Most people make the bulk of their charitable contributions during the year-end holiday season. This post summarizes some of the charitable giving ideas and opportunities, as well as some planning reminders, that donors may want to consider:
Gifts of Appreciated Securities
Many people have benefited this year from the surge in the investment markets. Appreciated marketable stocks are a preferred charitable gift to both public charities and private foundations because the charity benefits from the full fair market value of the gift, while the donor avoids paying a tax on any gain in asset value. Even gifts of appreciated interests in closely held entities (e.g., partnerships and LLC’s) made to a public charity offer the same tax benefits; however, certain formal appraisal requirements should be observed.
IRA Charitable Rollover
Current federal tax law permits an individual who has reached age 70-½ to direct a “qualified charitable distribution” (QCD) of as much as $100,000 to charity from his or her IRA. A QCD is not included in the individual’s taxable income, and can also be used to satisfy the individual’s annual required minimum distribution from the IRA. Only distributions to public charities and private operating foundations will qualify (but not distributions to a private non-operating foundation, supporting organization, donor-advised fund, charitable remainder or lead trust, or a charitable gift annuity). Since this benefit is set to expire in 2013, donors who have considered making a generous gift at some time in the future may want to consider the tax benefits of funding a gift in this manner before the end of the year. Continue Reading
As discussed in a prior post, one of the helpful provisions recently added to federal estate tax law allows a surviving spouse to use any “leftover” or “unused” federal estate tax exclusion amount of a deceased spouse. The federal estate tax exclusion amount will increase to $5.34 million for 2014 (to be adjusted for inflation in future years). If not used during the deceased spouse’s lifetime, the unused exclusion amount is “portable” and the surviving spouse can file a federal estate tax return to claim the deceased spouse’s “Deceased Spousal Unused Exclusion” amount.
Portability effectively allows married couples to pass up to $10.68 million to their heirs free from federal estate taxes with absolutely no planning at all. That said, it may not be wise to rely solely on portability for estate tax and marital deduction planning. There are other benefits to planning with trusts, including:
- Although the $5.34 million estate tax exemption is portable, the GST exemption is not. Trust planning is necessary to avoid wasting any unused GST exemption amounts.
- Electing portability requires the filing of an estate tax return. For some estates, this may be a complex determination.
- If portability is elected, the statute of limitations on the deceased spouse’s estate remains open until the statute has run on the surviving spouse’s estate. If not elected, the statute of limitations would expire three years after filing of the first spouse’s estate tax return.
- A credit shelter trust may provide certain asset protection benefits not otherwise available to a surviving spouse.
- A credit shelter trust could help protect inheritance for children of the first spouse to die.
- A credit shelter trust can help prevent the unforeseen and unintended use of the deceased spouse’s exclusion amount by a surviving spouse.
To reiterate the wisdom of another prior post, each estate planning document is unique to the particular client and it is difficult to generalize the benefits and detriments of the planning options now available. The best approach is for individuals to review the options with competent counsel. For more information about the effects of recent tax developments on marital estate planning, contact your estate-planning advisor or a member of the BakerHostetler Private Wealth team.
Florida law prohibits the devise of a homestead if the owner is survived by a minor child or children. For purposes of this prohibition, the term “devise” extends to both gifts under a will and transfers by way of a revocable trust. As such, Florida homesteaders with minor children are tightly restricted in their ability to transfer the homestead upon death.
An improperly devised homestead descends in accordance with Florida’s intestacy laws, which generally provide for a life estate in the surviving spouse and a vested remainder in the decedent’s lineal descendants. Therefore, an improper devise of a Florida homestead can frustrate a person’s dispositive wishes, potentially resulting in complicated, unanticipated and unwelcomed issues regarding the marketable title, use, and ownership of the homestead. The homestead restrictions can be especially problematic for funding credit shelter trusts, special needs trust planning, and qualified personal residence trust planning.
Florida law offers several options for planning around the homestead restrictions. One of the most useful options involves irrevocable trust planning. Under Florida law, if a homeowner conveys his or her interest in a homestead to an irrevocable trust without retaining any power to revoke or revest such interest, the transfer to the trust is not considered a devise, and the disposition of the homestead interest as directed by the trust will be respected. Continue Reading
Prenuptial planning is a common consideration for clients who are getting married. There are several circumstances where a prenuptial agreement is particularly useful, such as second (or perhaps third) marriage situations, especially when the couple have children from prior relationships. It is also not unusual for the children of wealthy clients to be strongly encouraged to discuss prenuptial planning with their spouses-to-be before the big day. Increasingly, people are waiting until they are older to get married for the first time and have accumulated significant assets before marrying; these couples particularly want to protect their ability to do what they like with their assets in the event of their death or a divorce.
Unfortunately, there is a common misapprehension that prenuptial planning is only for the wealthy. I have had some younger clients who are reluctant to broach the topic of prenuptial planning with their significant others because they do not want to create the wrong impression or are afraid of the reaction they will get – such as – “I would never want to be with someone who wanted me to sign a prenuptial agreement, because that would show a complete lack of respect and trust in me as a person and their potential partner in life.” Continue Reading
One of the most overlooked elements of an estate plan is the planning for the distribution of a person’s tangible personal property. This property, which many people commonly referred to as “belongings,” encompasses jewelry, furniture, clothing, household furnishings, silverware, cars, boats, art work, and other physical possessions. Without question, the distribution of these items is often the source of family disagreements following a person’s death. Everyone has experienced first-hand a prolonged disagreement with family members over the distribution of a decedent’s personal property or knows someone who has. It makes no difference whether the items have significant value or only sentimental value. Moreover, the cost of the conflict generated by such items can be disproportionately greater than their actual value. What is “fair” or “equal” will mean something different to each family and a client’s distribution process should be tailored to fit a particular family’s dynamics. While a planner cannot change the emotional and sentimental minefields involved, which may have been years in the making, a skilled planner can help streamline the process and, hopefully, reduce potential family conflict.
Most estate planning documents include a generic disposition of tangible personal property which might provide something like:
I leave all of my tangible personal property to my spouse, or, if my spouse does not survive me, to my surviving children as they may agree. If my children cannot agree, my personal representative shall divide the property among my children in his or her sole discretion. I ask that my family members and personal representative follow any wishes I may have expressed in writing or otherwise about the distribution of such property.
Trustees are often granted the power to distribute trust property “in the Trustee’s discretion” for a beneficiary’s “general well-being,” “best interests,” “comfort,” or, most commonly, “health, education, maintenance and support.” This “health, education, maintenance and support” distribution standard is so common that most trustees and other trust advisors refer to it simply as the “HEMS” standard. The HEMS standard is common in trust planning because limiting distributions to such an ascertainable standard avoids a number of transfer tax pitfalls. Transfer tax issues, however, are not the only issues that a trustee must consider when making distributions. Sometimes the most challenging responsibility of a trustee is to know how far his, her, or its “discretion” reaches when distributions are limited to a distribution standard, including HEMS.
Of course, a trustee can and should rely on specific instructions contained within a trust agreement to determine the extent and breadth of their discretion. In the absence of clear instructions, however, a trustee risks liability for “abusing” their discretion when making or refusing to make distributions. For example, if a current beneficiary requests a distribution for an elective medical procedure, a trustee may be sued for making the distribution (by remainder beneficiaries whose remainder interest would be reduced) or for refusing to make the distribution (by the current beneficiary who requested the distribution).
This potential for liability for action or inaction puts trustees in a difficult position. Luckily, trust agreements, common and statutory trust law, and courts generally protect trustees from liability for the reasonable exercise of discretion for distribution decisions under the HEMS standard, which itself is relatively broad and open to interpretation. Nonetheless, a trustee (or a beneficiary) should consider engaging legal counsel whenever he or she believes a distribution decision may be called into question because the governing lawin any given jurisdiction may give rise to unanticipated results.
Grantor trusts are a powerful tool in estate planning in part because they facilitate depletion of the grantor’s estate by the grantor’s payment of income taxes attributable to the trust. There may be circumstances, however, when the grantor is no longer in a position to bear some part or all of the trust’s tax burden, yet grantor trust status remains desirable for other reasons. In those circumstances, an issue arises as to whether the trustee may reimburse the grantor for income taxes paid by the grantor and attributable to the trust.
When trust agreements are silent on the issue of reimbursement of the grantor, the trustee may be in a difficult position. In addition, while Rev. Rul. 2004-64 approved of discretionary reimbursement of grantors, it also noted that estate tax inclusion arises unless state law prevents creditors from reaching the trust assets as a result of such reimbursement. Colorado recently followed the trend of other states and addressed these issues by a new statute, C.R.S. § 15-16-502, which became effective on August 8, 2013. Continue Reading
S corporation shareholders must be careful not to inadvertently terminate their closely held company’s S election when engaging in estate planning.
Closely-held entities, which choose not to be formed as a partnership or limited liability corporation, often elect to be taxed as an S corporation under the Internal Revenue Code to avoid the double taxation associated with C corporations. S corporations pass corporate income, losses, deductions and credit through to their shareholders for federal income tax purposes and, therefore, pay no corporate level income taxes.
Subject to certain conditions, individuals, estates and trusts are eligible to hold S corporation shares. If S corporation shares are inadvertently transferred by a shareholder to a non-qualifying shareholder, the S election will terminate and trigger corporate level taxes, which can be disadvantageous to all shareholders. Qualifying trusts are grantor trusts, qualified Subchapter S trusts (“QSSTs”), electing small business trusts (“ESBTs”), testamentary trusts, and voting trusts. Each type of qualifying trust is subject to different and very specific requirements under the Internal Revenue Code, and, therefore, we highly recommend consulting an attorney before transferring shares of an S corporation to a trust. Continue Reading
Differing points of view have arisen regarding determining the active participation of S-Corporation shareholdings held in Trust. The uncertainty centers on IRC § 469. Section 469 defines a passive activity as any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate, and the section specifically includes trusts within its scope. It does not, however, explain how the section applies in the context of a trust. Furthermore, the Treasury Department has not yet issued regulations addressing the practical participation requirements for trusts. Questions have arisen whether the participation requirements can be satisfied by the trustee (including a special trustee or trust advisor), the officers, employees, agents or even the beneficiaries of a trust. The IRS recently set forth its position on this issue in Technical Advice Memorandum 201317010. Continue Reading
A wide array of organizations can qualify to be recognized as exempt from federal income taxes. Most noted of late are those organizations which are structured to “promote social welfare” and which can seek tax-exempt status under section 501(c)(4) of the Internal Revenue Code (“IRC”). While the operative statutory language states such organizations must be organized and operated “exclusively” for such purpose, more than 50 years ago the Internal Revenue Service (“IRS”) effectively relaxed the standard by ruling such groups only needed to be “primarily” organized for such purposes. While it is not hard to parse “exclusively”, the IRS has never offered guidance on what would meet a test based on “primarily”. All of this happened long before political action committees (“PACs”), let alone so-called super-PACs, became a common feature of the political campaign landscape. Continue Reading