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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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.

Posted in Conference Call, Guidance Tagged , , , ,

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.
Posted in Conference Call Tagged , ,

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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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.

trusts and estates logo

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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Conference Call: Tax and Estate Planning Considerations for Same-Sex Couples

Nearly a year ago, on June 26, 2015, the U.S. Supreme Court ruled in Obergefell v. Hodges, delivering a historic decision in favor of State recognition for same-sex marriage. Exactly two years prior to this decision, in United States v. Windsor, the U.S. Supreme Court struck down the constitutionality of Section 3 of the Defense of Marriage Act (DOMA), which defined marriage for federal purposes as existing only between one man and one woman.

“In its most basic terms, recognition of same-sex marriage equates to the simple fact that a spouse is now a spouse, irrespective of gender, in the eyes of the law,” commented McManus. “Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history.”

Recently, during a conference call with clients, McManus & Associates Founding Principal John O. McManus shed light on the far-reaching effects of these Supreme Court decisions.

LISTEN HERE for details: “Top 10 Tax and Estate Planning Considerations for Same-Sex Couples”

Top 10 Tax and Estate Planning Considerations for Same-Sex Couples

  1. Gender-blind: First and foremost, when discussing the changes born of the recognition of same-sex marriage, the overarching theme is that there is no need to draft estate planning documents any differently for same-sex couples. In the eyes of the federal and state governments, same-sex and opposite-sex married couples are afforded the same tax benefits.  Whether a Will was executed before the date of Obergefell (6/26/15) makes no difference. The law that applies is the law at the date of the Testator’s death. Pursuant to Obergefell, states MUST recognize same-sex marriage.
  2. Unlimited Marital Deduction:  Same-sex couples that marry are eligible to take advantage of the unlimited marital deduction for federal estate and gift tax. Prior to Obergefell, same-sex couples had to rely on their applicable exclusion amount with regard to providing for the surviving spouse. It is important for same-sex couples to review with their wealth planning and tax advisors any existing estate planning in order to best utilize the tax-saving vehicles available to them.
  3. Portability:  In addition to the unlimited marital deduction, the surviving spouse is entitled to the portability provision under federal estate and gift tax law. Pursuant to the portability provision, a surviving spouse may preserve, and thereafter utilize, any portion of the deceased spouse’s unused applicable exclusion amount. One benefit of portability is to allow the surviving spouse to make tax-free gifts in order to reduce the estate tax owed upon the survivor’s death. For more information on portability, please see an in-depth discussion of the top 10 possibilities of portability: http://mcmanuslegal.com/2015/10/educational-focus-series-top-10-possibilities-of-portability/.
  4. Gift Splitting: Each individual is given the right to make gifts on a tax-free basis for federal gift and generation skipping transfer tax. The annual exclusion amount is currently $14,000. Now same-sex couples can enjoy the benefits of gift splitting, whereby one spouse can gift from their own assets, with the consent of the other spouse, in order to utilize both of their annual exclusion amounts (currently $28,000 maximum to any individual) resulting in the gifting spouse’s applicable lifetime gift tax exemption amount remaining intact. Generally, gift splitting requires the filing of a Form 709 Gift Tax Return; however, if the split gifts total $28,000 or less to each donee, only the donor spouse is required to file a gift tax return.
  5. Beneficiary Designation of Retirement Benefits:
    1. Retirement account assets of a deceased same-sex spouse can now be “rolled over” into the surviving spouse’s account without the requirement of a mandatory minimum distribution or lump sum distribution. This is a positive development because prior to the recognition of same-sex marriage this roll-over was not possible.
    2. With regard to an ERISA covered plan, the Windsor decision made it possible for the same-sex spouse of a participant in the plan to automatically be the beneficiary. The participant is now required to obtain consent from his or her spouse if that spouse is not the desired beneficiary of the plan.
    3. All state-level employment benefits should be reviewed and updated with the same-sex spouse information in order to take advantage of the rights and benefits available to the same-sex spouse. Review employer’s benefits policies – spousal benefits granted to same sex couples.
    4.         Also review prenuptials and other marital agreements.
  6. Insurance:  Insurance planning may have been part of same-sex planning prior to the Obergefell decision. All policies, along with beneficiary designations, should be reviewed in conjunction with the new planning concepts for a streamlined flow of assets upon both the first death and the death of the surviving spouse.
  7. Review previously filed federal tax returns:  Same-sex spouses may amend previously filed federal estate, gift, and income tax returns from single to married status, subject to the statutory limitations period of three years from when the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later. Married couples living in states that did not recognize same-sex marriages prior to Obergefell may be able to amend filed state income tax returns for the years 2012, 2013, or 2014, depending on the law of the state.
  8. Natural Born and Adopted Children: A child, whether born or adopted into the same-sex union, needs to be specifically identified throughout the estate planning documents. The relationship of the child to the adoptive parent or parents or birth parent in a same-sex married couple can be cause for contest at the death of the legal parent if not planned for ahead of time.
    1. If a child is born to one spouse, the other spouse should strongly consider adoption of the child to legalize the relationship. If there is no legal relationship between the child and the spouse of the natural parent, a relative of the natural parent could fight for custody if the natural parent dies or fails to care for the child.
    2. The same issue applies to a child who is only adopted by one spouse. Same-sex couples may consider co-parent adoption to ensure that both parents have rights regarding child custody and guardianship.
    3. If a partner has a child and the other partner plans to adopt that child, he or she is eligible to receive an adoption tax credit. This credit is not available for a spouse adopting his or her spouse’s child. If a couple is planning to marry and an adoption is part of the big picture, it may be more advantageous for the adoption to take place before the couple marries.
  9. Non-Citizen Spouse May Consider Becoming a Citizen:  Non-citizen same-sex spouses are afforded the opportunity to become U.S. citizens on the basis of their marriage to a spouse of the same sex who is a U.S. citizen. This eligibility should be considered carefully, taking all ramifications into account. For example, as a U.S. citizen the individual would be taxed by the U.S. on their worldwide income.

Also, expatriating from the U.S., renouncing your U.S. citizenship, and returning to your native country can be an expensive proposition. To expatriate, you generally must prove five years of U.S. tax compliance. If you have a net worth greater than $2 million or average annual net income tax for the five previous years of $160,000 or more, you must pay an exit tax. It is a capital gain tax as if you sold your property when you left. In addition, the U.S. State Department has raised the fee for renouncing U.S. citizenship from $450 to $2,350.

  1. Review current estate plan:
    1. Due to the tax-saving venues opened to same-sex couples, it is beneficial for the couple to review all existing plans in order to maximize federal and state estate, gift, and income tax planning.
    2. Beneficiary designations for insurance and retirement benefits should be reviewed in order to align the designations accordingly.
    3. Re-title any property with joint ownership to ownership by the couple as tenancy by the entirety. In community property states, the couple may want to convert separately-owned property to community property in order to receive a step up in basis upon the death of the survivor of the spouses.
    4. Confirm that definitions in the estate planning documents correctly reflect relationships, for example “spouse,” “husband,” “wife,” and/or “children,” whether naturally born or adopted.
    5. Determine if there is a necessity for a “no contest” clause to be incorporated in the event family members disapprove of the same-sex couple’s lifestyle or decisions regarding the estate plan.
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McManus Teams Up with Forbes to Shed Light on Elder Financial Abuse

forbes-logo-pngForbes Writer Ashlea Ebeling recently brought a very important topic to light with the help of John O. McManus and one of his clients: elder financial abuse. In her new article “Inside A Lottery Scam,” Ebeling tells the harrowing story of a McManus & Associates client, who – in her 90’s – was targeted strategically and relentlessly by unscrupulous phone fraud. From the piece:

“There was a man who was very friendly, very charming.” So begins the tale of a socialite widow from New Jersey horse country who lost nearly $1 million in a lottery scam. Call her Penny. She’s ashamed. “I can’t believe I was so ignorant; nobody can condemn me more than I do myself,” she told me on the line with her lawyer, John O. McManus of New Providence, N.J. “What’s funny is I’m a penny picker-upper; when I think of the amount of money that I gave away to an unknown person, it’s unbelievable,” she says.

How did the scammer convince Penny to part with a lot more than just pennies? “If she sent money, the caller said, she would have a chance to win big.” She started sending checks in hopes of hitting the sweepstakes jackpot, which would give her more money to make a big impact on the community by setting up a charitable foundation to honor her husband and carry on their family tradition of giving.

McManus & Associates was handling the administration of Penny’s late husband’s estate when a representative from Peapack-Gladstone Bank called to say there were suspicious transfers going from Penny to someone in North Carolina for various large amounts. From the story:

When McManus, her accountant, and a representative from the bank questioned Penny, she was tight-lipped. The other banks—worried that she would take her money elsewhere–wouldn’t take a stand. She had threatened to close the accounts…Only when the police came to Penny’s house and told her they confirmed that someone was committing fraud, did she tell the caller to stop.

Elder financial abuse is a widespread problem, with fraudsters stealing billions of dollars from seniors every year. However, planning can protect you and your family, the way that Penny is now protected with the help of McManus & Associates. From the Forbes write-up:

The solution in her case: McManus helped her set up a revocable trust, with Penny and his firm as co-trustees, and her accountant as a backstop. The idea is that the banks now have an excuse to reach out to McManus and not feel they’re in a compromised position of betraying their customer. “We as a firm have become far more paternalistic,” he says.

A revocable trust can be set up at any time, and you can name a trusted relative or friend as co-trustee. A simpler option is to authorize someone you trust as an emergency contact on your financial accounts should something seem amiss. And consider granting that someone you trust “view-only access” to your accounts.

McManus teamed up with Ebeling and Forbes to help others avoid Penny’s pain:

“What we’re trying to do is send a cautionary tale to your mom, my mom, Penny’s friends and their children,” McManus says, adding, “Here is an extreme example to warn those who think it just can’t happen to their family.”

To read more details on the financial elder abuse case in which Penny was a target, read Ebeling’s full Forbes story here. For help setting up a revocable trust to protect your loved ones, contact McManus & Associates at 908-898-0100.

Posted in Media Clips

McManus Pens Letter to the Editor Responding to New York Times Story on Privilege

New York Times graphic

Recently, the New York Times ran a story by Nelson D. Schwartz, titled “In an Age of Privilege, Not Everyone Is in the Same Boat (A1, April 24).” John O. McManus – McManus & Associates’ founding principal who grew up in the Bronx but has worked with high net worth families for 25 years – penned the Letter to the Editor below in response:

To the Editor:

Marketers see countless opportunities embodied by those striving to scale our country’s caste system of privilege – but their target audience is mistaken about from where happiness springs eternal. For many years, I was the poster child for this market: making every effort to rise to the top, circling that zip code of privilege. Starting life in the Bronx, there was nothing more coveted than a future exodus and the concomitant elbow-rubbing with the financial elite. For the past 25 years, I have represented high net worth families as an estate planning lawyer. The journey has been deeply rewarding, but – unlike what I had imagined as a kid – I’ve discovered that the richness of life is not universal among, nor exclusive to, this financially homogeneous group. Rather than exerting unending effort to be included in the newest club of privilege, I’m learning that sharing the wealth with the less advantaged may be the greater source of enduring satisfaction.

To read Schwartz’s full article for the New York Times, click here.

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Bankrate Relays Investment Ideas from McManus in Feature Slideshow

bankrate logoBankrate, which has more than 2.75 million readers, recently turned to McManus & Associates Founding Principal John O. McManus for advice on investments and IRAs. His thoughts are included in the publication’s feature slideshow, “Traditional or Roth IRA: Find out which IRA is better-suited for high-return investments.” From the slideshow:

Pay upfront, watch Roth explode later

Do you benefit from having an extra-long time horizon? Then going full throttle in the Roth IRA is apropos, says John O. McManus, founding principal of McManus & Associates in New York City.

“If you can take a long-term view, opt for a Roth IRA and take an aggressive approach with asset allocation and investing,” he says.

“Roth IRAs buy you a lot more time to allow the market to recover, absent the mandatory distributions of traditional IRAs. Create a self-directed Roth IRA and pour significant capital in it to build horsepower. Then smartly pursue alternative investments to generate the biggest returns,” he says.

“Private equity and real estate are the 2 best areas where real leverage can be achieved with a Roth IRA. The idea is to pay your taxes up front, then really watch returns from your investments explode.”

To view the full slideshow, click here. And to discuss your investment strategy with McManus & Associates, give us a call at 908-898-0100.

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