified expenses

• Allows parents to withdraw up to $10,000 from 529 plans to repay student loans  

While the new law may well succeed in strengthening retirement savings, it also undoes legislation that has long benefited the ultimate beneficiaries of the savings plans – legislation allowing for the “stretch”.

Retirement savings plans are typically distributed upon the death of the saver to those named as plan beneficiaries by the saver.  If the beneficiary is the saver’s spouse, then the beneficiary can simply “roll over” the saver’s retirement savings plan into his or her own.  And previously, if the beneficiary was someone other than the saver’s spouse – an adult child, for example – the beneficiary was required to take (and pay income tax on) distributions from the retirement savings plan immediately, but could “stretch” the required minimum distributions over his or her projected life expectancy, allowing him or her to limit the income tax due by reason of the savings plan to the lowest amount possible.

However, the SECURE Act eliminates the “stretch” for most beneficiaries (exceptions include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participate) and requires the beneficiaries of a retirement savings plan to withdraw all of the funds within ten years.  This is problematic from an estate planning perspective because it thwarts a primary goal of estate planning – tax efficiency – by requiring the beneficiary to incur potentially significant income taxes within a relatively short period of time.

However, there are estate planning strategies that can somewhat counteract the negative effects of the SECURE Act.

1. Split primary beneficiaries.  Assume, for example, that the primary beneficiary of your IRA, valued at $4 million, is your spouse and your contingent beneficiary is your daughter.  Upon your death, your spouse “rolls over” your IRA into his/her own IRA, valued at $1 million.  When your spouse later dies, having not spent down the combined IRA, your daughter inherits $5 million in retirement savings that she must withdraw over ten years – to the tune of $500,000 per year, all of which is subject to income tax. 

   However, if your spouse will not need your retirement savings to fund his or her retirement (and that’s a big “if”), consider naming your spouse and your contingent beneficiary as joint primary beneficiaries.  In the above example, if you name your spouse and daughter as joint primary beneficiaries, your daughter would inherit $2 million in retirement savings upon your death and would only be required to withdraw and pay income tax on $200,000 per year.  When your spouse later dies, your daughter inherits the $3 million balance, but the ten-year clock has been reset and, ideally, there will be no overlap between her $200,000 required minimum distributions from your IRA and her $300,000 required minimum distributions from your spouse’s IRA.  In this way, you can construct a “stretch,” albeit not over your daughter’s projected life expectancy.

2. Use your retirement savings for charitable giving.  Many people incorporate charitable giving in their estate plans and, to get the most bang for their charitable-income-tax-deduction-buck, they will earmark assets for charities that would otherwise be subject to income tax.  Retirement savings plans are often earmarked for charitable giving – now even more than ever.  By naming a charity as the beneficiary of your retirement savings plan you can ensure that the entire amount is passed on without diminishment due to income tax liability.  Your heirs can then inherit other assets that are subject to little or no income tax.  In this way, the negative tax implications of the SECURE Act can be neutralized.

3. Convert your IRAs to Roth IRAs.  Unlike a traditional IRA, a Roth IRA is a post-tax retirement savings account – meaning that the saver, not the ultimate beneficiary, pays income tax on the funds.  If you have retired and find yourself in a low income tax bracket, it may be advisable to convert your traditional IRA to a Roth IRA and pay the income tax now.  The result will be that your beneficiary – who may be in a high income tax bracket – can inherit the funds tax free, even if there has been interest growth since the conversion.

In sum, the SECURE Act has changed the game when it comes to estate planning with retirement savings plans.  If you have retirement savings, which many of us do, it is important that you consult with your T&E attorney to make sure that you are able to pass these savings on in a tax efficient manner. 

Work It: Estate Planning for Entrepreneurs

Estate planning is important for everyone, but for entrepreneurs and small business owners, who may be heavily involved in the day-to-day operations of the business and may have a significant portion of their assets tied up in the business, a thoughtful estate plan is absolutely necessary.

Estate Planning Essentials

Most people think of estate planning in terms of how their assets will be distributed at death, but business owners should also think of estate planning in terms of how their business will continue (or be wrapped up) in the event that they die or, perhaps more importantly, become disabled.  Indeed, the demands of a business do not necessarily halt when the business owner does, and it is critical to put into place a plan that will allow someone else to take over the reins of the business (even if just temporarily) to prevent a collapse of the business altogether.  

The first standard estate planning document that every business owner should have is a power of attorney.  A power of attorney is a document that authorizes one person (the “agent”) to act on behalf of another person (the “principal”).  Every business owner should have in place a power of attorney authorizing an individual familiar with the business to step into the business owner’s shoes in the event of the business owner’s disability to ensure that the business can continue to operate on a day-to-day basis.  The power of attorney should authorize the agent to do things like sign payroll checks, complete transactions initiated by the principal, enter into agreements with vendors and access the business’s digital assets (i.e. company e-mail, website, social media).  However, a power of attorney is only effective during life; at the moment of the principal’s death, the agent is immediately stripped of all authority under the power of attorney and cannot transact any business on the principal’s behalf.

A revocable trust picks up where the power of attorney leaves off.  A revocable trust is a trust that an individual (the “grantor”) creates and funds during her life, and which sets forth provisions for how the trust assets should be handled upon her death.  The grantor of a revocable trust is typically the sole trustee and the sole beneficiary of the trust, meaning that, during her life, the grantor has virtually unfettered access to the trust assets and can essentially treat them as if she owns them outright.  A revocable trust is also, obviously, revocable, and the grantor can amend or terminate the trust at any time.  Upon the grantor’s death, the successor trustee (who is someone the grantor has selected) is instantly vested with authority over the trust assets and can administer them pursuant to the provisions set forth in the trust agreement.

Thus, a revocable trust is like a last will and testament in that it provides for the administration and distribution of one’s assets upon one’s death.  But it is unlike a last will and testament in that it avoids the probate process altogether; meaning that, upon the grantor’s death, her successor trustee can act immediately and needn’t wait for a court to admit the last will and testament to probate which, in New York, can take many months and thousands of dollars.

Avoiding probate by means of a revocable trust is of particular value to business owners for several reasons.  First, assuming that the business owner has funded the revocable trust with her interest in the business, her successor trustee will be able to seamlessly assume responsibility for the business and ensure that it continues (or is wrapped up) without delay.  Second, a revocable trust ensures that private information relating to the business remains private.  To be given effect, a last will and testament must be filed with the court, which means that it becomes a publicly available document, and the probate process often requires a very detailed (and, again, public) disclosure of assets.  But because a revocable trust is not filed with the court, information relating to the trust’s assets (e.g. the business) are disclosed only to the beneficiaries of the trust.     

In addition to planning for the continued administration of the business, business owners must also plan for the financial needs of their families in the event that they die or become disabled.  Many business owners invest a significant portion of their personal assets in their businesses, and these assets may not be so easily or expediently pulled out of the business to support the business owner’s family if she is no longer able to provide financial support.  Therefore, business owners should consider obtaining disability insurance and/or life insurance to ensure that there are sufficient funds available to provide for their families in the event of their disability or death.       

Succession Planning

For those business owners who intend for their businesses to live on after their own deaths, succession planning is key.  The bones of a succession plan are typically set forth not in the business owner’s personal estate planning documents, but in the operative document of the business; for example, in the bylaws of a corporation, the partnership agreement of an LP or LLP and the operating agreement of an LLC.  As a result, all of the owners of the business must be in general agreement as to how the business will be owned upon the death of a current owner.

If the operative document is silent as to ownership of a deceased owner’s share of the company, then the default is that the deceased owner’s share becomes part of the deceased owner’s estate, and passes to the deceased owner’s heirs.  Obviously, this may be problematic – not only for the surviving owners who now find themselves in business with someone they had no intention (or possibly desire) of being in business with, but also for the deceased owner’s heirs, who may have preferred to receive the value of the interest in the business, not the interest itself (which may not be marketable).

Consider the following example:

The year is 1968 and (in the fictional world of “Mad Men”) Sterling Cooper & Partners has opened its doors for business.

The founding partners of Sterling Cooper are Ted Chaough, Jim Cutler, Don Draper, Roger Sterling, Pete Campbell and Joan Holloway.  Assume that Sterling Cooper is a New York limited partnership, that each partner owns an equal 1/6 partnership interest and that the partnership agreement is silent on the issue of what happens upon the death of a partner.

Tragically, before the first anniversary of Sterling Cooper, Don Draper and Roger Sterling are killed in a car accident on their way to schmooze a new client.  Neither Don nor Roger had a last will and testament at the time of his death, so New York law determines how their respective assets are distributed.

Under New York law, Don’s estranged wife and former secretary, Megan, will inherit the first $50,000 of Don’s assets, plus one-half of the remaining assets, while Don’s three children from his marriage to his first wife, Betty, will inherit the balance.  Don’s sole assets were his NYC apartment (which had only $50,000 in equity) and his interest in Sterling Cooper.  Megan sells the apartment for the $50,000 cash, and she and the children split the partnership interest equally, with Megan becoming a 1/12 partner and the children each becoming a 1/36 partner.  However, because the children are minors, they cannot legally own the partnership interests, so legal title to their interests vests in their legal guardian – Betty.

As a result, Don’s estranged wife and his ex-wife join Sterling Cooper as partners.

Furthermore, because Roger was unmarried at the time of his death, under New York law his entire estate, including his interest in Sterling Cooper, will pass to his children.  Roger has an adult daughter, Margaret, from his first marriage, and a minor son, Kevin, from a prior affair with Joan.  By 1968, Margaret has joined a cult, which takes possession of her 1/12 partnership interest, and Joan (as guardian) takes legal title to Kevin’s 1/12 partnership interest.

As a result, Margaret’s cult joins Sterling Cooper as a partner, and Joan effectively becomes the majority partner, with her 1/6 and Kevin’s 1/12.

Undoubtedly, the remaining partners of Sterling Cooper never intended to enter into business with Don’s estranged wife and ex-wife, or a cult.  And they likely never intended that any one founding partner would have a greater say than the rest.  But without a succession plan in place, they are stuck with that outcome.  Moreover, Don’s and Roger’s heirs may well have preferred to receive the cash value of their inherited interests in the business, but without necessary liquidity – and the consent of the other partners – they may also be stuck as unlikely partners.

A common succession plan often utilized by businesses to avoid these problems is the buy-sell agreement.  A buy-sell agreement provides, generally, that upon the death of a member, the remaining members will buy back the member’s interest and pay the purchase price to the deceased member’s estate or heirs.  These agreements typically set forth the price to be paid (or the method by which the price will be assessed) as well as the time period for payment.  Buy-sell agreements thus provide necessary clarity – the members know how much liquidity they will have to raise over a certain time period (and can plan accordingly, for example, by purchasing term life insurance policies on the lives of the members, the proceeds of which will be used to buy back the member’s interest) and the deceased member’s estate and heirs know how much money will be coming into the estate and when.

Another common succession plan utilized by businesses (particularly family businesses) is the designation of specific individuals who will inherit the interest.  This strategy helps to ensure that the business continues with only those individuals who are capable of (and interested in) continuing the business.  The trick to this plan is determining the value of the interest (particularly of a closely held company), so that the business owner can accurately apportion her estate assets among her heirs.

Get Organized

While estate and succession planning are clearly important, the value of simply being organized cannot be overstated.  In order to ensure that the business can be properly administered (either by winding up or transitioning to the next generation), the business owner must ensure that others can access all of the key information relating to the business.  Furthermore, it is important that the business owner’s family members and co-owners and/or successors are aware of the business owner’s general plan for how the business should be handled in the event of the business owner’s death so that there are no surprises and so that all that needs to be done can be done efficiently and effectively.

Real Property Ownership 101

Real property is the cornerstone of many Americans’ wealth, but the manner in which one acquires real property can have a dramatic affect on the owner’s ability to protect the property against the claims of creditors and to preserve the property for future generations.  As a result, before entering into any real estate transaction, it is important to understand the various forms of property ownership, and the pros and cons of each.

Sole Ownership

Sole ownership is a form of property ownership whereby an individual owns the real property outright in his or her own name.  While this form of ownership has the advantage of simplicity, it does not offer any of the built-in asset protection or estate planning features of other forms of property ownership described below.

Real property that is solely owned may be foreclosed upon by the owner’s creditors in the same way as other solely owned assets (such as bank accounts).  Likewise, upon the death of the owner, the real property becomes part of the owner’s estate, where it could also become subject to the claims of creditors of the estate before it ever reaches the owner’s heirs.

Joint Ownership

Joint ownership is property ownership among two or more individuals/entities and may take the form of tenancy in common, joint tenancy with right of survivorship or tenancy by the entirety.

Tenancy In Common

In a tenancy in common, two or more individuals/entities own distinct interests in the real property.  These interests need not be equal; for instance, one owner could own 50% of the property, one owner could own 30% of the property and one owner could own 20% of the property.  However, even if one’s share is less than that of another, each owner has the equal right to possess or use the property.  

Unlike tenancy by the entirety, tenancy in common allows for each owner to sell his or her interest in the real property without the consent of any other owner.  By that same token, creditors of an owner may take title to that owner’s interest in the real property without affecting the interests of any other owner.  Upon the death of one owner, his or her interest passes to his or her heirs, who will then become tenants in common with the surviving owners.  As with sole ownership, tenancy in common does not offer any built-in asset protection or estate planning features.

Joint Tenancy With Right of Survivorship

In a joint tenancy with right of survivorship (or “JTWROS”), two or more individuals/entities own distinct interests in the real property, but upon the death of an owner his or her interest is automatically distributed among the surviving owners.  In this way, JTWROS offers built-in estate planning because it determines ownership upon the death of one owner.  Property succession in this manner will trump the terms of a will – even if an owner specifically devises his interest in JTWROS property to a non-owner, such devise will be totally ineffective.  Furthermore, because the property passes outside of the deceased owner’s estate, it cannot be reached by the creditors of the deceased owner’s estate.    

There are four requirements – or “unities” – that must be present in order to create a joint tenancy with right of survivorship:

(1)             All owners must take possession of the property at the same time.

(2)             All owners must take title by the same instrument, such as a deed or a will.

(3)             All owners must have an equal interest in the property.  This is the case even if one of them paid for the entire property.

(4)             All owners must have the right to possess and enjoy the entire property even though he or she does not have a 100% ownership interest.

Unlike tenancy in common, creditors of one who owns real property titled as JTWROS cannot easily take title to the debtor’s share of the property; rather, a creditor could place a lien on the debtor’s share of the property, but the lien does not entitle the creditor to seize any portion of the property.  The creditor would have to sue all of the owners for partition by sale (discussed below) before he/she could recoup the amounts owed from the sale proceeds.  However, if the creditor places a lien on the property and does not sue for partition, and the debtor dies before the other owners, then the creditor’s claim against the property is lost.       

Tenancy By the Entirety

Tenancy by the entirety is a form of joint ownership that is available only to spouses and results in each spouse owning 100% of the property.  As a result, each spouse has the equal right to possession and use of the entire property, and neither spouse can transfer his or her interest in the property to a third party without the consent of the other. 

As with JTWROS, upon the death of one spouse, the surviving spouse inherits the entire property automatically – the property passes to the surviving spouse outside of the deceased spouse’s estate and cannot by reached by the creditors of the deceased spouse’s estate.  Furthermore, while creditors of one spouse can place a lien on the debtor spouse’s interest in the property, they cannot sue for partition and force the sale of the property, and if the debtor spouse dies before the non-debtor spouse, then the creditor’s lien becomes null and void.  These features make tenancy by the entirety an attractive form of property ownership for spouses.   

Breaking Joint Ownership

Tenancy in common and joint tenancy with right of survivorship may only be broken by partition.  Partition is a legal action whereby a party petitions the court to divide the property into different lots or sections.  There are two general types of partitions. The first is a partition in kind, which is the physical division of land. The court determines how to divide the property based on the ownership interest of each tenant in common. This type of partition is most appropriate where the real property consists of several tracts or acres.

The second type of partition is a partition by sale, whereby the court orders the sale of the property, even if all owners do not want to sell their interest in the property, and the directs the distribution of the profits to each owner in relation to their ownership interests.

In contrast, tenancy by the entirety may only be terminated (1) upon the death of one spouse, (2) upon the divorce of the spouses, (3) by the joint transfer of the property by the spouses to one of the spouses, to an entity created by the spouses (such as a trust or LLC) or to a third party or (4) by mutual agreement of the spouses.  Neither spouse may not sue for partition of real property owned as tenancy by the entirety. 

LLCs

Real property ownership via a limited liability company offers its own unique benefits.  A limited liability company is an entity that is similar in structure to a partnership, but with the creditor protection of a corporation.  An individual, or several individuals or other entities, can form an LLC and, in exchange for a capital contribution, each individual or entity receives a membership interest.  If the LLC then purchases real estate, none of the members would have a direct ownership interest, but they could share the use and possession of the property (depending on the terms of the LLC operating agreement) and in any net income generated by the property.

Because the members do not directly own the property, creditors cannot place a lien on the property or sue for partition.  Furthermore, the LLCs creditors generally cannot not reach the personal assets of the members.  For example, if there was a slip-and-fall accident on the property and the LLC was sued for damages, the plaintiff could only recover damages up to the value of the LLCs assets – he/she could not go after the members for any judgment amount above and beyond the assets of the LLC.

The members can agree in advance, in the LLC operating agreement, as to what will happen to the membership interest of a deceased member.  If the operating agreement is silent on this point, then the deceased member’s interest will pass to his/her heirs.

Trusts

Real property ownership via a trust can be designed to protect the real property from the claims of potential creditors while simultaneously accomplishing the grantor’s estate planning goals.  Trusts may be used in conjunction with another form of joint ownership; for example, a trust can own an LLC that owns real property, or a trust can be a joint owner of real property with other trusts, individuals or entities.

Stay True to Your School (Savings Plan)

Saving for college rivals saving for retirement as a priority for many parents.  And for good reason.  A college education is now a prerequisite for entry into American middle and upper socioeconomic classes, and as more and more students choose to apply to college, the costs intendant to higher education increase. 

These costs include not only the cost of college tuition, but also expenses associated with improving a student’s likelihood of being accepted into the college of their choice, such as private secondary school tuition, the cost of tutoring to maintain a competitive grade point average, fees for ACT and SAT prep courses and expenses relating to extracurricular activities.

Fortunately, there are some strategies that can help parents save for college while minimizing taxes.

529 Plans

529 plans are state-sponsored investment plans that are authorized by Section 529 of the Internal Revenue Code.  While these plans vary by state, there are two general types: (1) pre-paid tuition plans and (2) education savings plan. 

Pre-paid tuition plans allow parents to purchase credits at participating colleges and universities for future tuition at the current tuition rate.  Given that the cost of tuition increases at an estimated 8% per year, the cost savings of pre-paid tuition plans can be significant.  However, pre-paid tuition plans cannot be used to pay for future room and board and cannot be used to pay for tuition for elementary and secondary schools.  Furthermore, if the child chooses to attend a college that is not “participating,” the pre-paid tuition plan may only pay a small return on the original investment.

Education savings plans allow parents to invest money for future educational expenditures, with any interest earned by the plan being exempt from federal income tax (and sometimes state income tax, depending on the state) as long as the funds are used for a qualified education expense.    

Qualified education expenses are limited to college tuition, room and board, books and school supplies and technology items (computers, printers, internet service).  Secondary school tuition (up to $10,000 per year) is also a qualified education expense, but not room and board, books and school supplies or technology items relating to secondary school attendance.

In addition to the benefits of tax-deductible contributions and tax-free growth, section 529 allows a grantor to fund an education savings plan with an amount equal to five years of the annual exclusion amount without incurring gift tax – meaning that parents can front load these plans with up to $75,000 in a given year (although they would not be able to make additional contributions to the plan or the beneficiary for 5 years without incurring gift tax).  This feature of section 529 is potentially very valuable from an income tax perspective, particularly in those states that also offer an income tax deduction on 529 contributions (such as New York).  Moreover, education savings plans also allow the owner to change the beneficiary of the plan, enabling parents to maintain the tax benefits of the plan in the event that the initial beneficiary decides not to attend college.     

However, there are some pitfalls to education savings plans.  For example, if a withdrawal is made for a non-qualified expense, the owner of the plan will be liable for paying federal (and possibly state) income tax on the withdrawal, plus a 10% penalty.  As a result, parents should be sure that they are investing only what they can afford to set aside for educational expenses, because dipping into the plan for other expenses can be costly.  Furthermore, the appeal of education savings plans is greater in some states than in others.  For example, in New York, contributions to these plans are tax-deductible while in other states, such as New Jersey, they are not.

Annual and Lifetime Gifting

In addition to 529 plans, educational savings can be achieved through traditional gifting.  Minimalism (thank you, Marie Kondo) and the environmental consciousness of consumerism are becoming the trend in many households and, in an effort to reduce the amount of “stuff” in their homes, parents are now asking loved ones to give experiences – rather than possessions – to their children in celebration of birthdays and holidays.  These “experiential gifts” often include pre-paying for swimming lessons or music lessons or summer Lego camp – all things that will benefit children in their lives and, potentially, on their college applications.

Currently, individuals can make annual gifts of up to $15,000 per person ($30,000 for married couples) and lifetime gifts of up to $11.2 million ($22.4 million for married couples) without incurring gift tax.  Furthermore, individuals can make unlimited “qualified transfers” that do not diminish one’s annual or lifetime exclusion amount.  “Qualified transfers” are direct payments for tuition; for example, writing a tuition check directly to a university – even if it is in excess of $15,000 – is not a taxable gift and will not reduce one’s ability to make gifts of $11.2 million gift-tax-free during one’s lifetime.

Gifting can be structured to take advantage of both the annual exclusion and/or lifetime exclusion, as well as the rules relating to qualified transfers: one can use qualified transfers to directly pay for tuition, and annual exclusion gifts to pay other educational expenses or to fund education trusts (discussed below).  Even if this structure is not tenable for parents, it may be attractive to wealthy grandparents because it doubles as an estate planning technique – by transferring assets during one’s life, one reduces, or even eliminates altogether, the estate taxes due upon one’s death.

Education Trusts

Education trusts are an alternative to 529 plans. Annual exclusion gifts that otherwise would have been utilized on 529 plan contributions can be used to make contributions to an irrevocable trust for the benefit of the child, which can be structured to allow for more flexibility than a 529 plan.

Some of the advantages of an education trust over a 529 plan are:

• Trust assets may be invested in a wide array of investments, instead of the limited options of a 529 plan

• Trust documents can provide flexibility that allows trustees to distribute assets for “non-qualified” educational expenses, as well as for other purposes, including medical expenses, support and maintenance

• Assets can remain in trust for the benefit of beneficiaries even after education is completed, offering a level of asset protection from creditors, ex-spouses and spendthrift beneficiaries

• Trusts can hold life insurance as well as a beneficiary’s interests in other family wealth transfer vehicles (such as family limited partnerships)

Despite these advantages, education trusts do not provide income tax benefits.  The estate tax benefits of using trusts (and paying tuition and other education expenses directly) must be weighed against the loss of the income tax benefits of a 529 plan, as well as the legal and compliance costs associated with employing trusts.

At the end of the day, there are many options for parents interested in saving for college – it’s just a matter of finding the right fit for your family and your finances.

2018 Year End Estate Planning Checklist

The end of the year is unquestionably the busiest time of the year for most people, but it is important to make sure that your financial and estate planning affairs do not get lost in the shuffle.  Here is a quick checklist to help you make sure that your planning is up to date and relevant in the new year:

•      Make annual exclusion gifts (currently $15,000 per recipient) prior to December 31, 2018

  • Funding 529 Plans

  • Funding Irrevocable Trusts

  • Charitable gifts

  • Educational and medical exclusion gifts

• Retirement and Other Plans

  • Confirm employer sponsored benefits

  • Fully fund 401K, 403B or other employer sponsored retirement plans before December 31, 2018

  • Fund non-employer retirement plans such as traditional and Roth IRAs before December 31, 2018

  • Fund HSA accounts before December 31, 2018

• If older than 70½, ensure that required minimum distributions from pre-tax retirement plans have been taken

• Execute or review disability documents

  • Financial Power of Attorney

  • Health Care Proxy

  • Living Will

  • Nomination of Guardianship

• Confirm and coordinate beneficiary designations

  • Employer sponsored benefits

  • Life insurance

  • Annuities

  • Bank and brokerage accounts

• Review ownership documents (especially jointly owned property)

  • Deeds

  • Titles

  • Execute or review a Last Will and Testament or Revocable Trust

  • Current dispositive scheme (including disposition of digital assets)

  • Ensure proper selection of fiduciaries

• Consider pre- and post-nuptial agreements as part of matrimonial and estate planning, including the use of elective share waivers

• Review current life insurance to ensure the correct beneficiaries are reflected and that death benefit is sufficient

When to Call the Lawyer: Before You Say "I Do"

While those who are ready to say “I do” undoubtedly dream of a long and happy marriage, surveys show that 50% of people who say “I do” later say “I shouldn’t have.”  Which is why the one document that all married couples should have, aside from a marriage license, is a prenuptial agreement.

Prenuptial agreements have long been derided as the ultimate unromantic gesture, the proverbial “kiss of death” to a marriage before it’s even begun.  But prenups are not only a necessity in this day and age, where nearly half of marriages end in divorce, but an opportunity to make an incredible overture of love to a future spouse. 

For in a properly negotiated prenup, each party says to the other, “Even if our best intentions for the future never come to be and our marriage becomes untenable, we will still treat each other fairly, no matter what.”

What Is a Prenup?

A prenup is a contract signed before the marriage in which each party discloses their assets and agrees how these assets, and all assets acquired during the marriage, will be distributed in the event of divorce or death – yes, death.  One important feature of prenuptial agreements that many people overlook is that they are not limited to the division of assets upon divorce; they also spell out how assets should be distributed upon the death of one spouse.

Specifically, with respect to the prospect of divorce, a prenup details which assets will be deemed to be the separate property of each party and which assets will be deemed to be marital property subject to division.  It sets forth a specific scheme for distributing marital assets and will set forth the terms for the payment of debts acquired during the marriage.  It may direct the sale of jointly held property, or provide that property shall be held jointly for a certain period of time.  A prenup also determines whether either spouse will receive spousal support, or possibly a lump sum payment in exchange for spousal support.

With respect to the prospect of the death of a spouse, a prenup sets a “floor” for the inheritance rights of each spouse.  Under New York law, a spouse is entitled to at least 1/3 of their deceased spouse’s estate.  However, spouses may waive this right in the prenup, or they may add to it.  For example, the prenup could require each spouse to leave ½ of their estates to the other, or to leave their entire estate to the other, but in trust, with their children to inherit the remainder upon the death of the surviving spouse.  Thus, a prenup sets a “floor” for inheritance rights in that it sets forth the minimum that each spouse must bequeath to the other – spouses are always free to execute last wills and testaments which leave a greater amount to their spouse.

What cannot be included in a prenup?  Determinations relating to child custody and child support.  As a matter of public policy, these are issues that must be finally decided by the court at the time of the divorce.

Why You Need a Prenup

So why is it important for couples to have a prenup?  For lots of reasons.

1.                  Managing expectations.  Do you and your spouse-to-be intend to comingle your assets after you marry?  Do you intend to acquire assets jointly?  Will either of you stop working when you have children?  What do you think is a fair division of assets in the event of divorce?  Do you expect that, upon a divorce, you would pay or receive spousal support?  What do you think is a fair division of assets upon death?

These are all important questions that every couple should discuss before they get married so that they can enter the marriage with a clear understanding of their rights vis-à-vis each other, and their collective expectations vis-à-vis their assets.  This clarity provides both parties with security – if the marriage ever becomes unsustainable, each spouse knows in advance what they could expect from a divorce, and they can make an educated decision about how to proceed.  Moreover, each spouse knows what he or she will be entitled to upon the death of the other, and can plan ahead for their own financial futures knowing what they will or will not inherit.

2.                  Avoid protracted litigation.  Divorcing couples who have forgone a prenuptial agreement often find themselves negotiating their finances with a spouse they no longer like, and who no longer likes them.  This can make agreeing upon the division of assets and the payment of spousal support incredibly difficult, if not impossible.  If a couple cannot agree on these issues, then the court will hold a trial and make a determination.  But the process of negotiating a settlement or even getting to trial often takes several years and hundreds of thousands of dollars.  It is not uncommon for particularly hostile spouses to spend more money on attorneys’ fees than they ultimately recoup after trial.

In contrast, even the most litigious of spouses are limited to what they can do in court if there is a valid prenuptial agreement in place – the terms of the agreement, no matter how old and no matter how circumstances may have changed, will be enforced and the court will be involved only in the matter of child custody and child support.

3.                  Protecting your rights and interests.  Spouses have lots of rights to each other’s assets under the law, and a prenup can help to maximize these rights.  For example, instead of being entitled to 1/3 of your spouse’s estate, as discussed above, you can negotiate a larger portion.  A prenup can also protect the interests that are important to you.  For example, if there are items of personal property acquired jointly but that have special sentimental value to you, you can negotiate in the prenup that those items will be yours in the event of divorce or death.  Or, for example, if you and your spouse-to-be adopted a dog together before the marriage, the prenup could even determine who would get custody of the dog.  

Why You Need a Lawyer to Draft Your Prenup

When it comes to prenups, DIY is not an option.  Prenuptial agreements are complex documents that involve the interplay of several areas of law: matrimonial, contracts, trusts and estates, real estate, to name just a few.  You need a lawyer who is experienced in drafting these documents so that you can be sure that they are done correctly and will work the way they are intended to.  The only thing worse than not having a prenup is having a prenup has not been competently drafted.

Furthermore, a prenup is a powerful document, and the court will not enforce it unless it is convinced that both parties fully understood the terms at the time they signed it.  If the prenup was drafted by a lawyer, and if both parties were represented by independent legal counsel who advised them as to the terms thereof, then the prenup is more likely to withstand judicial scrutiny.  Steven Spielberg’s divorce is a excellent example of why you need a lawyer to draft your prenup: when the director proposed to his first wife, they infamously scrawled their prenup on a bar napkin.  Years later when they sought a divorce, the judge refused to enforce the napkin agreement and awarded the wife $100 million.

 What You Can Do If You Married Without a Prenup

Get a postnup!  Postnuptial agreements are becoming more and more common as couples come to realize the importance and utility of prenups.  Postnups make the same provisions as prenups, but are signed after the marriage.  Postnups are particularly useful for couples who may be on shaky ground but are not yet ready to throw in the towel – it can provide a sense of security in that they know what their divorce would look like in the event that they truly cannot make their marriage work.

While the conversation about prenups can be difficult for many couples, it is a necessity.  But, after you have that conversation – or even before! – make sure that you call the lawyer.

Keeping Your Ex Out of Sight, Out of Mind and Out of Your Estate: Estate Planning After Divorce

When a couple divorces, a court will dictate how they unwind their relationship and their finances, but the ex-spouses must take the initiative to reconstruct their estate plans.

It is very common for married couples to sign “I love you” wills, in which each spouse leaves everything to the other.  However, even in the most amicable of divorces, ex-spouses typically do not intend for the other to inherit all – or any! – of their property.  Under New York law, unless the will provides otherwise, a divorce will nullify any testamentary provision for the benefit of an ex-spouse, including the nomination of the ex-spouse as an executor or other fiduciary therein.  Relatedly, the law also revokes any beneficiary designations on securities, life insurance policies or retirement plans in favor of the ex-spouse. 

However, while the divorce will cut off the ex-spouse’s right to a share of the estate, it will not cut off any rights the ex-spouse’s family members may have.  For example, assume that, at some point during their 72 day marriage, Kim Kardashian and Kris Humphries executed “I love you” wills that also made provisions for members of each other’s families – specifically, Kris’s will appointed Kourtney and Khloe as co-executors and established college funds for Kendall and Kylie.  When the divorce was finalized, Kris (understandably) never wanted to speak to another lawyer again and did not contact his trusts and estates attorney to update his estate plan.  Upon his death, although the divorce revoked Kris’s bequest of his entire estate to Kim, the bequests to Kendall and Kylie and his appointment of Kourtney and Khloe as co-executors remain effective.

Furthermore, the New York statute that cuts off an ex-spouse’s right to inherit is only applicable when the divorce has been finalized – not while it is pending.  As such, if Kris had died during the pendency of his two year long divorce proceedings, Kim would have been entitled to inherit his entire estate pursuant to Kris’s “I love you” will.  While his family may have had an argument that Kim should be disqualified on the grounds of “abandonment,” they would have to commence a disqualification proceeding and prove that Kim left the marital abode without Kris’s consent and with no intent to return.  Given the nature of their divorce, it may be difficult to prove that Kim left without Kris’s consent – she probably did so at his request!

Consequently, it is advisable that spouses revisit their estate plan as soon as divorce proceedings begin, if not sooner.  It should be noted, however, that one cannot disinherit one’s spouse entirely without the spouse’s consent prior to the divorce being finalized.  New York provides spouses with an “elective share” of 1/3 of the deceased spouse’s entire estate (not just probate assets; property passing by operation of law or by beneficiary designation is included as well).  This means that if Spouse A attempts to disinherit Spouse B, Spouse B can still assert her right to an elective share and receive 1/3 of Spouse A’s estate.  If Spouse A revokes her “I love you” will and does not sign a new will, then her estate will be distributed pursuant to New York’s intestacy law and Spouse B will be entitled to more than the elective share – she will effectively receive more than ½ of Spouse A’s estate.

Therefore, one who is contemplating divorce or who is in the midst of a divorce should update their estate plan with the elective share in mind.  One strategy would be for Spouse A to bequeath to Spouse B property that is approximately equal in value to 1/3 of Spouse A’s total estate, but comprised of assets that are less attractive than other assets Spouse A owns (for example, property that is not appreciable).  Spouse A should keep in mind that, if Spouse A and Spouse B own their home jointly as tenants by the entireties, Spouse A’s interest in the house will be credited to Spouse B for purposes of determining Spouse B’s elective share.  Another strategy would be for Spouse A to take out a term life insurance policy equal to 1/3 of Spouse A’s estate and name Spouse B the beneficiary.  If Spouse A predeceases Spouse B during the pendency of their divorce, then Spouse B’s elective share would be satisfied by the insurance proceeds, rather than Spouse A’s other assets.  Spouse A should be careful to cancel the policy as soon as the divorce is finalized, however.

Once the divorce is finalized, Spouse A still cannot forget Spouse B entirely when updating her estate plan.  First, to the extent that Spouse A is obligated to make provisions for Spouse B in her will, either as a result of the terms of a prenuptial or postnuptial agreement or court order, she must do so.  Second, to the extent that Spouse A and Spouse B have children in common, Spouse A must think through the various contingencies that could still give Spouse B rights in and to her estate.

For example, assume that, at the time of her death, Whitney Houston’s daughter, Bobbi Kristina, was a minor and that Whitney’s will provided for her entire estate to be distributed to Bobbi Kristina outright.  Whitney’s ex-husband, Bobby Brown, as Bobbi Kristina’s legal guardian, would be entitled to receive Whitney’s entire estate on behalf of Bobbi Kristina (albeit only as a custodian; he would be required to distribute it to Bobbi Kristina when she turned 18).  Upon Bobbi Kristina’s untimely death a couple of years later, unless she had executed a will (which most 22-year-olds do not), Bobbi Kristina’s sole heir would be Bobby – and he would thus effectively inherit Whitney’s estate. 

(A similar result would occur if Whitney had died without a will, except that, in that scenario, Bobby (as Bobbi Kristina’s legal guardian) would have priority to letters of administration in Whitney’s estate as well – meaning that her ex-husband would be in charge of her multi-million dollar estate.)

To ensure that one’s ex is not allowed to participate in one’s estate (either as a fiduciary or, ultimately, a beneficiary), one should consider incorporating trusts for the benefit of any children one shares with an ex.  Using the Whitney Houston scenario as a further example, in this way, Whitney could nominate a trustee to hold the property for Bobbi Kristina and could provide that, in the event that Bobbi Kristina died unmarried and without descendants, the property left in her trust would be distributed to … anyone but Bobby.

Divorce is a common phenomenon – 50% of American marriages will ultimately end in divorce – and upends everything in the spouses’ lives, including their estate plan.  As a result, people who are thinking about divorcing, are in the midst of a divorce, or are finding themselves on the other side of their divorce should be sure to consult their trusts and estates attorney to ensure that their estate plan still does what it’s supposed to do.

First, Do No Harm. Second, Do Your Estate Planning: Estate Planning for Doctors

Doctors have many of the same estate planning concerns as non-doctors – maximizing federal and state estate tax exemptions, directing the proper distribution of assets and the proper mode of distribution (e.g. in trust or outright), nominating guardians for minor children and selecting executors to administer the estate according to the plan.  However, many doctors have additional concerns relating to their assets and estates, including asset protection and transitioning or unwinding a medical practice.

Asset Protection

Like many professionals, doctors run the risk of being sued for malpractice and related claims.  Recent polling indicates that 55% of doctors are sued at some point during their careers, and one-half of those are sued more than once.  Specialists are more likely to be sued than primary care physicians, with surgeons (85%) and OB/GYNs (85%) being the specialists sued most frequently, and psychiatrists (29%) and dermatologists (28%) being the specialists sued least frequently. 

Liability insurance is a doctor’s first line of defense against malpractice claims.  However, while liability insurance can mitigate a doctor’s personal liability, it does not guarantee that the doctor’s personal assets will be safeguarded from a money judgment or that a litigious patient will not go after the doctor personally.  Therefore, it is important for doctors to engage in some kind of asset protection planning, and it is vital that they do so before a malpractice claim arises; indeed, fraudulent conveyance laws will nullify most asset protection strategies implemented after the alleged malpractice occurred. 

When considering various asset protection options, doctors must be cognizant of how asset protection can impact their estate plan.

Investment in Exempt Assets

A strategy that is effective for both asset protection and estate planning is investment in exempt assets.  In New York, ERISA-qualified retirement plans (such as 401(k)s, pension and profit-sharing plans, life insurance plans and HSAs) and non-ERISA qualified retirement plans (such as IRAs, employer-only plans and government or church plans) are completely exempt from creditors’ claims as long as they are funded before a claim arises.  Doctors interested in asset protection may fund such plans with the maximum amount possible and these funds will be protected from creditors (unless, or course, the doctor takes a withdrawal).  Furthermore, as long as the beneficiary designations on the plans are properly completed, upon the doctor’s death the assets will pass to her heirs outside of her probate estate and will never be available to satisfy creditors’ claims.

Trusts

While self-settled spendthrift trusts, of which the grantor is also a beneficiary, are generally ineffective to protect assets from creditors, there are some foreign (e.g. the Cook Islands) and domestic jurisdictions (e.g. Alaska, Delaware and South Dakota) that specifically grant creditor protection to such trusts.  There are some drawbacks to these trusts, however.  First, establishing and maintaining these trusts can be costly.  Because the trustee must be a resident of the jurisdiction, this may mean paying a steep annual trustee fee to a corporate trustee authorized to do business in the jurisdiction.  Second, these trusts are not guaranteed to be effective.  The enforceability of the creditor protections of these trusts is not entirely clear, particularly where the grantor does not actually live in the jurisdiction where the trust was established, and a creditor may still be able to access the trust funds.    

However, spendthrift trusts created by a third party for the benefit of the doctor are generally immune from the claims of creditors, and are excellent vehicles for inheritances from relatives – including the doctor’s spouse.  For example, if the doctor transferred the bulk of her assets to her spouse for asset protection purposes (this strategy is discussed in greater detail below), the spouse should sign a will that provides for such assets to be held in a spendthrift trust for the benefit of the doctor.  In that way, the doctor gets the benefit of the assets, but her creditors cannot reach them.  In contrast, if the spouse died without a will, or with a will that did not provide for the creation of a spendthrift trust, the doctor’s creditors would attach the assets as soon as the spouse died. 

The same holds true for inheritances from other relatives; for example, from a doctor’s parents.  If a doctor received an inheritance outright from her parents, this money would potentially be available to creditors, especially if the doctor received the inheritance after a malpractice claim had already arisen.  However, if her parents left this inheritance to her in a spendthrift trust, her creditors would not be able to access it (unless, of course, she received a distribution).  Accordingly, doctors should ensure that any inheritances they receive (particularly from a spouse) are held for their benefit in a spendthrift trust, as opposed to an outright distribution.

Transfer to Entity

Another common asset protection device that allows for congruent estate planning is to transfer assets to an entity, such as a limited partnership or a limited liability company.  Under this strategy, the doctor would invest in the entity and upon the doctor’s death, she would cease to be an owner of the entity, and her interest therein would be distributed to her spouse, children, etc.  In this way, the doctor retains ownership of a valuable asset for estate planning purposes, but her lack of control over the asset would thwart potential creditors. 

While a creditor could obtain through litigation a “charging order,” which would allow the creditor to step into the doctor’s shoes for purposes of ownership, the spouse or trust at the helm of the entity would still be making all decisions and could ensure that no distributions were actually made to the creditor.  Upon the doctor’s death, her interest would be extinguished and her creditor’s charging order would terminate as well.  Charging orders are generally unattractive remedies to creditors, and may deter the creditor or, possibly, lead to a settlement.

Tenancy By The Entireties

Twenty-five states, including New York, recognize tenancy by the entireties as a means of joint ownership of real property.  Tenancy by the entireties is available only to spouses and, rather than each being owners of a portion of the real property (as with other forms of joint tenancy), each spouse owns 100% of the property.  This means that neither spouse can transfer their interest in the property without the consent of the other and, upon the death of one spouse, the other automatically becomes the sole owner of the entire property.

Ownership of property as tenants by the entireties is effective asset protection planning because a creditor cannot take what the debtor cannot give – and a debtor who owns her home with her spouse as tenants by the entireties cannot give it to anyone.  A creditor could attach a lien to the debtor’s interest in the property, but this lien would only be effective if the property was ultimately sold, or if the debtor’s spouse predeceased the debtor (in which case the tenancy by the entireties would terminate and the debtor would own the property individually).

Ownership of property as tenants by the entireties is also effective estate planning because it ensures that the family home will pass to the surviving spouse automatically, bypassing the probate process altogether, and without being potentially subject to estate tax on the death of the first spouse.

Transfer to Spouse

Another common asset protection device is to transfer assets to a spouse.  It is effective because it can render a doctor judgment-proof – if she has no assets, her creditors have nothing to take.  However, this strategy may not be practical for several reasons.  First, if the doctor and the spouse later divorce, the doctor may lose the transferred assets permanently.  Second, if the spouse is later sued (either for his own malpractice or for some unrelated reason) or incurs significant personal debt, the assets could be lost to the spouse’s creditors.  Third, if the doctor’s spouse dies first, the assets would potentially return to the doctor, negating the intended asset protection effect.

This strategy may also be impractical from an estate planning perspective.  For example, assume that the doctor has children that are not also the children of the spouse.  When the doctor dies, there are no assets in her estate to be distributed to her children – all of her assets have already been transferred to her spouse, who may choose to disinherit the doctor’s children entirely.  While the doctor and her spouse may have had an agreement that the spouse would ensure that the children receive their inheritance upon the spouse’s later death, there is no guarantee that the spouse will honor this agreement, or that there will be any assets remaining at the spouse’s later death.

Transitioning or Unwinding the Practice

Another important estate planning consideration unique to doctors is how to transition or unwind a medical practice upon the doctor’s death.

Liquidating the Practice

In some instances, a doctor’s death may result in the liquidation of the practice (for example, if the doctor was a sole practitioner and did not designate a successor to take over the practice).  In these instances, the doctor’s executor will be responsible for winding down the business.

One of the first things the executor must do is to notify all of the doctor’s patients of the doctor’s death and advise these patients that they have the right to a copy of their patient file and to have their patient file transferred to a new doctor of their choosing.  The executor will also be responsible for arranging for copies of the patient’s files to be provided and/or transferred at their direction.

Additionally, New York law mandates that medical records must be retained and made available to patients for at least six years from the date of the patient’s last visit (and obstetrical records and the medical records of children must be retained for six years or until the child reaches the age of 19, whichever is later).  This means that the doctor’s executor will also be responsible for storing the doctor’s patient files in a HIPAA compliant manner and making these files available to patients upon request.

It should be fairly obvious that the requirements of liquidating a medical practice are incredibly burdensome for an executor, particularly if that executor is not also a doctor.  However, doctors can make this process easier on their executors through a thoughtful estate plan.

First, while a patient is always entitled to a copy of his or her medical records, the original records belong to the medical practice (or the doctor, if the practice is a solo venture), and the doctor can bequeath the medical records to a colleague who may be in a better position to properly maintain and store them.

Next, the doctor can include instructions in her Last Will and Testament that will help her executor wind down the practice, for example, directing the executor to deposit the medical records with a specific medical record storage facility that the doctor has already vetted and has a relationship with.  If the doctor intends to nominate someone unfamiliar with her medical practice as executor (for example, a spouse or child), she may also consider nominating a co-executor who is familiar with the medical practice for the specific purpose of unwinding the practice.  

Finally, the best thing a doctor can do to assist her executor in the ultimate unwinding of the practice is to be organized.  Maintaining clearly labeled files with complete patient and vendor information, in addition to other crucial details about the practice (such as bills, insurance, the location and existence of narcotics (which will need to be reported to the DEA)), will help to ensure an ease of administration.

Succession Planning

While succession planning should be a key component of the estate plans of all business owners, having the right succession plan is particularly important to doctors because the rules governing the operation of a medical practice impose special restrictions on the transfer of a doctor’s interest in the practice.

As an illustration, assume that three individuals entered into a real estate investment business together.  They each owned one-third of the company, and all decision-making was by majority vote.  Their operating agreement did not include a succession plan (e.g. a buy-sell agreement) and was silent on the issue of the effect of the death of a member.  Upon the death of one of the members, the deceased member’s heirs would take her place as a member and, while her heirs could seek a buy-out of the member’s interest from the other members, they could also sit back and simply collect their share of the company’s profits over the life of the company, which may be the more lucrative option.

However, if these individuals were doctors and their business was a medical practice, this would not be an option.  In New York, groups of physicians can only practice medicine through a professional service entity of which all owners, members or shareholders must be licensed physicians and practice only that profession.  As a result, upon the death of one of the doctors, the deceased member’s heirs would not be allowed to take her place as a member, unless they were also licensed physicians and practicing only that profession.

Realistically, the remaining members would have to pay the deceased member’s estate an amount equal to the deceased member’s interest in the practice.  However, this could devastate the practice if it lacks the necessary liquidity to do so.  Therein lies the import of having a succession plan in place – it ensures that the deceased doctor’s estate will receive its share of the practice within a reasonable time frame, and that the practice will not be forced to fold.

Buy-sell agreements are vital in this context.  A buy-sell agreement provides, generally, that upon the death of a member, the remaining members will buy back the member’s interest and pay the purchase price to the deceased member’s estate or heirs.  These agreements typically set forth the price to be paid (or the method by which the price will be assessed) as well as the time period for payment.  Buy-sell agreements thus provide necessary clarity – the members know how much liquidity they will have to raise over a certain time period (and can plan accordingly, for example, by purchasing term life insurance policies on the lives of the members, the proceeds of which will be used to buy back the member’s interest) and the deceased member’s estate and heirs know how much money will be coming into the estate and when.

Estate planning is important for everyone, but even more so for doctors because of their unique need for asset protection, and the nature of their assets.  Doctors should implement an estate plan early on – even before they acquire significant assets – because, as doctors are well aware, an ounce of prevention is worth a pound of cure.   

When to Call the Lawyer: When You Need a Will (Which, If You Don't Already Have One, Is Right Exactly Now)

According to a recent Gallup poll, a majority of Americans (66%) do not have a will.  While each state has its own rules governing how assets are distributed if someone dies without a will, these rules are inadequate for most people. 

For example, in New York, if you are married with children at the time of your death and you die without a will, your assets will generally be distributed as follows: the first $50,000 will be distributed to your spouse, and the remainder will be split equally between your spouse and your children.  This distribution scheme may be problematic for many reasons. 

First, most people want their spouse to inherit all of their property, especially if the children are young or if all of their children are children of that relationship. 

Second, the law provides for children to receive their inheritance outright if they are over the age of 18, or upon attaining the age of 18.  While an 18 year old is technically an adult, most parents would agree that even the most mature 18 year old is probably too young to responsibly handle even a modest inheritance. 

Third, property will be distributed based on value, not type.  This means that your property may be distributed among your heirs in a manner that you would not have intended – for example, your jewelry may be distributed to your son, not your daughter, or family heirlooms from your relatives may be distributed to your spouse, not your children.  This also means that your heirs may become joint owners of your property – for example, your spouse may end up owning ½ of the marital home, with your children (who may not be your spouse’s children) owning the other ½.

Finally, the statute sets forth the individuals who may serve as administrator of your estate – including creditors! – and, while the courts give priority to certain individuals (i.e. your spouse), any of the individuals set forth in the statute may petition for letters of administration and attempt to persuade the court why they should be in charge of your estate.

A properly drafted will can eliminate all of these problems.  A will sets forth who will inherit your property and how (outright or in trust) and nominates the individuals who will administer your estate as executors.  Perhaps most importantly if you have children, a will nominates the individuals who will act as guardians of your children in the event that their other parent predeceases them or otherwise cannot act as their guardian while they are minors.

So now that you know why you need a will, how do you go about getting one?  Answer: call your lawyer.   

You Need a Lawyer to Draft Your Will

When it comes to legal documents, the old adage, if you want a job done right, do it yourself, is terrible advice.  Legal documents are complicated and nuanced, and if they are not prepared correctly, the results can be disastrous.  Trusts and estates attorneys are specially trained to prepare wills to ensure that they are accurate and effective, and the cost of hiring a lawyer to prepare your will is nothing compared to the stress and expense to your loved ones when they discover that the will you prepared on your own contained errors unknown until after your death.    

Online Forms – You Get What You Pay For (and Sometimes A Lot Less Than What You Pay For)

In the past decade, websites offering Will drafting services (such as LegalZoom, Rocket Lawyer and Willing) have gained traction with the more enterprising (and frugal) individuals among us.  However, these websites are not a recommended alternative to having a lawyer prepare your will. 

As other commentators have pointed out, LegalZoom’s own disclaimer should give customers pause about using a LegalZoom form to prepare their own Will.  LegalZoom warns its customers that “the legal information on this site is not legal advice and is not guaranteed to be correct, complete or up-to-date.  LegalZoom is not responsible for any loss, injury, claim, liability, or damage related to your use of this site or any site linked to this site, whether from errors or omissions in the content of our site or any other linked site … In short, your use of this site is at your own risk.”

To put it another way, LegalZoom is telling you that LegalZoom forms may contain errors, that these errors may result in damages and that those damages are your problem.

LegalZoom also warns customers that 80% of people who fill in blank forms to create legal documents do so incorrectly.  So between human error and website error, it seems that little peace of mind can actually be purchased online.

However, even if a $69 Will does give you peace of mind, it shouldn’t, because the real danger of using a website to prepare your Will lies in the fact that errors are unlikely to be discovered until after you have died.  At that point, your heirs must either live with the error or commence a proceeding in court (a lawsuit, essentially) to fix it.  And if you thought a Will was expensive, wait until you see how much a lawsuit costs.

Furthermore, Wills prepared via websites are also arguably easier to attack.  In New York, and many other states, a Will is entitled to certain presumptions of validity when the Will was prepared by the testator’s attorney and when the execution of the Will was supervised by an attorney.  If neither of those factors is present, a disgruntled family member may find it easier to invalidate even an error-free Will.

Your Lawyer Does More Than Fill Out a Form

At first blush, it may not seem that drafting a Will is all that difficult – you name your beneficiaries, you pick an executor and voila, you have a Will.  However, Wills actually need to do more than name beneficiaries and appoint an executor – for starters, they need to account for contingencies in the event that the testator’s assets change or beneficiaries predecease the testator, they need to nominate successor fiduciaries in the event that the named executor cannot (or does not want to) serve, and they need to direct how taxes should be paid.

And that is just the beginning.  There is no one-size-fits-all Will, because no one’s life looks just like another’s.  Lawyers know what questions need to be asked, what contingencies need to be accounted for.  Because most lawyers who draft Wills also represent estates, they can anticipate problems that may arise in the administration of an estate and suggest ways to avoid such problems, thus saving your heirs the headache (and attorney’s fees) of dealing with problems after you have already passed.

The bottom line is that, if you are going to make a Will (which you should), you should make sure that it does exactly what you intend for it to do, and the best way to achieve that, is to call your lawyer.     

Tales From the Crypt(o): Estate Planning and Bitcoin

Bitcoins are abuzz.  Goldman Sachs recently announced that it is setting up a cryptocurrency trading desk, J.P. Morgan is backtracking on the position of Jamie Dimon that bitcoin is a “fraud,” and more and more investors – both foreign and in the U.S. – are placing their bets on bitcoin.  

But what, exactly, is bitcoin?  Bitcoin is one of several forms of cryptocurrency.  It is like money in the sense that it is used as payment – in fact, over 100,000 merchants and vendors accept bitcoin in lieu of money, and it can even be used to fund an IRA – but it is unlike money in the sense that it exists solely in its decentralized, digital form.  Bitcoin is not physically represented by tangible coins or bills, and there is no bank where one can go to access an account.

Bitcoin accounts exist and are exclusively maintained in a database called a blockchain.  The blockchain is public but ownership of bitcoin is pseudonymous, meaning that a user’s bitcoin account is linked to a unique bitcoin address and the user’s name is not tied to the account at all.  Bitcoin is accessed by means of two digital keys – one that is public and one that is private.  Both keys are required to access the bitcoin, and the private key is irreplaceable.  Because bitcoin is decentralized, there is no “system administrator” who can send you your private key, and there is no “reset” to obtain a new one.  A lost private key equals lost bitcoin.  

So what does this mean for estate planning?

First and foremost, it means that, if you own bitcoin, it is imperative that you either (a) tell someone about it or (b) document its existence in such a manner that your executor or heirs will be able to discover it after your death.  An executor cannot distribute – and your heirs cannot inherit – that which they do not know exists.  Unlike other types of accounts, which are often made conspicuous through the issuance of statements or 1099s, bitcoin accounts are, by design, completely inconspicuous, and the only way anyone will ever know that you own bitcoin is if you tell them.

The only thing worse than not knowing about a bitcoin account is knowing about it and not being able to access it.  Which leads me to my second point – if you own bitcoin, it is important that you store your private blockchain key someplace where it can be found promptly upon your death.  Without the private key, the bitcoin is as good as lost.  Moreover, because bitcoin is a volatile asset, it is important that your fiduciary be able to access it quickly in order to maintain a diversified portfolio of assets in your estate (or trust, as the case may be), as is required in many states (including New York) under the Prudent Investor Act.    

(Presumably, someone who is tech savvy enough to own bitcoin also owns other digital assets, and, in the interest of ease of estate administration, it is crucial that the usernames and passwords of all digital assets – not just bitcoin – be kept someplace where they can ultimately be found.)

Ensuring that bitcoin can be found and accessed is only the first step in estate planning with bitcoin.  As with any other asset, there are many other factors that must be taken into consideration, including taxation.  The IRS has determined that, for tax purposes, bitcoin is property, not currency.  See IRS Notice 2014-21.  Given the volatility in the value of bitcoin, this asset is potentially highly appreciable, and bitcoin users should consult an attorney to ensure that proper planning is in place (e.g. strategies to take advantage of the step up in basis to ensure that one’s heirs are not hit with a huge tax bill when they transact with the bitcoin). 

In the end, while bitcoin poses some unique challenges for estate planners, it can (and should) be properly accounted for in your estate plan.

How the New Tax Law Can (and Should) Affect Your Estate Plan

The Tax Cuts and Jobs Act (“TCJA”), effective January 1, 2018, made sweeping changes to the Tax Code, including the doubling of the estate, gift and generation skipping transfer tax exemption amounts.  These changes should prompt taxpayers to take another look at their estate plans and to update them where appropriate.

The increased exemption amounts are scheduled to “sunset” in 2026, at which time they will return to $5 million per taxpayer, indexed for inflation.  However, taxpayers can take advantage of this temporary increase through strategies designed to “lock-in” the current, record-high exemption amount and avoid future transfer taxes permanently.

Lifetime Gifting

Taxpayers can now gift $11.2 million (or $22.4 million if married and gift-splitting) without incurring gift tax.  The estate tax benefit of making large gifts is that it reduces the overall value of the taxpayer’s estate (assuming that the taxpayer does not die within three years of making the gift).  Taxpayers can achieve even greater estate tax savings by gifting highly appreciable assets.  For example, if, in 2020, a married couple makes a gift of $14 million worth of stock to a trust for the benefit of their child and, by the time of the last taxpayer’s death eight years later, the stock has doubled in value, the taxpayers have effectively reduced the size of their estate by $28 million while still providing their child with the full value of the asset.  This gift of $14 million would not be subject to gift tax even when the gift tax exclusion amount returns to its pre-2018 threshold of $5 million for individuals and $10 million for married couples.

However, because, under the TCJA, inherited property still receives a step-up in basis, taxpayers will want to consider the capital gains tax implications of making gifts.  In some cases, the capital gains tax savings of the step-up in basis may outweigh the estate tax savings of a lifetime gift.

Dynasty Trusts

Taxpayers may also consider taking advantage of the new exemption amounts by establishing dynasty trusts.  Dynasty trusts are irrevocable trusts structured to last the maximum term permitted by law (in perpetuity in some states, such as New Jersey) and to avoid the imposition of transfer taxes – particularly generation-skipping transfer taxes – during the trust term.  The generation skipping transfer tax is a tax imposed upon transfers to individuals more than one generation below the transferor (a grandchild, for example).  When coupled with the estate or gift tax, further imposition of the generation skipping transfer tax could result in an effective tax rate of up to 64%.  As a result, avoidance of the generation skipping transfer tax could result in significant savings.

To maximize tax savings, a taxpayer can transfer the full gift tax exemption amount ($11.2 million) to the dynasty trust and allocate the full generation skipping transfer tax exemption amount (also $11.2 million) to the transfer.  The property transferred to the trust can grow without incurring any transfer taxes (and, in some jurisdictions, state income tax) and the taxpayer will have reduced the value of his/her estate by the appreciated value of the transferred property.  The taxpayer can further reduce the value of his/her estate by making annual exclusion gifts to the trust (currently $15,000 per year).  Dynasty trusts can also be made flexible, to account for changes in the tax laws and in personal circumstances, and can include provisions to allow the taxpayer to be added as a beneficiary at a later date.

529 Plans

The TCJA permanently expands the benefits of 529 education savings plans by allowing for tax-free distributions to be used for elementary and secondary school expenses, not just higher education expenses.  These plans are now more valuable to taxpayers – particularly those who pay private school tuition for their elementary- and secondary-school aged children – and can be utilized as an estate planning tool.  Contributions to 529 plans are excluded from a taxpayer’s gross estate even though he/she retains the right to change beneficiaries and take back the money.  Further, taxpayers can aggregate five years’ worth of annual exclusion gifts into one year – for example, in 2018, when the annual gift tax exclusion is $15,000, a taxpayer engaged in estate planning could contribute $75,000 (or $150,000 for married couples) without triggering gift or generation skipping transfer tax or using up any amount of exemption.  A taxpayer could thus reduce his/her gross estate by up to $150,000 per child every five years.

Charitable Giving

Charitable giving has long been a strategy for reducing a taxpayer’s gross estate, and is attractive because the taxpayer gets the simultaneous benefit of the charitable deduction for income tax purposes.  The TCJA increases the charitable deduction limit from 50% of adjusted gross income to 60% of adjusted gross income.

Business Succession

In addition to the increased estate, gift and generation skipping transfer tax exclusion amounts, the TCJA may well trigger the formation of an unprecedent number of pass-through entities, meaning that many taxpayers will have to update their estate plans to account for business succession. 

Perhaps the component of the TCJA that has received the lion’s share of attention has been the 20% deduction available to pass-through entities, such as sole proprietorships, partnerships and S Corps.  While the effect of this component remains to be seen, it is foreseeable that the number of pass-through entities will increase significantly in the coming years.  From an estate planning perspective, it is important that taxpayers organizing themselves as pass-through entities put into place a business succession plan.  A business succession plan provides what happens to an owner’s share of the entity upon his/her death.  Buy/sell agreements – in which the deceased owner’s estate is obligated to sell, and the remaining owners are obligated to buy, the interest in the entity – are common solutions.    

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