Conference Call: “Top 10 Ways to Solidify an Estate Plan Post-Execution”

You’ve labored to establish the framework for your legacy. McManus & Associates has helped you build the foundation through effective Estate Planning. However, it remains unfinished until all the elements of the structure are in place. McManus & Associates Founding Principal John O. McManus  held a call with clients this week to discuss how to build a solid and complete Estate Plan to protect and nurture your family today and beyond.

During the presentation, McManus covered the “10 Ways to Solidify an Estate Plan Post-Execution” (list follows). Click below to hear McManus discuss to-do’s after you have executed your documents. 

LISTEN HERE for details: “Top 10 Ways to Solidify an Estate Plan Post-Execution”

1. Dotting Your I’s and Crossing Your T’s – Proper Account Titles;

2. Beelining to Beneficiaries – Asset Beneficiary Designation;

3. Gifting Guidelines – Current Threshold;

4. Ensuring Insurance & ILITs – Account Funding and Premium Payments Checklist;

5. Taking the Guesswork out of GRATs: Scheduled Payments and Terminations;

6. The Rules of Generosity: Gift Tax Returns;

7. Foundation Fundamentals – Maintenance and Distribution;

8. Interstate Real Estate – Estate Tax Perspectives;

9. Leaving your Mark: Legacy Intentions, Family Meetings & Generational Preparation; and

10. Weathering the Storm – Maintaining an Estate Plan in a Dynamic World.

 

Posted in Conference Call, Guidance Tagged , , ,

Conference Call: Proposed Treasury Regulations and Discounting

Proposed IRS regulations were recently issued that would eliminate discounting of transfers of family business interests. Valuation discounting is now time-sensitive, as this opportunity is scheduled to be eliminated, possibly by the end of the year.

Partnerships are sophisticated vehicles for unifying family investments, providing for the orderly transfer of assets, delivering asset protection, and maintaining centralizing control. These partnerships are legitimate entities that facilitate the distribution of wealth to family members and the growth of family assets. Partnerships also afford the opportunity for discounts on asset transfer to family members; while discounting is not the number one reason for creating partnerships, the strategy is worth noting.

The Treasury Department has finally issued its dreaded proposed regulations limiting discounted transfers among family members. This means the clock is ticking until the public hearing on December 1, 2016, which will help determine the strategy’s fate. Final regulations can be issued at any time after that date and will become effective 30 days after their issuance.

Of interest, the November Presidential election results will not affect the implementation of these regulations, since the IRS is trying to eliminate a concept that has been frustrating it for years – an area where the IRS has consistently lost in the Courts.

Discounting is still available for existing family partnerships and for partnerships that are set up for gifting purposes, but, if you have not done so already, now may be the time to create a family partnership or make additional transfers of family partnership interests, with the opportunity potentially expiring soon.

LISTEN HERE for details: “Proposed Treasury Regulations and Discounting”

 Immediate Steps and Opportunities for Wealth Transfer Valuation Discounting

The recently proposed IRS regulations could significantly limit these discounting opportunities, as well as what you can do now to take advantage of the various planning opportunities using valuation discounting.

1) What Changes Are on the Table?

a) Issuance – As mentioned, on August 2, the IRS issued proposed IRC §2704 regulations related to valuation discounting in an effort to reduce or eliminate the size of valuation discounts being applied to intra-family transfers by gift or inheritance.

b) IRS Scrutiny – Valuation discounting has been an area of IRS scrutiny for many years and these proposed regulations were anticipated; the question has always been the extent to which the regulations would limit discounting.

c) Major Impact to Valuations – The proposed §2704 regulations, if adopted in their current form, will have a major impact on the way assets can be discounted for estate planning purposes.

i) Family Partnerships and LLCs (as holding entities) with minority ownership would be disallowed a discount for “Lack of Control,” which has a median of 27% and would suppress a discount for Lack of Marketability, which has a median of 35%.

ii) Non-family Partnerships and LLCs with minority ownership would most likely still be allowed to take such a discount, however, the burden of proof for business legitimacy may be more stringent moving forward.

iii) For Holding Companies, it appears that the elimination of the lack of control discount will impact and suppress the lack of marketability discount if the owners are family members. For operating companies (operating a trade or business), the elimination of the lack of control discount might not impact their ability to take a discount for lack of marketability.

iv) Perceived Abuse of Discounting – In the proposed regulations, the IRS is attempting to eliminate what it perceives to be an abuse of discounting by taxpayers using controlled family entities. Their rationale is that, if family members voting together can change the terms of the entity’s governing document, then the entity is controlled by the family. Thus, it follows that any restriction on liquidation of an ownership interest in the family entity is designed to generate a valuation discount.

Example: If my two daughters and I own an LLC, and our operating agreement requires a unanimous vote by all members for any amendment, we could vote together to impose a restriction on liquidating our respective interests. This restriction would generate a valuation discount, so that I could transfer my interest to my daughters at a discounted value. After the transfer, my daughters could vote to eliminate the restriction in the operating agreement.

Note: There are valid reasons for discounting. The IRS scenario presented in the proposed regulations ignores the fact that restrictions can be imposed for independent, non-tax reasons, and not merely to generate a valuation discount.

v) Other Significant Changes – will be discussed in another conference call.  These changes include: 1) the impact on preparing the Estate Tax Return Form 706 for interests passing to nonfamily members; and 2) that transfers to unrelated parties will be disregarded for discounting purposes until three years after the transfer.

2) Planning Priorities to Protect Your Wealth

a) Closing Window of Opportunity – The window of opportunity for using these discounting strategies before the final regulations go into effect will soon close. We recommend that those who would benefit from this type of valuation discounting act quickly.

b) Removing Future Appreciation – Discounting can be incredibly valuable for estate planning purposes. The transfer removes future appreciation from your estate, and assets entitled to a valuation discount use less of the $5.45 million lifetime gift tax exemption. This helps to preserve the gift and estate tax exemption for future transfers of wealth during lifetime or after death.

Example: If a gift of $15.6M in assets is discounted to $10.9M by funding two $5.45M trusts, that would save $2.5M. If that number is compounded over 20 years by growing in tax-efficient grantor trusts, that amount could triple, which would result in $7.5M of tax savings. Also, if the trusts purchase additional family assets at a discount (possibly originally valued at $100M, for example), then that gift could be discounted by approximately $28M and save $14M in current estate taxes. Compounding over 20 years, the strategy would save $42M in taxes.

c) Methodology for Discounting Closely-held Businesses – There are multiple ways to value a business. Private businesses, however, are usually valued lower than equally sized public companies for two common reasons:

i) Lack of Marketability – Ownership in private businesses is much harder to convert to cash than public shares, because there is no consistent market like the NYSE, for example.

ii) Lack of Control (also called a minority discount) – Private business interests are commonly non-controlling interests in the business, as opposed to stock in a public company in which all owners have a number of votes proportional to the number of shares owned.

iii) Family Limited Partnerships – Family limited partnerships can hold many different types of assets but are especially valuable for consolidating the management of illiquid investments, such as hedge fund and private equity interests and closely-held businesses.

  1. Using a family limited partnership is a common strategy for structuring closely-held businesses.
  2. The interests are held between general partner interests, which possess the power to make all decisions related to the partnership and limited partner interests that are non-controlling and only participate in the partnership’s profits.
  3. You can create a Family Limited Partnership to own a portion of your assets; one of our recommendations is that you move assets out of your name and off your balance sheet without surrendering control. The partnership would create a 1% controlling interest and a 99% non-controlling interest.  You can continue to manage the business through the 1% interest, but the non-controlling interest would be gifted and/or sold to an irrevocable trust.
  4. Since a non-controlling interest would be transferred, the value of the FLP interest that is gifted or sold would be reduced for gift tax purposes under the current IRS regulations.
  5. This discounting allows you to preserve a greater portion of the $5,450,000 lifetime gift exemption for use in future wealth transfers without imposition of the gift tax.

d) Discounting Requires Qualified Appraisers – The appraisal needs to come from either an accounting firm or a professional valuation firm specializing in valuation of closely-held business interests. According to the IRS, a “qualified appraiser”:

  1. Has earned an appraisal designation
  2. Regularly prepares appraisals
  3. Demonstrates verifiable education and experience in valuing the type of property
  4. Is NOT someone who is the donor or recipient of the property

e) Discounting with Real Estate

  1. Ownership of a tenant in common interest justifies a valuation discount that is not available with joint tenancy ownership. In a Tenancy in Common, each owner has an equal right to the property and separate fractional percentages of ownership interest in the property.
  2. It is well established that there is a very limited market for buyers who are interested in purchasing a fractional interest in real estate (lack of marketability discount). Lack of control over the property and historic costs associated with partition justify a 15% discount in these instances.

3)    Other Estate Freezing Strategies That Are Hot Opportunities – To decrease your taxable estate, these strategies transfer future growth in the asset to the next generation. Using these freezing strategies earlier during your lifetime could help offset the loss of discounting.

  1. Grantor Retained Trusts – One frequently used strategy utilizes grantor retained trusts, including a grantor retained annuity trust, a grantor retained unitrust, and a qualified personal residence trust.
  2. Defective Grantor Trusts – Another strategy is to sell appreciated assets to an irrevocable trust. This freezes the current asset value being sold. Although it is a grantor trust for income tax purposes, it is considered an irrevocable trust for gift and estate tax purposes.
  3. Philanthropic planning – Charitable gift planning can also achieve tax-efficient wealth transfer planning, including charitable remainder trusts, charitable lead trusts, and private foundations.

Please give us a call at 908.898.0100 if you would like to discuss any of these estate planning strategies before the IRS-proposed regulations become permanent.

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Trusts & Estates Publishes Feature Slideshow by John O. McManus on International Estate Planning Issues

trusts and estates logoIn Wednesday’s edition of “The Estate Planner,” a newsletter for estate planning practitioners, a Trusts & Estates/WealthManagement.com slideshow-feature by McManus & Associates Founding Principal John O. McManus was highlighted as a lead article. The item, “Top 10 Multinational Issues in Estate Planning,” appears with the preview text: “The complexities of estate and tax planning on an international scale can quickly ensnare the unaware.”

For the Trusts & Estates slideshow, the publication harnessed guidance issued by McManus & Associates for its recent “Beyond Our Borders” conference call with clients, which is part of the firm’s educational focus series. In this installment, McManus shed light on issues ranging from Foreign Bank Account Reporting (FBAR) to international guardianship, foreign succession laws and foreign trusts.

According to McManus:

“We live in an increasingly globalized world – today, many people travel regularly for work and pleasure, and have loved ones and investments abroad. Whether you are a US citizen with assets abroad, a US resident living overseas with ties back home, or have loved ones overseas from whom you could receive gifts or inheritances, it is important to keep up to date on multinational estate and tax planning issues.”

To review “Beyond Our Borders: Top 10 Multinational Issues in Estate Planning,” click here. To discuss multinational issues related to your estate, call the McManus & Associates team at 908.898.0100.

Posted in Media Clips

Wall Street Journal Cites Tips from McManus for Avoiding and Properly Handling Sweetheart Scams

wsj logoWall Street Journal Columnist Veronica Dagher penned a new article this week, “How to Avoid, Detect and Respond to Romance Scams.” The piece provides steps that readers can take to protect themselves (and their parents) from these fraudulent attacks, as well as things to do if the swindling has, unfortunately, already taken place.

As revealed by Dagher, so-called sweetheart scams cost victims nearly $120 million in the first half of 2016, according to the FBI’s Internet Crime Complaint Center. How are these criminals finding success? “The fraudsters are ‘very adept at playing on the vulnerability of human emotions’…With some senior citizens, they are also playing on a lack of tech savvy.”

Dagher buckets the steps to avoid and address these scams, as follows:

1)      Check the Connection

2)      Check In With Your Parents

3)      Check the Pressure

4)      Report It

McManus & Associates Founding Principal John O. McManus is cited and quoted in the “Check In With Your Parents” and “Report It” sections. From the article:

“Stay in touch and call your parents often so that they don’t become vulnerable to scammers,” says John McManus, an attorney in New Providence, N.J., who has helped several senior citizens who were victims of fraud…If your parents do fall victim to a scam, show compassion, says Mr. McManus. Help them keep their dignity and understand that anyone can be wrongly manipulated at any age, he says.

Another key step in the process, per Dagher’s piece:

Report fraud to the local police department and file a police report immediately, says Mr. McManus. Documenting the fraud can help to dispute any account changes (even if it doesn’t result in prosecution), he says. The FBI has a website for filing internet-crime complaints.

Alert credit-card companies, banks and any other financial institutions where the victim has an account, Mr. McManus says. Check for suspicious activity on the victim’s credit report and review bank accounts, insurance policies and investments for changes in beneficiaries or account ownership, or to see whether loans have been taken against the policies, Mr. McManus says.

To read Dagher’s full story, click here. And for help with preventative measures that protect your and/or your parent’s assets from romance scams, reach out to McManus & Associates at 908.898.0100.

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Conference Call: Beyond Our Borders – Top 10 Multinational Issues in Estate Planning

We live in an increasingly global world. Today, many people travel regularly for work and pleasure, and have investments and loved ones abroad. From different law codes to increasing scrutiny from world governments, the complexities of estate and tax planning on an international scale are ready to ensnare the uninitiated. Whether you are a U.S. citizen with assets abroad, or a U.S. resident living overseas with ties back home, it is important to keep up to date on these multinational issues.

Recently, McManus & Associates held a conference call on multinational issues in estate planning, as part of its educational conference call series. Replay the discussion or read about it below!

LISTEN HERE for details: “Top 10 Multinational Issues in Estate Planning”

  1. After the Brexit Referendum: What We Know At Present
    1. Now that the shock of the UK referendum has passed, it is important to review some potential implications.  To join the EU, the UK had to revise its own laws to conform to EU law in order to facilitate the free movement of goods, services, and persons across one EU market.  Therefore, although it is not totally clear at this time, their departure could affect UK policy.
    2. The EU tax policy did not have much impact on a UK domiciled individual. However, EU regulations governing cross border transactions for corporate taxpayers will no longer apply.  The UK treaties with other countries dealing with double taxation of both non domiciled UK individuals and corporations may provide some structure for international taxation for these individuals and entities.
    3. For individuals, EU membership provides for their free movement to live and work throughout the EU.  Therefore, persons moving into and out of Britain will have to deal with residency issues and passport issues, and they could lose their right to stay in the UK to live and work.
  2. Assets Abroad: U.S. Clients with Non U.S. Assets
    1. U.S. citizens and resident aliens are subject to U.S. income and estate tax on their worldwide assets. A nonresident alien is taxed only on U.S. source income, including income connected with a U.S. business or capital gains from the sale of U.S. real property.
    2. The U.S. has signed estate tax and income tax treaties with many countries to avoid double taxation.
    3. Given the increased lifetime gift tax exemption, lifetime gifts of foreign assets are an option to reduce the burden of U.S. persons owning non-US assets.
    4. A nonresident alien planning to immigrate to the U.S. should consider purchasing U.S. real estate through a foreign corporation and making unlimited non-U.S. sitused gifts to U.S. persons (directly or in a foreign trust) prior to immigrating, so as to avoid estate and gift taxes.
  3. The Financial Fine Print: Compliance Beyond FBAR
    1. As we talked about during our previous discussion in May, U.S. citizens working overseas and foreign citizens considered residents have FBAR reporting obligations if the value of their foreign financial accounts exceed $10K at any time during the year. Please discuss this with us if you have any questions about FBAR or Voluntary Disclosure programs.Form 8938: Specified Foreign Financial Assets must be filed with your U.S. income tax return for foreign financial assets worth more than (i) $50,000 on the last day of the taxable year or $75,000 at any time during the year, for an unmarried individual living INSIDE the U.S.; OR (ii) $200,000 on the last day of the taxable year or $300,000 at any time during the year, for an unmarried individual living OUTSIDE of the U.S.
    2. Form 3520: A U.S. beneficiary receiving $100,000 or more in gifts/bequests from a foreign individual is required to file it by April 15 of the year following the gift. Otherwise, it may result in a 25% penalty of the total value on the gifts/bequests.
    3. Form 5471: U.S. persons (including a citizen, resident alien, domestic partnership or corporation, and a domestic trust or estate) who are officers, directors, or shareholders of a foreign corporation must file this form if they own or acquire 10% of a foreign corporation’s shares.
  4. Forethought for Families: International Guardianship
    1. The process through which the court appoints a third party to care for a minor’s welfare is complicated when the third party is a non-U.S. person living abroad. The courts work through a system of jurisdiction and have differing means to establish that jurisdiction over the non-U.S. individual.
    2. The client who wishes to appoint non-U.S. individuals as guardians must address this in a Last Will and Testament that names the guardians overseas AND temporary guardians in the U.S. to assist with the transfer. The temporary guardians will help to ensure that the children possess current passports, and assure their safe transfer to their appointed guardians.
    3. Without clear direction from the Will, a court may be reluctant to approve such guardians and restrict U.S. citizen children from exiting the country. NY courts will not appoint overseas guardians to serve alone, but will accept a co-guardianship structure with a guardian in the U.S. (specifically NY due to jurisdiction issues). NJ has a process whereby the international guardians must appear at the U.S. embassy or consulate abroad in order to qualify.
  5. Prepare for Heirs: Foreign Succession Laws
    1. Common law:  The legal system in most of the U.S. (except Louisiana), Canada (except Quebec), Australia, UK, New Zealand, and Ireland.
      1. In general, an individual can dispose his/her property to whomever through a Will or Trust.
      2. However, spousal elective share and dependent’s rights may limit an individual’s freedom to dispose his/her property.
    2. Civil law: All other major legal systems inspired by the Napoleonic Code (based on Roman law).
      1. Maintains forced heirship of assets.
    3. Sharia Law: There is considerable variety among Islamic countries as to its application, but in general it shares more in common with civil law with respect to succession laws.
    4. New EU Succession Regulation applies a single national law of succession to a person’s moveable and immoveable property upon death and applies to both testate and intestate succession and may avoid local forced heirship rules that would otherwise apply to property of a U.S. person in a civil law jurisdiction. (UK, Denmark, and Ireland are not parties to this regulation)
  6. Two Wills Are Better than One: Using Multiple Wills for Foreign Assets
    1. Some clients require multiple wills for each local jurisdiction.
      1. Advantages: no ancillary probate, wills can be tailored to a particular jurisdiction (movable and immovable property) and can reduce fees and expenses in countries that compute fees based on worldwide assets.
      2. Disadvantages: more expenses in legal fees to prepare the wills, increased complexity of estate plan as they need to complement each other in a coordinated fashion.
    2. Consider using multiple wills if:
      1. There is substantial real property or investments in privately owned companies in a foreign jurisdiction.
      2. There is difficulty in conducting an ancillary probate.
      3. There are expected disputes regarding the disposition of property
      4. The foreign country has not adopted regulations raising issues concerning the formal validity of international wills in that jurisdiction.
  7. Distinct Differences around the Globe: Civil Law Interpretation of Common Law Trusts
    1. While Common law recognizes trusts and trusts are regularly used in estate planning, most civil law countries do not recognize trusts.
      1. Japan and South Africa are isolated examples that do allow trusts by statute.
      2. Colombia and Lichtenstein recognize and enforce trusts as part of their domestic law.
      3. Some civil law jurisdictions allow the recognition of a trust if the trust is valid under the law of jurisdiction of the trust.
    2. While certain civil law jurisdictions may permit common law trusts to hold property under their jurisdiction, the trust may be subject to different tax treatment.
      1. In France, trustees are obligated to report the existence of trusts annually if any trust assets are located in France or if any of the beneficiaries are French residents. They are also subject to taxation upon the death of the settlor or if assets are transferred to beneficiaries by the trustees. (Friedman-Lederman)
      2. In Spain, distributions from trusts to residents are treated as being between third parties, which result in higher tax rates.
      3. Trustees who move to the UK will cause the trust to be a UK resident trust no matter where the income is earned, in which case it will be subject to UK income tax (at a 50% rate).
  8. Pros and Cons: Offshore Asset Protection Trusts
    1. Such vehicles are less popular due to closer inspection by the IRS with respect to unreported taxable income, however, offshore asset protection trusts are still viable for anonymity and creditor protection.
      1. U.S. courts have no jurisdiction to seize trust assets, which creates further obstacles for creditors with more legal costs to even have their claims heard.
    2. Foreign LLCs can also protect against creditors.
      1. While the client is appointed as Manager of the LLC, the client can appoint a foreign Trustee to oversee the assets in times of legal duress.
    3. The Hague Convention on Trusts has ensured the recognition and protection of trusts and their assets in certain foreign jurisdictions.
      1. Although the U.S. has not ratified the convention (the U.S. has only signed it), a U.S. person can still benefit from countries that have adopted it.
    4. As always, fraudulent conveyance or fraudulent transfer – an attempt to avoid debt by transferring money to another person or company – can render the foreign trust invalid for creditor protection.
  9. Dollars and Sense: Taxation of Foreign Trusts
    1. A trust where U.S. laws do not have jurisdiction AND where a U.S. person is not a trustee makes a trust a foreign trust for U.S. tax purposes.
    2. A foreign trust is treated and taxed as a U.S. person if there are U.S. beneficiaries or there is a U.S. grantor.
    3.  A foreign non-grantor trust with U.S. beneficiaries has Distributable Net Income (DNI), which is subject to income tax whether the income was distributed or not.
      1. Undistributed Net Income (UNI) will suffer “throwback rules,” which imposes heavy penalties when income tax is not paid.
      2. Foreign trusts can invest in tax exempt income or manage investments for capital appreciation only to avoid throwback rules, although the trustee must remain mindful about its obligation to diversify investments.
  10. Land of (Planning) Opportunity: Portability and the QDoT
    1. Portability permits the surviving spouse to use the Deceased Spouse’s Unused federal estate tax Exemption (“DSUE”) of their most recent deceased spouse, in order to increase the estate tax exemption amount.
    2. However, portability is only available to U.S. citizens and U.S. residents unless otherwise provided by treaty.
    3. In order to have similar tax benefits as a U.S. citizen, non-U.S. citizens or non-U.S. residents should establish a Qualified Domestic Trust (“QDoT”) to have the DSUE amount of the decedent included in the surviving spouse’s applicable exclusion amount, with some restrictions.
    4. QDoTs must be “maintained under the laws of” and “governed by the laws of” a particular state or the District of Columbia, and must include a U.S. Trustee.
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McManus & Associates Named One of AI’s Top 50 Legal Elite

AI Legal Elite

McManus & Associates has been named one of Acquisition International’s (AI) Top 50 Legal Elite. According to its website, “AI is a monthly magazine that seeks to inform, entertain, influence, and shape the global corporate conversation through a combination of high quality editorial, rigorous research and an experienced and dedicated worldwide network of advisors, experts and contributors.” It has over 108,500+ subscribers that range from business leaders to investors.

The Legal Elite Awards honor the “firms, lawyers and attorneys that make their mark within the industry and who set the standard for their peers and competitors.” According to AI, the award winners were “determined through a process of in-depth research coupled with [AI’s] in-house expert analysis.”

For more information, go to Acquisition International’s website.

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McManus Quoted by MarketWatch on Digital Estate Planning

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McManus & Associates Founding Principal John O. McManus was recently tapped for insight on digital estate planning by MarketWatch (WSJ), which has over 16 million unique visitors per month. Andrea Coombes’ column, “How to include your digital assets in your estate plan,” explores the importance of accounting for one’s online presence – from email and “bank accounts to Facebook, PayPal and more” – when planning for the transfer and administration of assets.

From the article:

If you fail to account for those digital assets in your estate plan, you risk burying your family or friends in red tape as they try to get access to and deal with your online accounts that may have sentimental, practical or monetary value.

John’s comments make up #5 and #6 on the article’s list of tips:

  1. Consider writing both a broad statement of intent for digital assets as well as specific directions for each account. John O. McManus, founder of McManus & Associates in New York, recommends that “clients create a memorandum addressed to one’s executor and heirs indicating the intentions regarding specific digital accounts.” But to avoid the problem of forgetting to include an account, you need two statements, he says. “Due to the dynamic nature of technology and the fact that an average American could have hundreds of accounts, I also recommend a general statement of intention to encompass all other accounts — past, present, and future — belonging to the decedent.”

  2. Think carefully and be specific about what you want your executor to have access to. For example, can he read all of your email messages? If not, be clear about that, McManus says. “When an executor is granted the power to access a decedent’s online accounts, this authority should be limited and specific in nature so that it does not allow an extensive and invasive search of the decedent’s online records,” McManus wrote in an email.

Click here to read Coombes’ full story. For help with properly accounting for your digital assets in your estate plan, reach out to McManus & Associates at 908-898-0100.

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McManus’ Insight on Modern Estate Planning Featured in NJBIZ Wealth Issue

Last week, McManus & Associates Founding Principal John O. McManus was featured in NJBIZ‘s Wealth Issue. The piece, “A GUIDING HAND – McManus: Estate planning is increasingly complex,” includes a Q&A with John and highlights his insights on trends in how the ultra-wealthy protect their assets and their families.
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John pic - NJ BIZ

A GUIDING HAND: McManus: Estate planning is increasingly complex

By NJBIZ STAFF, July 7, 2016 at 10:29 AM

John McManus has spent more than 25 years as a guiding hand for high net worth families and individuals, but it was an experience with his own family that helped shape his career.

When his grandfather died in 1974, he left behind the legacy of a moving and shipping business he had built in New York City. His will had been prepared by “a lawyer who was incredibly smart, but not an expert in this area” — and the estate took 20 years to settle.

“I learned from that to say, ‘If I ever get involved in law, I would want to do things where I’m helping people avoid those crises, where the whole family devolves and disintegrates,’” McManus said. “And that, in effect, happened on my grandfather’s level.”

Today he serves as founding principal of McManus & Associates, a New Providence-based law firm specializing in trust and estate planning that serves some of the state’s wealthiest residents.

“We are an estate planning, asset protection and family office firm, where we give advice and consultation to affluent people on how to save on estate tax, on how to — in an organized way — orderly transfer their assets to the next generation and do that in an asset-protected way,” McManus said. “(We also) advise them on philanthropic issues and share with the various families what we’re learning from other families — what good ideas they’re putting together and try to make it a fluid distribution of information.”

NJBIZ spoke with McManus about trends in estate planning and how the wealthy manage and protect their assets.

NJBIZ: The estate tax is one of the hottest issues of the day right now, but you must live and breathe it every day. What should people know about the tax in New Jersey, relative to other states?

John McManus: The issue that happens for people is that they say, ‘If I am not so anchored to New Jersey because I’m spending time in London, I’m spending time in Jackson, Wyoming, I’m spending time in Southern California and I’m spending time in Palm Beach or in Miami, why would I want to choose as my jurisdiction a state that has the highest tax rate? So, we’ve been seeing that.

We haven’t seen people just mass migrate out of this area. (David) Tepper is a large pronouncement of that. Others are saying, ‘My business is here. Even though I’d like to call myself a Florida resident, I can’t avoid the very important contacts and the amount of time I need to be in New Jersey.’

So, it’s much more relevant when people get to the point when they’re either about to sell their business, so they’re moving it, or when they’re close to retiring and they don’t need to put as many hours in, in New Jersey.

NJBIZ: You’ve had your firm for 25 years and you’ve been doing this for even longer than that. What are some of the trends and changes in estate planning that you’ve been seeing?

JM: I would tell you the biggest trend is that in the past, if you had $600,001, you were paying federal estate tax, and that’s just not that long ago. Today, you can have a $5 million net worth and be exempt from federal estate tax, and if you’re not in the New York metropolitan area, you can be exempt from state estate tax as well. So, it leaves a significant portion of the population exempt from paying estate tax. That’s awesome news for that group. Some would argue it’s highly disproportionate and not fair. On the other hand, when we’re dealing with the IRS, if we have just wiped out a large block of people that they would otherwise be going after for estate tax issues, now that leaves a more concentrated sum.

So, we saw the smoke coming down the tracks and we knew this was coming, so we moved our practice to doing more complex stuff and to addressing people that had net worth in excess of the exemption amounts. And that has made all the difference in the world.

So when we could do great work avoiding the estate tax for the ($1 million) to $20 million clients, now we realize that our best work and our most sophisticated work is for the group beyond that.

NJBIZ: Can you give us some examples of how you’re advising clients in estate planning and protecting their wealth?

JM: The best thing that people need to understand and the best example I could give you is that (heading into 2011), we were all afraid that the amount of money that you could give away — or that if you passed away — anything over $1 million, was going to be subject to a (55 percent) tax. So when you add life insurance and when you add your IRA and you add your house, even mom and dad can eclipse all of that. So there was a huge rush to the door to get assets into trust. And we did scores and scores of them at that time. …

(So, in late 2010), President Obama negotiates with the Republicans a deal that clearly was not to his advantage, and the exemption, which was down to $1 million, settled back up at $5 million, and all of these people had put assets into trusts and they were at the golf clubs telling their spouses and telling their friends, ‘We wasted all of our effort doing that.’ And the other people who didn’t get to it were all laughing.

But 2012 was one of the better years in the market. So if you put $5 million into trust in 2011, that $5 million became $6 million by the end of 2012. So now you have $6 million off your balance sheet. The person that did nothing, that $5 million they had is now at $6 million, but they could still only give ($5 million) away. So they missed that delta, that extra million dollars, which was growing inside the trust. The result was that, that strategy alone saved that group of people $500,000 in estate tax.

So, the best part about estate planning is to give assets into trust and let them grow, because then all of the growth is what avoids estate tax.

NJBIZ: We know wealthy people often have international ties and overseas assets to consider. What about that piece of it?

JM: The most important trend — and this has been a trend for several years — right now is that the U.S. government is firing up age-old reporting requirements that they have largely left untouched. And that goes to when you have assets offshore, you have to not only report the income tax on it, you have to report the asset value. So, clients historically had just moved assets offshore to help pay for grandma and grandpa’s thatched roof or dirt floor in their old family place. Or people emigrated here and they want to send money to help. It’s been a basis of this wonderful country for the past 200 years — always sending money. But now we found people taking advantage of growing economies, whether it’s China or it’s India or it’s Brazil, where now it’s not just moving assets offshore to help family members — it’s moving assets offshore to invest in those economies. That’s No. 1.

No. 2 is that sometimes those assets are ill-gotten. They’re in cash businesses, which is not an unreasonable thing for first generations who don’t have significant education, they’re choosing the first way they can to make money and sometimes taxes aren’t always paid on (that cash). So what a neat opportunity to take those assets, load them up in a suitcase and bring them overseas. The U.S. government says, ‘Enough.’ And the U.S. government’s view on this is, ‘If you have assets offshore and you don’t tell us about it, and we find out about it, it’s no longer a civil issue where you’re going to pay penalties and interest — you’re going to go to jail.’ As my father-in-law likes to say — he’s a first-generation immigrant — we can’t catch many of you, but the ones we catch, we cut their head off, put it on a stake in the middle of the town square as a gentle reminder that this is what happens when we catch you.

So the sophisticated people right now are spending a lot of time making sure that, wherever they have assets outside the U.S. perimeter, they are focused on reporting requirements.

NJBIZ: What else is there to consider?

JM: Clients who are receiving assets from their noncitizen, nonresident foreign family members — in the past, if they passed away, they may have left the country home in France or in Asia to their child. The rule has always been the same, but today, if you inherit an asset overseas, no tax, as long as they are noncitizen nonresidents, but you must let the U.S. government know that you’ve received it. Why? Because if your parents have a million-dollar bank account in Lichtenstein, they lived there and they died, that account is now on your balance sheet and the U.S. government wants to know that you’re paying tax. So no tax on the way in on the gift, but once it’s inside your estate, you now have to pay the tax, and the only way they’re going to assure that you do that is you’ve got to report the receipt of that gift.

What we’re doing is helping clients create trusts, not that we can avoid tax, but we can avoid estate tax through having it in a multigenerational vehicle. Clients are also wealthy, first-generation immigrants who are involved in finance, or the children of that, often have roots overseas so they’re making gifts of charity back to the countries of their origin. So we’re helping them maybe set up a side-by-side fund here in the U.S., where if you make the gift to this fund, it’s a charitable donation because it’s a U.S.-based charity and then that charity sends the money overseas.

NJBIZ: Estate planning is complex enough by itself, but we take it that wealthy people have other things to worry about.

JM: If one would ask, ‘What are people concerned about when they’re on that level?’ I would say that they have their own stresses, and life is very, very complicated. There is no downtime for people of the highest level of wealth, because they’re concerned about their families, they’re concerned about taxes, they’re concerned about government intrusion, they’re concerned about kidnapping. They’re concerned about large lawsuits, they’re concerned about an evacuation of assets from their hedge funds. Today, hedge funds, even the most powerful ones, are seeing with these markets that are providing at the current amount lukewarm returns that, very sophisticated investors who are in hedge funds are grumbling. And we’re dealing with some of the smartest investors in the world who are managing these hedge fund interests, but the fear is what happens if partners start to demand their money?

So, it may not be the easiest to say, ‘I feel bad for these people,’ but there are real issues.

NJBIZ: What other types of issues?

JM: They’re concerned about cyberattacks, for example. … The typical wisdom right now is that we cannot stop cyberattacks, but what we must be able to do is two important things: As soon as the breach takes place, be able to rally quickly and get assets protected and freeze the attack. No. 2: We have to have a public statement that we can get out to our investors and to the world as to the breach and what we’ve done immediately to address this issue. So that’s a very important piece that I think customers are concerned about.

Another piece that people are concerned about is that wealthy people travel a lot. In the U.S., we don’t have a problem with kidnapping, but when you go to Brazil, there’s problems with kidnapping. When you go to certain places in Africa … there are real risks with kidnapping. So we have clients that are invoking international security groups that are with boots and checking those areas and making sure that, if we can’t necessarily stop the kidnapping, we can do a search for that area. When you and I travel, we may check with the Department of State and find out if a country is on a watch list. These guys are actually sending people to those communities and doing research within that area to find out what’s going on. And then they may have somebody on the perimeter. We have one of our clients right now that’s interviewing that group because he’s got family members that are going to be overseas. And for him, at that level of net worth, why wouldn’t you want to invest in something like that?

NJBIZ: Just to bring it full circle, at least estate planning is something that they can control. Is there anything else we should know about that process?

JM: I think the biggest thing that this group does and that we do the most is creating trusts that are designed to have an organized, disciplined path of wealth transfer through the generations. That’s No. 1. No. 2, it’s helping to avoid the estate tax and, No. 3 is setting a structure in place so that the generations beyond here do not just think they have been blessed with largess, because our clients don’t want their children to feel that they’re entitled, and by putting assets in trust, it says, more that you’re a steward of these assets and your job is to grow them and compound them for the generations beyond you than to just think that you can do nothing.

Warren Buffet said, ‘Enough that you feel that you can do everything, but not so much that you can do nothing.’ And it’s a great quote.

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Wall Street Journal Shares Guidance from McManus in “Wealth Report”

The Wall Street Journal “Wealth Report” recently published a story by Veronica Dagher titled “When an Elderly Parent Has Been Scammed.” The article outlines key steps for an adult child to take if he/she expects that a parent or loved one is the victim of elder financial abuse. McManus & Associates Founding Principal John O. McManus is quoted throughout the piece.

At the outset of the article, Dagher helps readers understand both the obstacles that they’re likely to encounter when trying to help an elderly loved one who has been scammed and the typical feelings of the victim. Empathy and patience are key.

Dagher then lays out concrete steps, identifying actions that can be taken by the many people who find themselves in the difficult situation of picking up the pieces left by elder financial abuse. From the story:

….it’s important to report fraud to the parent’s local police department and file a police report immediately, says John McManus, an attorney in New Providence, N.J. Even if an investigation doesn’t identify the scammer or result in a prosecution, documenting the fraud can be helpful when disputing any account charges, Mr. McManus says.

Children should help the parent alert credit-card companies, banks and any other financial institutions where the parent has an account, he says. They also should review the parent’s credit reports for suspicious activity. And the parent’s bank accounts, insurance policies and investments should be reviewed to see if there have been any changes in beneficiaries or account ownership, or if loans have been taken out against the policies, Mr. McManus says.

He also recommends that victims change and unlist their landline and cellphone numbers to help protect against further abuse.

And later in the story:

If you don’t have power of attorney and suspect your parent is being swindled, visit the parent’s bank or branch manager to discuss your concerns, Mr. McManus says. You possess no legal rights to the parent’s financial information, but at least a visit puts the financial institution on notice that there may be a problem and they may be more likely to detect any fraud, he says.

Click here to read the full story for more great tips on salvaging a situation where an elderly loved one has been swindled. For experienced guidance on dealing with elder financial abuse, or to be proactive and protect your loved ones before any damage has been done, give McManus & Associates a call at 908.898.0100.

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Bankrate and WealthManagement Highlight McManus’ Guidance on Tax and Estate Planning for Gay and Lesbian Couples

bankrate logoBankrate, which has more than 2.75 million readers, recently published a story based on McManus & Associates’ “Same-sex marriage tax and estate planning tips.” As the story points out, thousands of gay and lesbian couples are celebrating wedding anniversaries this year and, this month, another momentous date. June 26 was the day last year that the Supreme Court declared same-sex marriage legal throughout the United States. From the article:

“The Internal Revenue Service had been accepting jointly filed federal tax returns from same-sex couples married in states that sanctioned their vows since the High Court struck down the Defense of Marriage Act in 2013. The 2015 Supreme Court decision in Obergefell v. Hodges, however, made taxes less of a hassle for gay and lesbian married couples at the state and federal levels regardless of where they live.”

As Bankrate Reporter Kay Bell puts it, “The historic 2015 marriage ruling also opened up a new world of estate planning for same-sex married couples.” She goes on to share insight from John O. McManus:

“Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history,” says John O. McManus, founding principal of the New York/New Jersey-based estate planning law firm McManus & Associates.

As the Supreme Court same-sex marriage ruling anniversary approaches, McManus offers some estate planning tips.

Marital deduction plus portability

Same-sex married couples can now take advantage of the unlimited marital deduction from federal estate tax and gift tax for transfers between spouses. This means that, in most cases, one spouse can leave an unlimited amount to his or her surviving spouse without any federal estate tax ramifications.

In addition, the portability provisions of federal gift and estate tax laws generally allow a surviving spouse regardless of gender to use any portion of his or her deceased spouse’s unused applicable estate and gift exclusion amount. This amount is adjusted annually for inflation. For 2016, the amount that skips these taxes is $5.45 million per spouse.

Greater gift splitting

Same-sex married couples also now can enjoy the benefits of gift splitting, says McManus.

The annual gift exclusion amount currently is $14,000. Now a same-sex husband or wife can, with the consent of his or her husband or wife, give a total as if each spouse contributed half of the amount.

This combining of individual allowances lets married couples increase their total gift tax exemption amount.

Generally, gift splitting requires the filing of a Form 709 Gift Tax Return. However, says McManus, if the split gifts total $28,000 or less to each gift recipient, only the donor spouse is required to file a gift tax return.

To read Bell’s full article for Bankrate, click here.

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WealthManagement.com also featured a byline slideshow by John O. McManus on same-sex planning in its Morning Memo on Monday. The newsletter links to “Top 10 Tax and Estate Planning Considerations for Same-Sex Couples” on the publication Trusts & Estates’ website. Click through the slideshow for a quick download on key opportunities now available to gay and lesbian couples in light of the historic U.S. Supreme Court decision in Obergefell v. Hodges.

Morning Memo - Same-sex

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