Bay Area Wills, Trusts & Probate Report

Can a Corporation Be a Philanthropist? California's Benefit Corporations Pursue Both Profit and Purpose

Karen Meckstroth — Thu, 15 Mar 2012 16:00:00 -0800

What do Patagonia, Give Something Back Office Supplies, and Thinkshift Communications all have in common? They are California "benefit corporations" -- a new type of for profit corporation that is allowed -- or, more precisely, required -- to put society and the environment at the center of how the company does business. Six other states have enacted similar legislation.

Even though California's benefit corporation law is less than three months old, mission-driven corporations are not new. Numerous for profit companies measure their success not only by their profits but also by their social and environmental impact. The new form of legal entity offers companies an alternative model of corporate governance, and greater freedom to pursue their social and enviromental goals. Sandra Stewart of Thinkshift Communications writes:

'I hope that five years from now, ten years from now, we’ll look back and say this was the start of the revolution. The existing paradigm isn’t working anymore—this is the future.' Those were Patagonia founder and CEO Yvon Chouinard’s closing words as he led a parade of companies up the steps of the Secretary of State’s office . . . to become California’s first benefit corporations. . . . For Thinkshift, and I think for the other newly minted benefit corporations as well . . . , it felt like we took a significant first step in support of the kind of business culture that can build a sustainable, responsible and vibrant economy.

Proponents of the benefit corporation say this new form of legal entity will allow socially responsible companies to thrive. Susan Carpenter writes in a Los Angeles Times blog post titled California's new B Corp law eyes social, environmental interplay:

Incorporating under [the benefit corporation law] allows companies greater access to social impact and venture capital investments; legal protection for directors and officers as they consider non-financial social and environmental goals; and validation of their social and environmental responsibility claims since their annual benefit report must assess their performance against a third-party standard.

The benefit corporation differs from traditional stock corporations in significant ways.

A traditional corporation can (with some exceptions) engage in any lawful business activity. But, if a company is organized as a benefit corporation, its purpose must be to create a material positive impact on society and the environment.

A director of a traditional corporation must perform his or her duties "in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders" under California law (Section 206 of the Corporations Code). Directors of benefit corporations, on the other hand, are given explicit legal authority to consider a broader group of stakeholders and the company's social or environmental mission when performing their duties as directors. The new law requires directors of California benefit corporations to consider:

Shareholders
Employees
Customers (as beneficiaries of the public benefit purposes of the corporation)
Community and society
The local and global environment
The interests of the benefit corporation, including the possibility that long-term interests of the company may best be served by retaining control of the corporation (rather than selling or transferring control to another entity)
Ability of the benefit corporation to accomplish its public benefit purposes

Laura Arrillaga-Andreessen, founder of a venture philanthropy fund, member of Stanford University's faculty, and author of Giving 2.0, defines a philanthropist this way:

A philanthropist is anyone who gives anything—time, money, experience, skills, and networks—in any amount to create a better world.

I like this definition and I think it gets down to the roots of what philanthropy is all about.

Philanthropists are kids who get involved through organizations like dosomething.org and the Jane Goodall Institute's Roots and Shoots program, individuals who aggregate their gifts with others by donating to organizations like the Jolkona Foundation and the Acumen Fund, families who make grants through the operation of their private family foundations and donor advised funds, and people who leave portions of their estates to nonprofit organizations in their wills and trusts.

And sometimes a philanthropist is a for profit corporation on a mission to use the funding and power of business to materially benefit humanity and the environment.

(This event took place April 2011) April 19th Speaking Engagement -- Incorporating Philanthropy into the Family Wealth Plan -- The City Club, San Francisco

Karen Meckstroth — Tue, 29 Mar 2011 21:26:51 -0800

I'm excited to have the opportunity to speak with Robert Lew, president and founder of Planning & Financial Advisors, on the topic "Incorporating Philanthropy into the Family Wealth Plan: Different Approaches from a Financial Planner and an Estate Planning Attorney." The event is co-hosted by the Northern California Planned Giving Council and the Financial Planning Association of San Francisco. It takes place on April 19th, from 11:30 - 1:30, at The City Club in San Francisco. Registration is available online and at the door.

Here's what we plan to cover:

Some wealthy families have strong charitable intent and would be receptive to charitable planned giving planning concepts. Most families have weak or no charitable inclination so incorporating philanthropy into their wealth plan is often very difficult. Bob Lew will share how, as a financial planner, he is able to integrate charitable concepts within wealth plans. More importantly he will share how he has been able to foster charitable goals.

Attorneys are often uncomfortable talking about charitable giving unless the client brings it up first. Or we reduce the conversation about charitable gifts to a simple yes/no question. But attorneys, and other trusted advisors, are in a unique position to help the client articulate charitable goals, recognize time-sensitive opportunities, and sort through different planning strategies. Karen Meckstroth will discuss how she and other attorneys are changing the way they practice to assist clients in making meaningful choices about charitable giving. She will also touch on some of the ethical issues attorneys face when advising clients about charitable planning.

It is an honor to speak with Bob, and to learn from him. Bob has dedicated enormous time and talent to enhancing the lives of his clients and the community through charitable planning. He currently serves on the Board of the San Francisco Estate Planning Council and is a former Board member of the Northern California Planned Giving Council, the National Committee on Planned Giving, and the California State Bar Tax Specialization Committee. Bob received the Phil Hoffmire Service Award from the Northern California Planned Giving Council in 2007 in recognition of his lifetime contribution to the charitable planned giving community.

Connecting Children with Charity: Paper Cranes for Japan

Karen Meckstroth — Wed, 23 Mar 2011 21:53:55 -0800

As parents, we have the opportunity to teach our children compassion and empathy, to expand their perspective of the world, and to instill in them a sense that they have the power to make the world a better place. Estate planning is an opportunity to continue this teaching process. As Silicon Valley attorney John Hopkins says, when parents leave a portion of their estate to charity, when they treat the community as extended family, they pass along a powerful personal legacy to their children in addition to their wealth.

Estate plans do have their limitations though -- a testamentary gift in a will or trust will not do much to instill philanthropic values in children if parents miss the opportunity to do so during their lifetimes. John Hopkins, Jon and Eileen Gallo and others emphasize the need to start young. The letters posted at The Giving Pledge reveal that some of our biggest philanthropists learned the value of giving from their own parents:

Both of us were fortunate to grow up with parents who taught us some tremendously important values. Work hard. Show respect. Have a sense of humor. And if life happens to bless you with talent or treasure, you have a responsibility to use those gifts as well and as wisely as you possibly can. Now we hope to pass this example on to our own children. -- Bill and Melinda Gates

The challenge for parents is to find opportunities for volunteering and charitable giving that are meaningful and age appropriate.

StudentsRebuild, in partnership with DoSomething.org and Architecture for Humanity, have launched Paper Cranes for Japan. This project involves making paper cranes to represent a message of support and healing for Japan and to cause a gift to be made by the Bezos Family Foundation:

These simple yet powerful gestures will trigger a $200,000 donation from the Bezos Family Foundation - $2 for each crane received - to Architecture for Humanity's reconstruction efforts in Japan. Once we reach our goal of 100,000 submissions, the cranes will be woven into an art installation - a symbolic gift from students around the globe to Japanese youth.

The Paper Cranes for Japan project is also an example of how philanthropy is changing -- it demonstrates how technology provides the opportunity for many individuals to coordinate efforts to make a substantial impact. Somehow I believe we'll see more than 100,000 paper cranes. Many more.

Making Donations to Help the People of Japan

Karen Meckstroth — Thu, 17 Mar 2011 06:37:00 -0800

The first thing I do each morning these days is check the Daily Beast and Huffington Post for news about Japan. The stories break my heart. I come from a family that has survived earthquakes. My grandmother's sister used to tell me stories about the 1906 earthquake -- how scared and confused she and the other children were, how the family lost their business and their home, how they left San Francisco to start over in West Oakland. I can't imagine what families must be experiencing today in Japan.

What I do know is that I want to help, and others here in the United States want to help, through charitable donations.

Taxgirl has posted some things to keep in mind when making charitable gifts for disaster relief in Japan such as:

Do your homework. Check out the credentials of a potential donee/charitable organization before you make a donation. Charity Navigator is a great site to gather information (that link takes you directly to the Japanese earthquake relief part of the site). You can also confirm charitable status through the IRS web site – remember that some organizations (like churches) may not be listed, so ask the organization for more information if you’re not sure.

Remember the rules. The rules for charitable giving still apply, even in a disaster of this magnitude. That means that only contributions to domestic tax-exempt charitable organizations are deductible. However, those that provide assistance to individuals in foreign countries qualify for charitable deductions (think Red Cross, etc.) so long as they otherwise meet the rules as domestic tax-exempt charities. Again, check with the IRS – or ask to see the organization’s credentials.

Private foundations wanting to make grants for Japanese earthquake relief must be careful to comply with the rules governing cross-border grant-making. The Council on Foundations has posted resources for grant-makers.

Some additional resources for those who want to donate:

Chronicle of Philanthropy (Responses from Charities to the Japan Earthquake and Pacific Tsunami)

Silicon Valley Community Foundation (Support Japan Earthquake and Tsunami Efforts)

Can We Create More Meaningful Estate Plans?

Karen Meckstroth — Wed, 16 Mar 2011 00:08:49 -0800

A big part of my practice is working with clients to pass along as much of their wealth as possible to the people they love. If you stopped by my office, you could find me doing the types of things estate planning attorneys do to minimize tax and preserve wealth. I might be --

Drafting a GRAT to transfer appreciation on assets such as pre-IPO stock.
Structuring a transfer that reduces the value of assets for gift or estate tax purposes, perhaps through a gift of a partial interest in real property or a gift of family limited partnership interests.
Drafting a GST trust or dynasty trust to pass more and more wealth to grandchildren, great-grandchildren, great-great-grandchildren and beyond.

But wealth preservation is not an end in and of itself. (At least not for most clients.) I believe that clients go through the time and expense of sophisticated estate planning because what they really want is to increase the opportunities for their loved ones to live happy, fulfilling lives.

Of course, more wealth doesn't necessarily lead to greater happiness. "The Joys and Dilemmas of Wealth," a new study out of Boston College's Center on Wealth and Philanthropy, funded in part by the Bill & Melinda Gates Foundation, reveals that parents worry an awful lot that wealth has the potential to do their children more harm than good. An article by Graeme Wood in The Atlantic, "Secret Fears of the Super Rich," previews some of the results of the study:

the overwhelming concern of the super-rich—mentioned by nearly every parent who participated in the survey—is their children. Many express relief that their kids’ education was assured, but are concerned that money might rob them of ambition. Having money 'runs the danger of giving them a perverted view of the world,' one respondent writes. Another worries, 'Money could mess them up—give them a sense of entitlement, prevent them from developing a strong sense of empathy and compassion

The study also reveals how some of the estate planning techniques used to address these fears (distributing wealth in stages, using incentive trusts) are not the answer in and of themselves, and may actually rob beneficiaries of a sense of personal autonomy or purpose:

Many wealthy parents structure their children’s inheritances such that the money arrives only in discrete packets, timed to ensure that during their formative years they have no choice but to find a vocation. But [Robert A. Kenny, one of the survey’s architects] hasn’t seen the strategy work, he says, because the children always know that the money is out there, and usually their friends do too. . . . Even if parents succeed in setting up a trust to parcel out the inheritance according to guideposts—get a degree, get a job, raise a family, etc.—they run the risk of setting up bitter intergenerational feuds. As one survey respondent from a wealthy family explains, 'I have grown up with a father who never wanted to give up control of his business but kept taunting me with the opportunity to step into his shoes.' His wife adds, 'It has been difficult to feel financially independent when [my] spouse’s parents hold tight control over [our] children’s inheritance.'

So how do we create estate plans that move beyond enhancing wealth to enhancing lives? Although wealth preservation is part of the estate planning process, the conversation between the estate planning attorney and the client needs to begin with people, not property. Jon Gallo, a leader in the estate planning field (married to psychologist Eileen Gallo), blogs about how Eileen's work on the psychological impact of wealth caused him to change how he approaches meetings with clients:

For most of my thirty plus years in practice, I viewed myself as a teacher, whose job consisted of four functions:

Obtain and analyze the necessary financial data.

Determine the techniques that can be used to transfer the client’s assets to his or her intended beneficiaries in a tax-smart manner

Present the alternatives to the client in such a manner that the pros and cons of each is clearly revealed and the client is able to make an informed decision.

Implement the client’s decisions . . . .

After 30 years in practice, I changed my introductory meeting into one which explores the clients’ relationships with their children and grandchildren and focuses on the values that the client wishes the estate plan to convey. Asking the clients to prepare a family mission statement accomplishes far more than extolling the virtues of exempt generation-skipping trusts.

I think Jon's approach is correct, but that's not to say it is easy. As estate planners, we can get pretty uncomfortable when we leave the familiar (and technical) realm of GRATs, IDGTs and FLPs and start talking with clients about things that can feel very personal -- hopes (and fears) for their children, attitudes about how wealth should (or should not) be used, charitable causes. We may implicitly make decisions for our clients by asking closed-end questions that do not explore many possibilities ("Would you rather distribute assets to your children immediately upon your death or in stages at different ages?"). Or we may cut the conversation short through abrupt yes/no questions ("Do you want to leave a gift to charity?").

When I ask myself what I want for my own still-very-young children, I realize that my goals are more open-ended. An attorney could not elicit them by asking narrow questions:

I want a safety net -- I want to make sure that my children will never fall through the cracks -- that they will always have the basics (a safe place to live, health care, and basic support if they can't earn a living)

I want my children to pursue a meaningful education, which, depending on who they grow up to be, might mean pursuing advanced degrees, attending a conservatory, training at a culinary academy, or something else

I want my children to have the opportunity to start a business to make the world a better place, or engage in philanthropic activities to make the world a better place, or supplement their income from the trust if they need to so they don't have to turn down a job that might make the world a better place

And, to round off the list, I want my children to be happy (in a meaningful way)

Estate planning attorneys may need to learn new communication skills. Clients will need to accept that the planning process will be more time-consuming and more expensive. But I think it will be worth it. When we focus on something beyond wealth preservation -- to creating opportunities for our children, promoting happiness, enhancing lives -- the process of estate planning becomes more personally meaningful for our clients and the people they love.

Will Billionaire Dan Duncan's Estate Pass Free of Federal Estate Tax?

Karen Meckstroth — Tue, 13 Apr 2010 08:49:01 -0800

Professor Gerry Beyer (Wills, Trusts & Estates Prof Blog) links today to Scott Martin's post, Billionaire's Heirs First to Win 2010 Estate Tax Jackpot on The Trust Advisor Blog.

Dan Duncan is the first billionaire to die during the repeal of the federal estate tax. Prof. Beyer notes:

If Congress reinstated the death tax for 2010 and made it retroactive for the year, Dan Duncan’s estate would generate up to $4 billion for the IRS. Although this seems to be a strong incentive for Congress pass a retroactive reinstatement, The Trust Advisor Blog predicts that Duncan’s death will actually have the opposite effect.

Will Congress retroactively restore the federal estate tax for 2010? Scott Martin proposes that the deaths of individuals leaving large estates make it less and less likely that Congress will reinstate the estate tax for 2010:

. . . probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years.

Planning an estate under the current 2010 rules (no estate tax; modified carryover basis rules) differs significantly from planning an estate if there is an estate tax and "traditional" basis rules. As things currently stand, I draft estate plans to work under the current 2010 rules and at the same time build in flexibility in case Congress restores the estate tax for 2010. Many estate planners are taking the same approach.

Congress has returned from its recess -- and I have returned from my blogging break.

I'll keep you posted.

House Passes Pomeroy Bill HR 4154

Karen Meckstroth — Thu, 03 Dec 2009 13:52:30 -0800

Today the House passed HR 4154 to make permanent the $3.5 million individual federal estate tax exemption and 45% federal gift and estate tax rate (and to avoid the scheduled repeal of the federal estate tax in 2010). It appears that all Republicans and 26 Democrats voted against the bill -- I will update this information if my numbers are off. From what I hear from others closer to Washington, the Senate won't pass the bill without significant changes. Chances are there isn't time to do this by the end of the year.

According to an article by Arthur D. Postal today in National Underwriter Life and Health Insurance News:

Observers expect the Senate to pass a measure that will merely extend the current rate on a temporary basis. The Senate probably will deal with the issue when it works on comprehensive tax reform legislation in 2010.

Although the House acted today, the future of the federal estate tax is still anybody's guess.

House to Vote on HR 4154 Today

Karen Meckstroth — Thu, 03 Dec 2009 08:24:57 -0800

The Office of the House Majority Leader released today's floor schedule. The House is voting on HR 4154 today.

House to Vote Soon on HR 4154

Karen Meckstroth — Wed, 02 Dec 2009 14:00:59 -0800

Today, OMB Watch posted House Set to Vote on Pomeroy Estate Tax Bill by Gary Therkildsen.

According to the article, we could see a vote on H.R. 4154 as early as tomorrow. (Admittedly, some of us were disappointed not to see a vote today.) The OMB Watch article summarizes and provides links to:

OMB Watch's statement of support (pdf) for the bill
analysis (pdf) released today by the Center on Budget and Policy Priorities
report (pdf) released today by Citizens for Tax Justice

H.R. 4154 provides for a $3.5 million federal estate tax exemption for individuals ($7 million per couple) and sets the federal gift and estate tax rates at 45%. Therkildsen reports that the Center on Budget and Policy Priorities finds the Pomeroy bill "more than reasonable" and Citizens for Tax Justice "concludes that H.R. 4154 is somewhere in the middle of the spectrum between good and bad tax policy."

Therkildsen also reports:

On the other side of the debate, legislators looking to further reduce or eliminate the estate tax are preparing to introduce their legislation as well. A bi-partisan bill (H.R. 3905) sponsored by Rep. Shelley Berkley (D-NV), which almost mirrors a Senate proposal introduced by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ), would reduce the estate tax to a $10 million per couple exemption at a 35 percent rate.

Stay tuned!

House Could Vote Wednesday on Estate Tax Legislation

Karen Meckstroth — Sat, 28 Nov 2009 18:33:44 -0800

Hani Sarji, an LL.M. candidate in Tax at New York Law School, is keeping track of Congress's increased activity to do something about the federal estate tax before the end of the year on his blog -- Future of the Federal Estate Tax. Hani Sarji recently provided a link to a Dow Jones Newswires article by Martin Vaughan (US House To Vote On Permanent Estate Tax Bill Next Week) that reports that the House will vote on a new bill:

The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.

The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.

The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.

The Pomeroy bill appears to be HR 4154, which is the second estate tax bill introduced by Representative Pomeroy this year. This bill -- known as the "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009" -- does the following:

repeals the new carryover basis rules
retains the estate tax
provides for a $3.5 million exemption
freezes estate and gift tax rates at 45%

Check here for Hani Sarji's updated list of all the estate tax bills introduced in Congress this year.

New Bills Aim to Restore Estate Tax in 2010

Karen Meckstroth — Wed, 28 Oct 2009 10:36:47 -0800

On October 22nd, Rep. Berkley (D-NY) introduced H.R. 3905 to "amend the Internal Revenue Code of 1986 to repeal the 1-year termination of the estate tax, to increase the estate and gift tax unified credit, and to coordinate a reduction in the maximum rate of tax with a phaseout of the deduction for State death taxes."

The bill increases the federal estate tax exemption from $3,650,000 in 2010 to $5,000,000 in 2019 and thereafter. The bill decreases the maximum tax rate from 44% in 2010 to 35% in 2019 and thereafter.

On October 15, 2009, Rep. Schrader (D-OR) introduced H.R. 3841 (pdf) "[t]o amend the Internal Revenue Code of 1986 to repeal carryover basis for decedents dying in 2009, to increase the estate tax exemption to $5,000,000, and to reduce the maximum estate and gift tax rate to 45 percent."

Upcoming Seminar: Presence and Ethics at the End of Life

Karen Meckstroth — Tue, 27 Oct 2009 15:31:48 -0800

On November 12th, I will be giving a Silicon Valley Bar Association seminar on Preparing for Dying: Presence and Ethics at the End of Life with sociologist and filmmaker Dr. Michelle Peticolas and estate planning attorney Deborah Radin of Kramer Radin, LLP.

We will begin the seminar by watching Dr. Peticolas's award-winning documentary, Caring for Dying: the Art of Being Present. You can view a trailer for the film here.

Deborah Radin will cover the benefits of using advance health care directives to make decisions about the end-of-life. She will also discuss what an "ethical will" is and how individuals can use ethical wills to transfer their personal values, history and legacy.

I will discuss estate planning ethical issues and rules of professional conduct when representing a client at the end of life. If you are an estate planning attorney who has worked with clients in hospice, you are aware that there are numerous ethical issues, including knowing who the client is, undue influence, and capacity. I plan to cover these and other topics.

Attorneys will receive one hour of ethics credit for attending the seminar. You can register for the event through the Silicon Valley Bar Association.

Estate Tax Set to Expire (Temporarily) as Congress Waits

Karen Meckstroth — Mon, 21 Sep 2009 15:50:46 -0800

As we enter the last quarter of 2009, the future of the federal estate tax remains uncertain.

Will the estate tax be repealed for a year in 2010? (Doubtful.)
Will Congress enact major tax legislation by the end of 2009? (Also doubtful -- more likely, we will see a one-year fix to avoid repeal in 2010.)
Will the federal estate tax exemption revert to $1,000,000 in 2011 or will Congress increase the exemption, perhaps by freezing the exemption at 2009 levels as suggested by the Obama administration? (A couple months ago I predicted a $3.5 million exemption, but I have to admit that suspense about this question is building.)
Will the top tax rate be 55% or 45%? (Probably 45% in 2010 (the one-year quick fix), but who knows about 2011!)

An article appearing in the WSJ -- Estate Tax Faces Its Own Life-and-Death Struggle -- provides a status report:

President Barack Obama and congressional Democrats are united behind an effort to block a scheduled year-end repeal of the estate tax. But prospects are blurred by divisions between the House and Senate over the contours of a restored tax, as well as Capitol Hill's focus on health care . . . .

Officially, Republicans in Congress would like to see it disappear on schedule. . . . But very few believe that is possible. . . .

[S]harply different bills in the House and Senate could make a long-term solution elusive. With health care and routine spending bills jamming the Senate calendar, an estate-tax fight -- first on the Senate floor, then with the House -- could make passage of a bill virtually impossible this year, House and Senate aides say. Lawmakers likely would fall back on a one-year extension of the current rate and exemption and leave the fight to next year. . . .

Even [Democratic Senator Blanche Lincoln of Arkansas, who is up for re-election in a state where opposition to the estate tax is solid,] has her eyes elsewhere. 'Our complete focus is on health care,' said Ben Portis, a spokesman for the senator. 'On the estate tax, there will be a time and place.'

Thank you to Professor Paul Caron, author of the Tax Prof Blog, for posting a summary of the WSJ article earlier today.

Short-Term Fix to Estate Tax Seems More Likely

Karen Meckstroth — Tue, 15 Sep 2009 13:45:06 -0800

David Shulman writes today in his South Florida Estate Planning Law blog about an article from The Hill that adds to the growing speculation that Congress will enact a one-year extension of current estate tax rates and postpone a permanent fix until next year:

A split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it expires at the end of the year.

Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year.

Representative Pomeroy is holding out hope that there is time to enact new estate tax legislation this year:

Rep. Earl Pomeroy (D-N.D.), a senior member of the House Ways and Means Committee, said that the House tax-writing panel should consider a long-term solution this month or in October.

Pomeroy said lawmakers should do “something meaningful with the estate tax issue for the American people and eliminate the uncertainty of the present tax code.” Pomeroy said he has been asked by Ways and Means Committee Chairman Charles Rangel (D-N.Y.) to prepare new estate tax legislation for the panel.

September 7520 Rate Remains Low

Karen Meckstroth — Fri, 04 Sep 2009 16:05:00 -0800

Federal interest rates for September (pdf) are still very, very low. The Section 7520 rate remains at 3.4% for a third month in a row. Likewise, applicable federal rates remain low -- the mid-term rate (a 3 to 9 year term) is 2.87% (annual compounding).

Individuals who want to take advantage of low interest rates and low asset values should consider using one or more of the following estate and gift tax planning vehicles:

a grantor retained annuity trust (a "GRAT")
an installment sale to a grantor trust
a qualified personal residence trust (a "QPRT")
a charitable lead annuity trust

There is talk among some estate planning commentators that we are unlikely to see legislation enacting a 10-year minimum GRAT as proposed in the Greenbook. These commentators explain that the ten year minimum can be easily defeated by using a steeply declining GRAT.

Michael Jackson's Will Makes Sense in California

Karen Meckstroth — Mon, 06 Jul 2009 22:36:01 -0800

There is nothing dramatic about the structure of Michael Jackson's basic estate plan. At least not in California. It looks like Michael Jackson set up a revocable living trust (the Michael Jackson Family Trust) and a "pour over" will (pdf). Most Californians who establish estate plans, even Californians with modest estates, use revocable living trusts to dispose of their property. The trust, not the will, directs how to distribute the individual's assets on death. The will "pours over" to the trust and, in the case of a parent, nominates guardians for minor children.

The California Bar Association's pamphlet "Do I Need a Living Trust" describes how a revocable living trust like the Michael Jackson Family Trust works:

What is a living trust? It is a written legal document that partially substitutes for a will. With a living trust, your assets (your home, bank accounts and stocks, for example) are put into the trust, administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die.

The terms of the revocable living trust are private. Unlike a will, the trust is not lodged with the court. The terms of the Michael Jackson Family Trust will not become public unless there is a trust contest or other proceeding involving the trust. Or the trust is leaked to the public.

One reason Californians prefer to use a revocable living trust instead of a will to dispose of their assets is the high cost of probate in California. Probating an estate in California is usually much more costly than a trust administration. From the Bar Association's pamphlet:

How could a living trust be helpful at my death?

The assets held in your living trust could be managed by the trustee and distributed according to your directions without court supervision and involvement. This can save your heirs time and money. . . .

If your assets (those in your name alone) are not in a living trust when you die, they would be subject to probate. Probate is a court-supervised process for transferring assets to the beneficiaries listed in one's will. . . .

Probate can take more time to complete than the distribution of property held in a living trust. In addition, assets tied up in probate may not be as readily accessible to the beneficiaries as those held in a living trust. And the cost of a probate is often greater than the cost of managing and distributing comparable assets held in a living trust.

A trust alone will not avoid probate. After someone sets up a revocable living trust, he or she must take steps to transfer assets to the trust. (Some assets are not subject to probate and are not transferred to the trust -- for example, retirement plans with beneficiary designations.) Even though Michael Jackson set up the Michael Jackson Family Trust, a probate may still be necessary if "probatable" assets were left outside the trust. There are some other possibilities, short of a formal probate, such as transferring assets to the trust by means of a Heggstad petition.

From the Bar Association pamphlet:

If I have a living trust, do I still need a will?

Yes. Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship. If you have a living trust, your will would typically contain a pour over provision. Such a provision simply states that all such assets should be transferred to the trustee of your living trust after your death. (This does not mean, however, that your beneficiaries can avoid going through probate for these assets.)

Michael Jackson did what most Californians do when they set up their estate plans. He established a revocable living trust and a pour over will. The Michael Jackson Family Trust, and not Michael's will, dictates how Michael's estate is to be distributed. Most likely, the Michael Jackson Family Trust establishes separate share trusts for each of his children. There may also be distributions to other family members and charity. The trusts for Michael's children may last for their lifetimes with distributions to Michael's future grandchildren. Or the trusts for his children may terminate during their lifetimes. We don't really know.

Which brings us to another reason Californians prefer revocable living trusts to wills -- privacy.

Estate Tax Change Is Around the Corner: A Recap of the Current Proposals

Karen Meckstroth — Mon, 15 Jun 2009 19:30:43 -0800

With 2010 nearing, we should see Congress act in the next few months to pass new estate tax legislation. What changes can we expect to see?

Here is a recap of where we are:

Federal Estate Tax Exemption and Rates:

Congress's concurrent budget resolution for fiscal year 2010 is based on the assumption that the federal estate tax exemption will be frozen at $3.5 million with a 45% tax rate.
Members of Congress have introduced a number of House and Senate bills, ranging from repeal of the estate tax to Rep. McDermott (D-WA)'s "Sensible Estate Tax Act of 2009" (H.R. 2023), which calls for a $2 million exemption with new graduated rates of 45%, 50% and 55%.
The Treasury Department's "Greenbook," (pdf) which explains the Obama Administration's fiscal year 2010 revenue proposals, states on p. 125 of the Appendix: "Estate and gift taxes are assumed to be extended at parameters in effect for calendar year 2009 (a top rate of 45 percent and an exemption amount of $3.5 million)."
I believe that the most likely outcome is a $3.5 million exemption at a 45% rate -- but we will have to wait and see what legislation Congress actually passes.

Portability:

Members of the House and Senate have introduced bills (H.R. 2023 and S. 722) calling for portability -- i.e., the transfer of a deceased spouse's unused unified credit to the surviving spouse
The Greenbook does not mention portability
Policymakers have discussed portability for years -- will Congress makes portability a reality? It's hard to predict what will happen.

Other Greenbook Proposals

The Greenbook contains three proposed changes to the estate and gift tax laws starting on page 119:

Require Consistency in Value for Transfer and Income Tax Purposes
Modify Rules on Valuation Discounts
Require Minimum Term for Grantor Retained Annuity Trusts (GRATs)

Ronald D. Aucutt discusses these proposals in Capital Letter No. 17 published on the ACTEC website. The article provides in-depth analysis of the proposals, and I recommend reading it in its entirety. Below, I have excerpted parts of Aucutt's discussion:

Require Consistency in Value for Transfer and Income Tax Purposes:

. . . this proposal would require the income tax basis of property received from a decedent or donor to be equal to the estate tax value or the donor’s basis.

The proposal would be effective as of the date of enactment.

Modify Rules on Valuation Discounts:

The proposal is to create a category of "disregarded restrictions" that would have to be ignored when valuing an interest in a family-controlled entity (such as an interest in a family limited partnership) transferred by one family member to another. It would apply to transfers after the date of enactment, but would not apply to restrictions created on or before October 8, 1990. Aucutt comments:

. . . . Using section 2704(b) as a framework, the proposal would create a more durable category of “disregarded restrictions.” Disregarded restrictions would “include” restrictions on liquidation of an interest that are measured against standards prescribed in Treasury regulations, not against default state law. Thus, no change in state law would affect the reach of the statute. In addition, the Greenbook is careful to cast its references in terms of all “entities,” not just corporations or partnerships.

Although the Greenbook does not say so, it is possible that that the “disregarded restrictions” in view, which “include” certain limitations on liquidation (the current scope of section 2704(b)(2)(A)), may also include other restrictions, such as restrictions on management, distributions, access to information, and transferability. . . .

Disregarded restrictions would also include limitations on a transferee’s ability to be admitted as a full partner or other holder of an equity interest, thus apparently overriding any disposition to value a transferred interest as an “assignee” interest. Treasury would be empowered by regulations to ignore the ownership of certain interests by charities, treating those interests as held by the family. . . .

Require Minimum Term for Grantor Retained Annuity Trusts (GRATs):

"Zeroed-out" GRATs survive under the proposals. Instead, the proposals target short-term and rolling GRATs. The proposals require GRATs to have a minimum term of ten years. The 10-year term increases the probability that the grantor will die during the GRAT term -- in other words, it increases the risk that some or all of the GRAT assets will be included in the grantor's gross estate. The proposal would apply to GRATs created after the date of enactment. Aucutt comments:

After reciting the history of section 2702 and the use of GRATs, the Greenbook notes that “[t]axpayers have become more adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to 2 years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.”

While rumors have occasionally been heard of congressional plans to limit the attractiveness of GRATs by imposing a minimum gift tax value for the remainder (such as 10%), the Greenbook instead proposes to increase the mortality risk of GRATs by requiring a minimum ten-year term.

The Greenbook proposals are proposals, not law. But the proposals identify substantive changes in tax legislation that we could see in the next few months. Again, we will have to wait and see.

IRS Releases Section 7520 Rate for June

Karen Meckstroth — Wed, 20 May 2009 17:42:06 -0800

In my last post, I explained how the low Section 7520 rate and depressed asset values make this a good time for some individuals to do a GRAT or re-GRAT an old GRAT. The IRS has released the 7520 rate for June -- 2.8%. The rate is higher than the 7520 rate for May, but is still very low.

The Time Is Right for a GRAT (or Re-GRAT)

Karen Meckstroth — Thu, 07 May 2009 21:34:26 -0800

A grantor retained annuity trust (GRAT) is a particular type of irrevocable trust -- the grantor retains an annuity for a term of years and the remaining assets pass to named beneficiaries when the term ends. When a GRAT works, the grantor can pass assets to the next generation with little or no gift tax. When a GRAT "fails," nothing is left in the GRAT to pass on. The assets are returned to the grantor (or the grantor's estate), and the grantor is out the legal fees for setting up the GRAT with nothing to show for it.

Low federal interest rates and depressed asset values make this a good time for some individuals with large estates to do a GRAT or to "re-grat" an old GRAT that is failing.

From Revising Grantor-Retained Annuity Trusts in the Wall Street Journal:

Here's how a GRAT works: The grantor puts his or her assets into the trust and gets back an annuity that pays a fixed amount each year. Any assets left when the GRAT ends pass to the beneficiary -- usually the grantor's children -- tax-free.

Gift tax is paid upfront on what is known as the present value of the remainder of the trust. This is calculated by the taxpayer's attorney or accountant; a key to the formula is the hurdle rate. It is the assumed rate of return for the assets.

In fact, most GRATs are set up so that no gift tax will be owed. This is done by setting the present value of the remainder of the trust at zero, a practice known as "zeroing out" a GRAT. The person who sets up the GRAT generally takes back annuity payments equal to the value of the asset transferred to the trust, plus the 7520 rate.

As pointed out in the WSJ article, the annuity is calculated using an assumed rate of return on the assets -- the Section 7520 rate. GRATs work when the trust assets appreciate more than the Section 7520 rate.

A GRAT makes sense with assets that are expected to appreciate -- such as pre-IPO stock and undervalued securities. A GRAT also makes sense now because the current Section 7520 rate -- just 2.4% -- is unusually low. To emphasize just how low the current 7520 rate is, compare it to May 2008 (3.2%), May 2007 (5.6%), or May 2006 (5.8%). For a GRAT that is set up this month to work, the assets in the trust will need to grow by more than 2.4%. Even the most pessimistic among us has to admit this will be a pretty low hurdle once the market recovers.

If this is a good time to establish a new GRAT, it is a great time to fix a failing GRAT. Some existing GRATs are coming up bust because the assets in the trusts have depreciated and won't recover before the GRATs end -- especially since the 7520 rates that were in existence when the GRATs were set up are higher than the current rate. There is just too much lost ground to make up. This is where "regratting" comes in. According to the WSJ article:

The process involves replacing assets in an existing GRAT, such as stock, with others, such as cash, of an equal amount. The person then takes the shares and puts them into a new GRAT. . . .

'It's an optimal time to regrat,' says Michael J. Jones, a certified public accountant and partner at Thompson Jones LLP in Monterey, Calif., who has regratted trusts for a number of his high-net-worth clients.

The assets that are moved to the new GRAT will have a chance to outperform the lower 7520 rate, so the increased value in the assets can pass tax-free to the next generation.

I believe it is important for a client to work with his or her financial advisor before making the decision to establish a GRAT. The decision to do a GRAT should not be made in isolation, but should be part of an overall plan given the client's current situation and future goals. Among other things, the client should work with his or her financial advisor to determine if the client has the financial security to part with the future appreciation on assets transferred to the GRAT.

Although a GRAT will make sense for some individuals with large estates, it won't make sense for everyone. Consider the following:

If the grantor dies before the end of the GRAT term, some or all of the trust assets will be included in the grantor's estate for estate tax purposes.
The GRAT is not effective, from a generation skipping transfer (GST) tax perspective, to transfer assets to grandchildren.

The problem with using a GRAT to transfer wealth to grandchildren is the estate tax inclusion period (ETIP). This means that the GST exemption is applied at the end of the GRAT term, after the assets have appreciated. This is not the best use of the GST exemption. There are other options to consider if someone wants to transfer assets to grandchildren.

The IRS sets the Section 7520 rate each month. We don't know what the rates will be next month or the next. But, for the time being, the Section 7520 rate is so low that a GRAT or re-GRAT can be a smart option.

Budget Calls for Congress to Do Away with 2010 Estate Tax Repeal

Karen Meckstroth — Thu, 30 Apr 2009 15:04:31 -0800

This week, the House and the Senate approved the concurrent budget resolution for fiscal year 2010. The budget calls for a permanent extension of the 2009 federal estate tax levels -- in other words, a $3.5 million federal estate tax exemption per individual and a 45% top federal estate tax rate.

The budget also calls on Congress to "extend incentives for enhanced charitable giving from individual retirement accounts, including life-income gifts." This language refers to extending and expanding the IRA charitable rollover.

The budget resolution does not change current tax laws. It is a nonbinding document. Unless Congress acts, the estate tax will be repealed for 2010 and will return with a $1,000,000 federal estate tax exemption in 2011. But the budget is a blueprint for major tax legislation and indicates Congressional support for a permanent extension of the 2009 federal estate tax levels.

The New York Times and the Wall Street Journal reported on Congress's approval of the budget resolution.

If you'd like a nice roadmap to the federal budget process, the Center on Budget and Policy Priorities offers this overview.