Death represents a significant and vulnerable point in time for both the individual facing it and his or her loved ones. In the medical field, it is even associated with failure; only five out of 125 medical schools (4%) in the country offer a course on death and dying. This negative stigma means that what should be accepted as a natural part of life, often becomes an uncomfortable topic.
However, it is important to talk about death with loved ones. There are emotional benefits to reflecting on a life spent together, and expressing gratitude and admiration. It is also important to ask difficult questions so that this topic receives adequate attention and preparation. While everyone would prefer to focus on life, a significant amount of stress related to death can be reduced by proper planning.
Press play to hear McManus & Associates Founding Principal John O. McManus explain his 10 recommendations below for getting the best end-of-life care:
1. Know your options – What is the difference between hospice and palliative care?
2. Dot your i’s and cross your t’s – Are all the necessary legal documents in order?
3. Broach the subject – Have you had a discussion with your loved one to understand what his or her wishes are?
4. Nail down the timeline – When does your loved one want end-of-life care to begin?
5. Research reputation – Have you discovered all that you can about the potential care facilities that you are considering?
6. Find out who is behind the mask – How well do you know your loved one’s care providers?
7. Do your due diligence – Have you done your own research? Have you asked care providers to tell you what you can do to help? Have you explored all of the factors that could influence your decision?
8. Learn the ins and outs – Is in-patient or out-patient care best for your loved one and family?
9. Prepare Plan B – Do you have a backup plan?
10. Ask for help – Could your loved one and family benefit from counseling?
For guidance on ensuring that your estate plan reflects your wishes for life and death, contact McManus & Associates at 908-898-0100.
John O. McManus, Founding Principal of McManus & Associates, was featured as one of New York’s Leading Lawyers in a special section of award-winning New York Magazine. Here’s a picture of the plaque celebrating the special recognition. McManus & Associates congratulates you, John, for being chosen as a “Leader in the Law”!
Karen Brown, a reporter at New England Public Radio, contributed a heartbreaking op-ed to The New York Times that was published over the weekend. In the piece, “This Was Not the Good Death We Were Promised,” Karen shares the story of her father’s death…and how his final time on earth fell short of what he (and she) wanted – from the article:
But at the very end, confronted by a sudden deterioration in my father’s condition, hospice did not fulfill its promise to my family — not for lack of good intentions but for lack of staff and foresight.
John O. McManus, founding principal of McManus & Associates, was moved by the piece and wanted to reach out to Karen. Below is the comment that John submitted in response to the article, which was selected as one of only 16 “Times’ Picks” out of more than 750 reader comments and has already been recommended over 120 times.
I too, am saddened by your loss. What an elegant job you do outlining the issues, and an evolution in hospice care will come.
Running an estate planning law firm, I see our team confronted with the passing of loved ones more frequently than we would ever wish.
What strikes me most was how wonderfully you and (ostensibly) your siblings were there with your father “curled up with him” as he undoubtedly curled up with you in your youth, a heartwarming demonstration of the cycle of life and family.
Indeed your father was not in an enviable position in his final hours, but your father has so much for which to be thankful in his final months as you all comforted and tended to him. The stories of each of you, your father’s children, making your daily sacrifices, no doubt skipping work, time with your own children and social commitments, never cease to significantly move me showing the power of humanity to comfort loved ones and the strength and commitment to the family bond.
Despite those final hours, I submit that your father was — and if you believe in an afterlife — your father is happier than you might ever give yourself credit to appreciate. Your work sends a great message to your children.
McManus & Associates is here to provide guidance to you and your family on the creation of a plan that will do everything possible to help avoid heartbreaking situations like Karen’s. Reach out to us at 908-898-0100.
With President Trump having signed the GOP tax bill today, new tax planning opportunities are now available – but you must take advantage of many of them within the next nine days, before 2018. John O. McManus, founder of top-rated estate planning law firm McManus & Associates, makes the following time-sensitive recommendations in light of tax reform and the reduction of income tax rates:
- Accelerate your income tax deductions. Certain itemized deductions, i.e. income tax and real estate tax deductions, will be capped at $10,000. Pay your January estimated taxes in December; make your January mortgage payment in December; deduct any unreimbursed medical expenses; make your 2018 charitable donations in 2017. Some commentators suggest prepaying property taxes that have been assessed, such as the 2/1/18 and 5/1/18 installments – but it depends on the state. Also, the American Institute of Certified Public Accountants has opined that CPAs should advise clients that payments in 2017 of state tax liabilities projected for 2018 are not deductible on their 2017 federal income tax returns. You should be mindful of the fact that these additional payments could cause you to be subject to the alternative minimum tax, which results in you losing the benefits of these state and local taxes.
- Prepay in 2017 any business entertainment expenses, such as sports tickets or green fees, and membership dues for clubs organized for business. The final tax reform bill disallows these expenses; it will continue to allow the deduction of 50% for food and beverages associated with a trade or business.
- Postpone/defer receipt of income until 2018 to take advantage of the lower tax rates.
- Review your potential capital expenditures. Under the final tax reform bill, until January 1, 2023, a business will be able to expense 100% of the cost of the non-real estate property as first-year additional depreciation (bonus depreciation). (There is the possibility that 100% expensing may be available for property placed into service after September 27, 2017). Starting in 2023, the allowance of 100% is phased out by 20% each year.
- While rates are higher in 2017, make gifts to charities and family foundations with appreciated assets. Because of the lower limitation of 20% of AGI for appreciated stock to a foundation, you should split your gift between this year and next.
- Consider gifting low-basis stock instead of selling to raise cash for gifting that could lead to gains.
- Fund a charitable remainder trust with concentrated positions in appreciated securities in order to diversify without adverse tax consequences associated with selling appreciated securities.
- Harvest your losses to offset capital gains.
- Establish and fund qualified plans. Consider making a gift of up to $5,500 to either a traditional or Roth IRA for your children or grandchildren who are not funding their own IRAs, but have enough earned income to report.
- Contribute up to $28,000 gift-tax free per married couple ($30,000 for gifts made in 2018) to a 529 Plan, which grows free of income tax. The final tax reform bill will allow withdrawals for private, elementary and secondary school expenses up to $10,000 per year.
- Make annual exclusion gifts to chosen loved ones of $28,000 per married couple ($30,000 for gifts made in 2018).
- Make gifts into trusts for children/grandchildren.
- Make unlimited gifts directly to educational institutions and medical facilities.
- Make distributions of income from trust accounts and estate accounts to lower the income tax liability. Estates and trusts are taxed at the highest income tax rate (and a lower threshold at which the 3.8% Medicare surtax applies). Therefore, it may make sense to distribute income to the beneficiaries to be taxed at the beneficiaries’ lower income tax rates.
“Trump’s new tax bill creates tax planning opportunities before year-end,” commented McManus. “Find time for last-minute tax planning as soon as you finish your last-minute holiday shopping.”
For trusted advice on tax and estate planning, call McManus & Associates at 908-898-0100. Learn more about the award-winning firm at www.mcmanuslegal.com.
Ten Tips for Protecting Private Foundation Benefits
The end of the year means a drastic increase in philanthropic gifting.
If any of your clients are considering charitable gifts this month through a private foundation, here are 10 precautions to advise them about:
1. Use Caution when Compensating Family Members Through the Private Foundation
Certain transactions between a PF and a disqualified person are subject to self-dealing rules. The Internal Revenue Code imposes a 10 percent excise tax on the disqualified person for acts of self-dealing between a PF and the disqualified person. A disqualified person includes:
- Officers and members of the PF board
- Substantial contributors to the PF
- Managers of the PF
- Family members of any of the individuals described above
Be aware of the acts that are considered self-dealing between a PF and a disqualified person to avoid penalties, including:
- Sale or exchange of property, or leasing of property, even though the terms are favorable to the PF
- Lending money or other extensions of credit, except on an interest-free basis
- Providing goods, services or facilities
- Paying compensation or reimbursing expenses to a disqualified person
- Transferring PF income or assets to, or for the use or benefit of, a disqualified person
There are some exceptions to these self-dealing prohibitions: The PF can pay compensation to a disqualified person for personal services that are reasonable and necessary to carry out the PF’s purpose and if the total amount of the compensation is reasonable.
- Personal services include PF management and administrative support, real estate management services, investment management services and legal and accounting services, but doesn’t include secretarial services.
- Specific services that a disqualified person can provide include contract and lease negotiation, debt management and budgeting, accounting, supervision of property, operations and inspection, rent collection and supervision of personnel.
2. Don’t Fall into the Ticketing and Fundraising Event Trap
As a general rule, a disqualified person can’t use a ticket to a charitable event receiving support from the PF. This includes attendance by a guest, such as a spouse, of a trustee of the PF.
A trustee can only attend a charitable event if she has responsibility for evaluating and reviewing the activities of the PF.
3. Follow Guidelines for Sharing Office Space, Equipment and Personnel with a Family Office
Office space. The general rule for office space is that it’s an act of self-dealing for an FO to pay the PF for its portion of the lease (the opposite is also true—renting space to a PF). To solve this problem, the FO must enter into its own separate lease, and the landlord can’t be a disqualified person. The common areas should also be allocated to the FO—not to the PF—because the PF can’t pay for such space and then allow the FO to use it. If separate offices and leases aren’t a viable approach to self-dealing, the FO should sign the lease and allow the PF to utilize the space rent-free. Renting to a PF isn’t self-dealing if the lease is without charge. The lease is still considered to be without charge if the PF pays for its own utilities and other maintenance costs to third parties as they occur.
Equipment and supplies. The FO can purchase and provide the supplies at no cost to the PF, or the FO and the PF can enter into separate contracts with a third party to provide the necessary equipment and supplies. If the technology infrastructure can’t be divided between two entities, the FO must pay the expenses and allow the PF to use it free of charge.
Personnel. It may be difficult to separate the time of a shared employee in a shared space, so the safest and best response is always to have the FO pay for these services and not charge the PF. If the employee’s time can be allocated between the two entities, it’s possible for the FO to employ the individual, with the PF providing reimbursement; however, these services must constitute personal services, which aren’t considered secretarial assistance.
4. Avoid Legally Binding Pledges
A member of the board making a personal pledge for a charitable donation, but wishing to have it fulfilled through the PF, rather than through personal funds, causes an issue. This is an act of self-dealing. If an individual, officer, trustee or president of a PF makes a pledge that isn’t legally binding, the PF can assume the pledge. However, the PF can’t assume a legally binding obligation of one of its disqualified persons.
5. Identify any Benefits from Joint Investments and Co-Ownership
A disqualified individual may assume that she can enter into a business proposition with the assistance of her PF, but the Internal Revenue Service has indicated that joint investments could inappropriately benefit the disqualified person and would be considered self-dealing in many circumstances. Depending on the facts, co-ownership of other types of property by a PF and a disqualified person may or may not be considered an act of self-dealing if the PF’s co-ownership confers a significant benefit to the disqualified person as the other co-owner. For example, in Private Letter Ruling 9651037 (1996), the IRS ruled that co-ownership of property by a PF and disqualified person wasn’t self-dealing because the co-ownership was not a sale, exchange or leasing of property. Further, the PF and the co-owner didn’t acquire an interest in the property from the other party; and the PF received its share of rental payments directly from the unrelated third-party tenants.
6. Promptly Address Misuse of Foundation Income or Assets
When family dynamics come into play, there can be liability for a director, so it’s always important to enlist an outside advisor. When there’s misuse of PF’s income or assets, the board will need to reevaluate policies to prevent the transaction from happening again. An example of misuse is a disqualified person displaying a PF’s artwork in his home or office. When a member of the board of the PF has been using PF funds or assets inappropriately, the board should marshal the evidence and retain legal counsel and a forensic accountant. Investigating utilities, furniture purchases, artwork and credit card statements may be a sufficient form of evidence. Legal counsel can then work with the forensic accountant to prepare a full report including all of the self-dealing transactions. If the PF’s directors and officers policy covers excise tax and self-dealing, it should notify the insurance company for possible reimbursements for legal expenses under the policy.
If any transactions might be considered an act of self-dealing, the PF should seek legal counsel. After full disclosure, if a person relies on written legal advice, indicating that the transaction doesn’t constitute self-dealing, the person won’t be liable for any penalty taxes, even if the transaction is subsequently considered to be self-dealing.
8. Beware the Penalties of Self-Dealing
The PF doesn’t pay self-dealing taxes; it’s the individual who participates in the act who pays the initial tax. The first-tier tax on self-dealing is 10 percent, assessed on the amount that’s involved and will be imposed on the disqualified person. A 5 percent tax is imposed on the PF manager who knowingly and willingly participates in the transaction of self-dealing. A second-tier tax of 200 percent of the amount involved can be imposed on the disqualified person if there’s a failure to correct the self-dealing in a timely manner. According to the IRS, self-dealing taxes can’t be abated for reasonable cause.
9. Exercise Expenditure Responsibility
An excise tax of 20 percent is imposed on a PF for distributions that are classified as a taxable expenditure, which is defined as any amount paid by a PF. If a PF is making a contribution and doesn’t want it treated as a taxable expenditure, it must ensure that it exercises expenditure responsibility. Such responsibility includes:
- Obtaining a written agreement from the grantee
- Ensuring that the grant is spent solely for its intended purpose
- Obtaining reports from the grantee on how the funds were expended
- Recovering the funds if they haven’t been used for the intended purpose
- Reporting such expenditures to the IRS on its Form 990 PF
10. Protect the Founder’s Mission
Many individuals establish their PF with a specific purpose for the use of PF assets through the use of a purpose clause. A charitable trust statement can also be included to provide a stringent interpretation of how funds that are being donated to the PF can be used. Governance structures are also beneficial options. One governance structure is to have outsiders act as individuals or majorities on the board. It can be specified that the PF will terminate in the event that the board tries to make a donation that’s not in line with the original intent. The founder can also sunset the PF to terminate within 10 years after her death so that decades later, the money isn’t at risk of being spent outside of the original intent. A gift document can also be included in the original creation of the PF stating that the gift may only be used for specific, delineated purposes.
There are a limited number of days left in 2017. McManus & Associates Founding Principal John O. McManus recently discussed imperatives before year-end for the firm’s clients, in light of significant current events, concerns, and considerations, and amidst a changing tax and economic environment. Listen to the call below, as well as review the list of topics that are covered.
1.Tax Reform – How will potential estate tax repeal impact you?
2. Estate Freezes – You have exhausted much of your lifetime gift exemption; how can a GRAT aid in shifting wealth in a tax-effective manner?
3. Low Interest Rates and the Market – How does the continued low-interest rate environment support the transfer of investments to the next generation?
4. Leveraging Existing Trusts – How can you deploy previously gifted assets to participate in other estate tax minimization strategies?
5. Family Limited Partnerships – What actions should you be taking in light of the new Partnership Audit rules?
6. Estate Tax – Can estate tax be eliminated if you have taken full advantage of all wealth transfer opportunities but still have a sizable net worth?
7. Asset Protection – Are you confident in your protections against exposure to personal and professional liability?
8. Life Insurance – How does premium financing of life insurance by a family member or bank shift wealth and minimize tax?
9. Planning with Basis – Can you take advantage of upstream gifting to an older family member to minimize capital gains tax?
10. Compliance – Are you certain that you have met the IRS requirements for reporting gifts that you have made in 2016 and prior to 2016?
Interested in protecting your estate and maximizing the impact of your charitable giving? Then establishing a Private Foundation is worth your consideration.
A Private Foundation provides the ability to retain control over the administration and investment of assets that have been recognized as important for future grant-making. By making gifts from your Foundation to charities in increments over time, you can extend your influence over the ongoing use of your gifts.
While there are many advantages of Private Foundations, there are also often-overlooked pitfalls (see below), which McManus & Associates Founding Principal John O. McManus recently discussed with clients, as part of the firm’s educational focus series. To listen, click here:
1. Using care when compensating family members through the foundation
2. Beware the penalties for self dealing
3. How to address office sharing with family offices
4. Promptly addressing misuse of foundation funds or income
5. Why you should avoid legally binding pledges
6. How to protect the founder’s mission
7. When to seek legal advice
8. How to exercise expenditure responsibly
9. Identifying any benefits from joint investments or co-ownership
10. Using caution with ticketing and fundraising events.
For guidance on the creation or management of a Private Foundation, contact McManus & Associates at 908-898-0100.
Ten Ways to Prevent Affluenza
As with lottery winners and athletes who are in danger of spending significant portions of their new-found wealth in an instant, children who were raised with wealth must be properly prepared to handle affluence and their inheritance wisely
Older generations must be intentional to guard against the development of affluenza in children of all ages.
Here are 10 tips to help clients accomplish this elusive goal.
1. Reality Check: Preventing affluenza starts with discipline. This includes enforcing consequences when the child breaks rules and giving responsibilities such as chores in early childhood. Each shows that there are real consequences for one’s actions and that life requires hard work and accountability, regardless of status and wealth. Giving children duties creates opportunities for them to feel accomplished when those duties are fulfilled. It also establishes a pattern or habit of personal responsibility. Often it is with these struggles that real personal growth takes place.
2. Better to Give than Receive: Involve children in philanthropic activities and have them volunteer for a charitable organization of their choice. This provides children with a genuine sense of what life is truly like for the majority of the community which is less fortunate. As a result, it develops a profound appreciation for the opportunities they are receiving and, further, what their inheritance can bring in the future if managed properly. Prior to their earning years, children can often better understand the sacrifice of giving time, as they haven’t yet had the privilege to make money or manage their livelihood or lifestyle. Hours in a day, on the other hand, working selflessly for the benefit of others, feel very real to them.
3. The Most Important Things in Life Are Not Things: Informed families derive enjoyment from activities that do not require buying the latest items or spending a significant amount of resources, but stresses the value of relationships and celebrate personal achievement. The amassing a great deal of wealth should not be viewed as an end in itself or essential to achieving happiness. Therefore, involve children in activities that create enjoyment but aren’t driven by the payment of money, and instead require commitment of time and personal effort, such as sports. School activities and undertakings that build relationships in the community are very important.
4. Patience Is a Virtue: Require children to save for things they wish to purchase. This teaches the value of money, self-control and delayed gratification. It also leads to a much deeper appreciation for the items earned. Postponing gratification builds character, discipline and fortitude in children, and it creates strength for managing relationships with others. Meaningful relationships require each of these personal traits.
5. Knowledge Is Power: Enroll children in basic, age-appropriate financial literacy classes. It is a good investment in a child’s future and will help them learn to manage the money they earn and their family inheritance. Spend the time to teach children to protect themselves first from themselves, before protecting themselves from others.
6. No Substitute for Hard Work: Beginning in high school, especially during the summertime, encourage children to secure employment or start their own businesses to earn resources. This imparts the meaning of hard work, the importance of being responsible and accountable and the pride of ownership in dollars earned. In affluent families, travel and other enrichment activities, including participation in sports events, can make it difficult to consistently integrate the weekly responsibilities of a summer job or other activities during the school year, which often are the most enriching lessons of all.
7. Word to the Wise: Identify advisors that can be trusted to guide children once their inheritances are received, but these individuals should be introduced while your children are adolescents. The value of having these advisors in their lives should be covered as well. Concepts can be integrated modestly regarding the management of family assets. It is an iterative process; a 14-year old may not fully appreciate the value of the family advisor in the same way that a 20-year old would. That said, at a very early age, make it clear that a child must come to trust their established and proven professional relationships.
8. Failing to Plan Is Planning to Fail: Develop a plan for significant assets to be passed in a shielded way. Create goals for the orderly process of wealth transfer, and outline what resources should be allocated and what vehicles should receive them. Move assets to be passed to children into protected entities first to safeguard them, and then communicate to the children at a later date that the assets exist—eventually let them know the size of those assets. As we move to guard assets from others, think of it as a gradual process instead of a “wholesale immersion” of the children into the family finances. That said, fearing children will find out too soon is a reason why too often people fail to protect the assets and themselves. As a child learns more about their interest, teach them to be more active in its management and protection rather than spending it.
- Include requirements to pay off any debt, calculate income and living expenses, and create a realistic budget.
- Encourage the child to invest and track assets received. Portfolios must compound to outperform inflation, key to avoiding dissipation of the protected assets. The assets must also be diversified to avoid concentration in just a few positions, which can lead to dramatic losses if the concentrated bet fails.
- Consider putting a temporary freeze on making significant decisions regarding the assets; this can allow time for the child to think through their situation and avoid making monumental mistakes due to impatience or panicky decisions with their inheritance.
9. Know When to Say No: Children should always be selective in their choices of friends. It is simply unavoidable that certain friends may be attracted to the lifestyle that a child enjoys rather than the quality of the child’s character. As children grow, part of their decisions regarding their friends might be: “Is this person or group spending time with me because of my family’s affluence? Do they support the values we promote as a family?” An example of a red flag could be if a child is asked or is presumed to pay for common items when they are out with others.
10. Preparation Is the Key to Success: Create or update estate planning documents. The best laid plans are irrevocably undermined if parents pass away before completing the mission of ensuring that their children are ready to accept the inheritance. Delivering a gift in a protective vehicle is as important as delivering the gift itself.
- Not only create trusts and protective partnerships, but be prepared to amend your Will to reflect any new situation that, if otherwise ignored, could affect your child’s growth and progress within the family. If there is a demonstrated weakness with social or financial matters, for example, this will require further maturation.
- Setting up a trust for a child offers him an opportunity to exercise the wisdom you have provided from a very early age with the protection against wrongful, unanticipated attacks. Have a co-trustee serve with the child well into adulthood. The trustee’s job is not to give the child a fish, but rather to teach him to fish.
As Warren Buffet once said, “A very rich person should leave his kids enough to do anything but not enough to do nothing.”
Source URL: http://www.wealthmanagement.com/high-net-worth/ten-ways-prevent-affluenza
This week, The New York Times published the story, “Want to Help? Do Your Research Before You Donate,” which highlights John O. McManus as a trusted philanthropic advisor. As noted by the article, John recently challenged the firm’s foundation clients to think beyond the borders of their typical charitable intent and to consider a new initiative: the needs of those suffering in the most recent natural disasters. From the article:
Dr. Granowitz was on a business trip when the hurricane struck. He watched on television the images of devastation. The day he returned home, he got a call from John O. McManus, a lawyer who advises Dr. Granowitz on philanthropic giving through his family foundation.
“He said, ‘What are you doing about charity relief in Puerto Rico?’” said Dr. Granowitz, who is chief medical officer for a major pharmaceutical corporation. “I said, ‘Frankly, John, nothing yet.’ He said, ‘Well, get off the stick and do something!’”
This client worked with McManus & Associates to combine his own philanthropic mission with the immediate need of the people of Puerto Rico. In the story, The Times follows the charitable gift from its source to the distribution warehouse in San Juan.
Two key pieces:
- In times of need, please think beyond your typical charitable beneficiaries. From The New York Times article:
Mr. McManus said the focus of his clients’ charitable giving includes organizations affiliated with the nursing profession and those that serve older people.
- Take time to research these gift initiatives to ensure that your new charitable investments provide the “hoped for” yield. Also from the story:
Communicating directly with donors, showing the effect their dollars have had, is more than just a way to verify that the recipients have used the money. “We’ve found that people want to meet someone with the organization, and they want to hear the stories, the so-called ‘mission moments’ which give examples of their work,” Mr. McManus said.
McManus & Associates would love to help you think through your family foundation’s strategy, or if you are now ready to establish a family foundation, we are here to guide you through its creation.
Most importantly, if we can assist you to refine your own relief effort in the recently devastated areas of Houston, Puerto Rico, Northern California, Mexico City, or the tragedies in Las Vegas, New York City, or the First Baptist Church in Texas, please contact McManus & Associates at 908-898-0100; we’re happy to make the process easier.