INC-centricity

Anna Nicole Smith: a legacy of not planning for the future

There is an Associated Press article on Law.com about the mess that Anna Nicole Smith left behind for her estate. In addition to the paternity suits, DNA tests and jurisdictional wars between the Bahamas and the U.S., there is also the highly personal tragedy of an infant daughter who will never know her mother.  This tragedy, and the uniqueness of Smith's life underscores the need for proper and up-to-date estate planning.

Marlon Brando and trust privacy

I stumbled on an interesting blog today, written by Francis Foster, professor of law at Washington University School of law on the topic of Trust Privacy.  In her post, Professor Foster describes how Marlon Brando was able to maintain the one thing he sought most in his life, privacy, through the use of his estate planning trusts.  She describes the feeding frenzy of the media when Brando's will was filed for probate back in 2004, and how the will devised his entire estate to his living trust, which was not part of the public record.  That serves as a good reminder to the rest of us that when we put all the details of our final wishes into a will, we could be publicly airing our dirty laundry, the dis-function of our family relationships and other details for the whole world to see.  Follow Brando's example, and use a living trust to preserve your family secrets.

Charitable Remainder Trust

What can you do when you own highly appreciated assets and your estate value exceeds the Federal Estate tax equivalent exemption?

A Unitrust, also called a Charitable Remainder Trust or CRT, allows taxpayers to reduce estate taxes, eliminate capital gains, claim an income tax deduction, and benefit charities.  It also requires that a fixed percentage (minimum 5%) of the annual value of trust assets be paid to the income beneficiary. For example, a CRUT with a value of $2,000,000 and a 5% payout would pay $100,000 to the income beneficiary in that year. If the investment performance for that year was 10% and the value of the trust on the valuation date was $2,200,000 the income beneficiary would receive $110,000 in that year. Another benefit of the CRT is that it will allow for additional contributions. The Unitrust will generally produce higher amounts of income but a smaller tax deduction.

Estate Tax Conundrum: Fed vs. State

When it comes to death and taxes, most of the focus lately centers on Congress' ongoing battles over the federal estate tax. But many states impose their own taxes and costs when residents die. Estates too small to trigger the federal tax can easily rack up thousands of dollars in state death taxes and probate costs. Far from being repealed along with the federal tax, this state burden is on track to rise over time.

• Some states have their own estate- or inheritance-tax systems that are independent of the federal estate tax system.
• Another group of states is imposing new estate taxes to make up for revenue from the waning federal tax.

The federal estate tax is scheduled to phase out over the next few years and disappear entirely in 2010 -- only to return in 2011 when the temporary repeal expires. Opponents of the estate tax are struggling to make repeal permanent, but are facing stiff opposition in the Senate. (The House has already voted to permanently repeal it.)

A number of states have estate or inheritance taxes that are independent of the federal system. State estate taxes, like the federal version, are assessed on the estate as a whole. But states can have different rules about who pays.

In the past, most of the other states haven't had to impose separate taxes to get a piece of their residents' estates. Instead, the states received a portion of what the estate owed the federal government. This "pickup" tax raised state coffers without the estates owing any extra tax. However, states are losing this boost. The federal law temporarily repealing the estate tax has already phased out the states' ability to take a portion of said tax. That cost states billions in lost revenue. So it's probably not surprising that many states are trying to hang on to their piece of the pie by decoupling their estate tax system from the federal system. In effect, they're pretending that the repeal isn't happening and taking from their residents' estates some of what they used to get from the federal government.

Some states made their decoupling temporary, hoping that revenues would improve enough in coming years so that they wouldn't miss the lost tax. The states also might get a break if efforts to make the federal repeal permanent fail. The full state death-tax credit would return, along with the rest of the federal estate tax system, in 2011.

Regardless of how this issue plays out, properand thoughtful estate planning can serve to minimize the impact of estate taxes while maintaining one's privacy and bypassing probate.

In the coming years, there will most likely be a lot of changes to the way states impose their estate taxes. For example, the substantial changes to the federal estate tax laws enacted in 2001 under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) include the gradual phase-out of the state death tax credit. This means that states with only a pick-up tax in place will entirely lose their estate tax revenues unless additional state estate taxes are enacted (which many have already done). Just keep in mind that the billions of dollars of associated lost state revenues will have to be made up somewhere. (Translation: look for some form of higher state taxes imposed to make up the shortfall.)

Family LLCs: Sharing the Wealth

For years promoters have touted the use of Family Limited Partnerships (FLP) as a tool for owning and protecting assets and providing a mechanism for passing them on to the next generation.  The FLP has been used so frequently that it could lead one to the impression that the FLP is a separate kind of entity.  It isn't.  It is simply a Limited Partnership used for family purposes.  Similarly, the LLC is becoming used for family purposes, which has coined the usage of the Family LLC.

What is a Charitable Remainder Trust?

A charitable remainder trust (CRT) could address many of your personal financial goals while providing the ability for you to make a significant gift to the qualified organizations of your choice.  CRTs are planning tools that allow you to take control of your social capital —  the portion of your wealth that is customarily paid in taxes to the government.  With a CRT, you designate the qualified organizations that will receive your social capital and you also receive significant financial benefits.  Anyone who is subject to paying capital gain taxes on appreciated assets and whose estate is subject to estate taxes is a candidate to benefit greatly from a CRT.