Using Trusts in Estate Planning for the Second Marriage

The recent news reports about Oleg Cassini’s estate got us thinking about estate planning for second marriages, particularly a second marriage where the spouse is the same age (or in some cases even younger) than the children from a prior marriage. 

One possibility when there are children from a prior marriage is to use a trust for the second spouse for life, with remainder to the children.  The goal is to provide for the support of the spouse during his or her lifetime, but ensure that the children will receive their inheritance after his or her death.  By using a trust, the spouse cannot control what happens to the property and divert it away from the children (for example, to a subsequent spouse and/or children).  An impartial trustee can ensure that the trust is well managed and any distributions comport with the trust terms.  That may be a workable strategy when the children are adults who don’t need immediate access to the wealth after the death of their parent, and the spouse is close in age to the deceased parent.  But what if that is not the case?  What if the decedent does have minor children from a prior marriage or relationship, so that the decedent will need to meet the support needs of both the children and the surviving spouse?  Or what if, as in the Cassini case, or even TV’s “Modern Family”, the surviving spouse is around the same age as the adult children, so that waiting to inherit until after the death of the surviving spouse is not a viable option?

The best approach in such a case may be for the decedent to create two separate pools of wealth, one for the children and one for the surviving spouse.  This can be accomplished by simply dividing the estate under the Will into a share for the spouse and a share for the children.  The spouse’s share can still be in trust, with the remainder after death going on to the decedent’s issue, so that the wealth stays in the family.  The main problem with this approach is that if more than the $5,340,000 exemption is left to the children, the estate will be subject to federal estate tax, which is not at all desirable.  In such a case the pool of wealth for the children will likely have to be created either by well-structured lifetime transfers and/or by life insurance held in an irrevocable life insurance trust (ILIT) for the benefit of the children.

Another option would be a shared discretionary trust with both the spouse and the children as beneficiaries.  The advantage of this approach is flexibility in that the property can be made available to the entire family with distributions made to those who most need it from time to time.  The disadvantage is that unless family relationships are excellent, a shared trust is highly likely to become a bone of contention and cause conflict within the family – again, not at all a desirable result.  Also, such a discretionary trust could only be used in any case up to the remaining exemption amount before federal estate tax would be imposed.

The emotional factors at play in a second marriage situation can make estate planning challenging.  Ideally such planning will reduce the risk of dispute between spouse and children by providing appropriate wealth and financial security for all parties.     

Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

    

      

Estate Planning With Basis in Mind

Income tax aspects are an important part of estate planning.   One of the most crucial of those aspects is the distinction between the “carryover basis” rule for gifts and the co-called “step up” in basis rule for inherited property.  

Under the carryover basis rule for gifts, the donee usually takes over the donor’s basis.  So for example, let’s say father Frank buys stock for $1,000.  Frank is a savvy investor, and a few years later the stock is worth $10,000.  Frank then gives the stock to daughter Diane.  Diane’s basis in the stock is $1,000, “carrying over” Franks basis.  Consequently, if Diane sells the stock for $10,000 she will have taxable gain of $9,000 (the difference between the $1,000 basis and the $10,000 sales price).

By contrast, inherited property gets a new basis equal to its value on the date of death.  This is called the “step up” in basis – although of course it could be a step down in basis in some cases, depending on the value of the property at death!  The step up applies even if no estate tax is due at death.  All that is necessary is that the inherited property be included in the federal gross estate.   So going back to our example, let’s say instead of making a gift when the stock was worth $10,000, father Frank died and Diane inherited the stock from him at that time.  In that case, Diane’s basis in the stock is $10,000, equal to its value at the date of Frank’s death.  Consequently, if Diane were to sell the stock for $10,000, she would not have any taxable gain.       

Traditionally, people were usually more concerned about estate tax than income tax consequences.  In the first place, estate tax rates were much higher than long term capital gains tax rates.   In addition, estate tax was imposed at a much lower level of wealth —for example, in 2004 there was only a $1.5 million federal estate tax exemption.  By contrast, the federal estate tax exemption is now $5,340,000 (and is scheduled to be increased for inflation in future years).  Meanwhile, the top federal estate tax rate is now lower at 40%, while the top long-term capital gains tax rate is now 23.8% (including the ACA surtax), and 28.7% on average if state capital gains taxes are also taken into consideration.  As a result, fewer people are paying estate tax and planning to avoid capital gains tax has greater significance. 

Interestingly, if assets have gone down in value from the date of purchase, the gift basis for gain could actually be higher than the inherited basis.  Even if the fair market value is lower than basis at the time of gift, if the property is later sold at a gain the donee can still use the donor’s carryover basis. For example, let’s say mother Meg buys stock for $1,000 and it goes down in value to $800.  If Meg then gives the stock to son Sam, Sam’s basis for gain is still $1,000, the “carryover” of Meg’s basis.  On the other hand, if Meg dies and Sam inherits the stock, Sam’s basis is only $800, the value of the stock at the time of Meg’s death. 

In such a situation a prospective donor like Meg might choose to sell the property and take the loss assuming he or she can use it.  However, some property is not easy to sell, and/or the donor may wish to pass certain property on to family members regardless of its current value.  In that case, it may be better to gift the property to take advantage of the higher carryover basis.  To preserve the opportunity to make such a gift it may be important to have a durable power of attorney in place that grants broad gifting authority, as the donor may lack capacity to make gifts in the period before death. 

In the case of assets that have increased in value from the date of purchase, if the estate will not be subject to estate tax it is likely better from an income tax standpoint for the recipient to inherit the property and get the step up than to receive it by gift – recognizing that there is no absolute certainty that the estate will remain low enough to be non-taxable (and that the tax law could also change again).  In this stratum of wealth the desire to actually include assets in the estate has led, for example, to renewed interest in retained life estates, by which property can be technically given away during life but yet included in the estate at death to get the step up in basis.   

If the estate is of a size that estate tax is likely to be a concern then many factors -- including the overall size of the estate, post gift appreciation, future exemptions and rates of tax and the basis of the property -- will be relevant in evaluating whether a lifetime gift is likely to be more beneficial than holding the asset until death.  In general, this is a complex analysis but may at a minimum argue in favor of making any gifts in trust to maintain some flexibility in tax planning. 

Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

What is a Pet Trust?

In the 1970 Disney movie “The Aristocats” a wealthy woman leaves her entire estate to her four cats for their lives, and then to her butler, Edgar.  Edgar secretly hates the cats and tries to kill them so he can inherit the property right away.  Apart from the attempted murder of course, what was a whimsical movie plot almost 45 years ago is now common as the majority of states authorize trusts to take care of pets after their owner dies.  Specifically, according to the ASPCA website, only four states --Kentucky, Louisiana, Minnesota and Mississippi – do not recognize pet trusts.  And even in those states a pet owner can take steps to provide for a pet using a “common law” trust. 

Trusts for pets are usually created by pet owners who do not have a close family member to care for the pet.  In order to create a pet trust the pet owner leaves money to a trust for the benefit of the pet, and appoints a trustee to manage the money and make sure it is used as intended.   The pet can also be left to the trustee under the pet owner’s Will so that the trustee is the pet’s legal owner.  The trustee does not have to be the person taking day to day care of the pet.  It may even be good to have those be two different people so that there is some oversight.  The pet trust should designate a back- up trustee and a back-up caretaker in case the named people die or become unable to take care of the pet.  The trust can of course detail the pet’s routine, preferences, needs, etc., to give complete guidance to the caretaker and trustee.  After the pet trust ends any money left over will go people and/or charities designated by the pet owner.  

One downside is that a court can reduce the size of the pet trust if the court finds it is excessive for the purpose.   For example, under New York Estates Powers and Trusts Law 7-8.1(d): “A court may reduce the amount of the property transferred if it determines that amount substantially exceeds the amount required for the intended use. “  Such was the case with Leona Helmsley’s dog Trouble, who saw his $12 million trust reduced to $2 million.  However, by all accounts Trouble lived a life of luxury until his death in 2011, as reported in Trouble’s obituary from the NY Times: http://www.nytimes.com/2011/06/10/nyregion/leona-helmsleys-millionaire-dog-trouble-is-dead.html?_r=0

Pet trusts usually last for the life of the pet.  A pet trust can also cover more than one pet, and in that case will usually last until the death of the last pet to die.  However, some states limit the term of a pet trust.  Four states – Alaska, Michigan, Montana and New Jersey – limit pet trusts to a maximum length of 21 years.  Tennessee has a maximum limit of 90 years, and Washington State has a maximum of 150 years.  Colorado and South Carolina specifically provide that offspring in gestation are covered by pet trusts.  However, even in states that do not address this issue, the term “living” has usually been understood under trust law to apply to those in gestation, so the result should likely be the same.    

Instead of a formal pet trust (or where a pet trust is not a legal option) a pet owner may use a “common law trust” to provide for a pet after death.  In that case the pet owner would leave the pet to a trusted individual, and would also create a separate trust for that individual with directions that it be used for the care of the pet.  That means the caretaker is the beneficiary of the trust, and the caretaker is also the pet’s legal owner.  The trust could, however, still have a separate trustee. 

Because pet trusts (whether formal or informal) are often created by those who do not have close family members, it may be wise to anticipate that  more distant family members who otherwise stand to inherit may object to a large gift to a pet.  In a 2012 New York case an elderly woman named Charlotte Stafford disinherited her nephews (who were her closest relatives) and left $100,000 in trust for her cat “Kissie Meow,” together with a direction that Kissie and her designated caretaker should occupy Charlotte’s house rent free until Kissie’s death.  The Will withstood a challenge by the nephews based in part on the testimony of the lawyer and paralegal who assisted with the preparation and signing of the Will that Ms. Stafford was clear as to her wishes.  Thus, solid documentation of the pet owner’s wishes and careful execution of documents may be particularly important when dealing with pet trusts.    

 For more information about pet trusts in general, see the ASPCA website: http://www.aspca.org/pet-care/planning-for-your-pets-future/pet-trust-laws

Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

Estate Planning for Digital Assets – the Good, the Bad and the Unknown

Introduction. Because we engage in so many activities on line, estate planning for “digital assets” is increasingly important.  The phrase “digital assets” can encompass many things, including contents of an iTunes account, ebooks on a Kindle, postings on social media accounts, such as Facebook, Twitter, or Youtube, and email accounts, among others.  Some of these items have monetary value, and some have mainly sentimental value.  So what happens to these digital assets after death?

Law is still developing.  In fact, there is no clear answer because the law in this area is still developing.  Some assets are not transferable legally, but may be available to family members as a practical matter.  Another legal issue is that various federal laws prohibit anyone other than the account holder from having access to email and similar on line accounts.  So for now it’s a piecemeal answer that depends in part on the user or terms of service agreements for the various assets. However, there are some steps you can take to plan for digital assets. 

Identify assets.  The first step is to identify the assets.  For example, perhaps you have two email accounts, an iTunes account, a Twitter feed and a Facebook account.  It is also important for this purpose to include accounts that are not in themselves digital assets but that provide access to assets through on line portals – for example, bank accounts, brokerage accounts, credit card accounts, etc.  It will be quite difficult to handle your financial matters in the event of incapacity or death without that information.          

Maintain accessible but secure list of user names and passwords.  Write down all user names and passwords for each asset and/or account and keep the list in a safe but accessible location known to loved ones and/or your legal representative.  There are also online secure user name/password storage systems – but in that case be sure the password to gain entry to the system is in a safe but accessible location known to loved ones.  Also be sure loved ones know the passwords of your actual computers and electronic devices.  In one reported instance a woman left her iPad to her family but they could not access it because they did not have the necessary user name and password – the family described the iPad as a “shiny placemat”  while they tried to get Apple to release the information. 

Decide what should happen to the assets.  The next question is – what should happen to the assets?  Assets with sentimental value, such as email or a Facebook account, are often the most important to loved ones, substituting for the cherished home movies, box of photos or packet of letters of an earlier time.  On the other hand, perhaps you do not wish to grant access to all or some accounts.  Some social media and other digital platforms have adopted policies about what happens to accounts at death – in other cases the situation is less clear.   

Facebook has a policy allowing loved ones to maintain a Facebook account after death as a memorial.  Facebook also recently announced that it would permit memorial accounts to be more public based on privacy choices made during life, and that it would create “look back” videos upon request. However, apparently some relatives have felt the memorial page is too restrictive and have maintained the Facebook account in active mode; regardless of the legalities, they were able to do this as a practical matter because they had the user name and password. 

Google has a service called “inactive account manager” that permits you to name a person to receive the contents of all google accounts (gmail, YouTube, google+, etc.) if your account becomes inactive, including by reason of death (or, presumably, prolonged incapacity).  On the other hand, Yahoo has a policy denying access to email accounts.  In fact, in what is probably the most notable digital asset case to date, Yahoo required a court order to give the family of a deceased marine named Justin Ellsworth copies of his emails.

The status of music and other content downloaded from iTunes is actually rather murky.  Given the significant dollar value of iTunes and other digital content, as well as the personal nature of these items, there really should be a mechanism for giving or bequeathing them at death to loved ones, in the same way one could, for example, transfer a collection of CDs or vinyl records.  Unfortunately, that is not the case. The iTunes user agreement says downloaded content is held on a personal license, which probably means it can’t be transferred to others and expires at death.  However, it is not clear what that means as a practical matter, especially given that often family members share a single iTunes account across multiple devices. 

Include language in planning documents to help an Executor, Trustee or other personal representative gain access. Ideally an Executor or personal representative should be able to deal with your digital assets, both in terms of accessing them and then transferring them to loved ones, the same way they can for any other personal asset, like a car, jewelry or work of art, but the law is not yet at that point.   Legal access to the accounts holding the assets is a tricky question, and depends on state law, federal law and the user agreements.  At the moment the best advice is to include a detailed provision in your estate planning documents (Will, revocable trust and/or power of attorney, as the case may be) authorizing your executor, trustee, or other legal representative to access your accounts and handle your digital assets.     

Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.