The Art of Gifting: Top 10 Issues with Owning and Gifting Artwork

Owning artwork is not only a cultural indulgence, but the sophisticated (and the lucky) possess artwork as an investment that can provide a handsome return. Auction houses, most recently Christie’s, have seen record-setting bids as fine art wrestles to take its position as an asset class equal to equities, commodities, and other hard assets. In light of the increase in capital gains tax combined with the collector’s desire to reduce the imposition of income tax and estate tax, the field is ripe for sophisticated planning.

As part of it Educational Conference Call series, John O. McManus this month discussed strategies to addresses the hard and soft issues surrounding the ownership and transfer of art. We invite you to listen to the recording to find detailed information on the Top 10 issues with owning and gifting artwork that follows, whether you’re an artist, dealer, investor or collector.

LISTEN HERE: “Top 10 Issues with Owning and Gifting Artwork”

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John O. McManus Pictured and Quoted in the New York Times

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New York Times “Wealth Matters” columnist Paul Sullivan recently interviewed John O. McManus, founding principal of NJ-based McManus & Associates and a top AV-rated attorney, about the implications of a recent court case in which he successfully helped a client named Kate contest the will of her late grandmother. John grasped the dynamics at play in Kate’s situation with her family, which was crucial to a successful outcome with the case.

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McManus Shares Mission-Critical Advice on the Do’s and Don’ts of Creating a Trust in CNBC Article

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On assignment for CNBC, Jennifer Woods recently penned an article to help readers think through the terms when creating trusts in order to ensure money “lands in the right hands and isn’t squandered.” For expert guidance on the topic, Woods turned to John O. McManus, founding principal of McManus & Associates and a top AV-rated estate planning lawyer.

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McManus Interviewed by Best-Selling Author Gail Liberman for “Managing Your Fortune” Column

palm beach daily newsGail Liberman—personal finance columnist for Dow Jones Retirement Weekly and the Palm Beach Daily News, contributing editor for Financial Advisor magazine, and best-selling author (her latest book is “Quick Steps to Financial Stability” – Que/​Penguin)—recently chatted with John O. McManus, founding principal of McManus & Associates and a top AV-rated tax and estate planning attorney, for her column “Managing Your Fortune.” As part of her regular spot for the Palm Beach Daily News, Liberman’s piece “Need a revocable living trust?” explores the commonly-heard recommendation from financial gurus to implement one of these planning vehicles.

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Conference Call: Top 10 Considerations for Domestic Asset Protection Dynasty Trusts

State laws vary rather widely regarding the jurisdiction of trusts and trust assets. Certain jurisdictions have laws that are generally more favorable in their treatment of trusts for purposes of asset protection, access to trust-owned assets and creditor protection. As part of McManus & Associates’ Educational Focus Series, Founding Principal John O. McManus shares expert guidance on the top 10 things to consider when deciding where to site your trust.

LISTEN HERE: “Top 10 Considerations for Domestic Asset Protection Dynasty Trusts”

Top 10 Considerations for Domestic Asset Protection Dynasty Trusts

 During the discussion, you’ll find answers to the 10 questions below:

  1. What is a self-settled trust? When can the grantor list himself or herself as a beneficiary?
  2. How do state income taxes affect the choice of situs for my trust?
  3. What variation is there in state legislation regarding creditors and Statute of Limitations?
  4. Are certain exemptions made for specific types of creditors?
  5.  What are the standards for proving fraudulent transfers?
  6.  What role do the courts play regarding actions involving a Trust?
  7. Does the state require an Affidavit of Solvency upon the transfer of assets?
  8. How does the rule against perpetuities affect choice of situs?
  9. Discussing observations of trustee fees in each of the most favorable states.
  10. What are some of the other miscellaneous trust enhancements in the most favorable states?

We would love to learn more about your asset protection needs. Send us an email at reception@mcmanuslegal.com or give us a call at 908.898.0100.

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McManus & Associates’ Advice on Irrevocable Trusts Featured by The Trust Advisor

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The Trust Advisor, dubbed as “America’s Leading Wealth Management e-Newsletter,” today published an article based on McManus & Associates’ latest client conference call in our educational series. The piece, titled “The Trusts Are Signed, Now It’s Time To Keep Them Running,” opens by pointing out that the fiscal cliff pushed billions of dollars into irrevocable trusts.

Author of the story Scott Martin observes that “most of the assets have already flown, leaving many advisors who rode the trust wave to ask what’s next.” Martin goes on to cite advice from top-AV rated Attorney and Founding Principal of McManus & Associates John O. McManus:

This is actually a big opportunity for those who can switch gears from helping people create trusts to the heavy lifting of keeping those vehicles properly, says top attorney John O. McManus.

He still preaches the importance of those families who have not yet transferred their estates into an irrevocable trust – as he notes, the assets should continue to appreciate – but those who already have are often at a loss.

“I always explain to my clients that the creation of a trust shouldn’t be viewed as a box to check,” he says. “Rather than setting up the trust and moving on, new planning ideas can be continually implemented that utilize the trust as a leading instrument to accomplish one’s financial mission.”

Check out the full write-up to see McManus’ checklist for managing an existing irrevocable trust.

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Conference Call: Maintaining and Operating Irrevocable Trusts

With the flurry of trusts created over the past two years that peaked as we approached the “fiscal cliff,” guidance on how to properly maintain and operate these wealth transfer vehicles is useful. Now that they are in motion, who is at the helm?

During this 30-minute call, McManus & Associates reviews strategies to ensure that your trust operates properly as it advances your estate planning and wealth transfer goals. John O. McManus also discusses the special provisions for life insurance trusts, payment of taxes on income earned by trust assets and the new planning ideas utilizing the trust as a leading instrument to accomplish the mission.

LISTEN HERE: “Conference Call – Maintaining and Operating Irrevocable Trusts”.

  1. Are all trust accounts, real property owned by trust and life insurance policies held in trust correctly titled?
  2. How does the tax basis of an asset and its projected future growth affect future planning? What future swaps of assets might you consider?
  3. How do we avoid common filing and reporting errors, especially payment of income taxes? If it’s a grantor trust, do we file an income tax return?
  4. Now that the trust is funded what post-funding strategies can be employed to impact the trust to better meet your goals?
  5. If you have not used the full exemption amount, ($5.25MM), should you consider making additional gifts now to further “freeze” the estate.
  6.  If your life insurance has been transferred to trust, are you properly maintaining the trust to address annual payments?
  7. When and why should you transfer a trust to an asset-protected state? Are there any actions pending against an individual who is a beneficiary of the trust or you, the grantor? What states are most favorable?
  8. When should you consider an institutional trustee? What are the pros and cons? When an individual is named as trustee, does he know his responsibilities?
  9. When your trust owns your primary residence, how should you cover expenses, insurance and titling? If you are the occupying tenant, have we formalized a lease agreement?
  10. How should you make distributions when the family business or other corporate entity (LLC, partnership, etc) is owned by a trust? Are two transactions necessary?
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Reuters Publishes Article by John McManus in Practical Tax Strategies

The below article written by John O. McManus appeared in “Practical Tax Strategies,” published by Thomson Reuters, in the April 2013 issue (Volume 90, Number 4,  pg. 172- 174).

VACATION PROPERTY: PRESERVING THE FAMILY RETREAT

There are advantages and disadvantages to using a second residence as a funding source for a trust.

JOHN O. MCMANUS, J.D., is the founding principal of the trusts and estates law firm McManus & Associates in New York, NY.

Amidst ongoing uncertainty over America’s economic future and about which financial strategies will be effective in the long-run, many Americans are focused on ensuring that one of their most treasured assets— the mountain house, lake house or beach house—is able to be appreciated for years to come. The family retreat often holds rich memories, serves as a spot for loved ones to still gather, and is a place that the owner hopes children and grandchildren will continue to enjoy. After working hard, finding success, building net worth, and employing the gift of a second residence for the benefit of family, how can one protect both the asset and his or her intentions for it over the long-term?

Thanks to the fiscal cliff deal, the opportunity to take advantage of the $5 million gift tax exemption to transfer real estate, businesses, private equity ownership, stock portfolios, and cash out of one’s name and into trust for the benefit of loved ones has been extended for the foreseeable future. Strictly from a financial standpoint, is real estate the best asset to transfer?

When considering one’s second residence as a funding source for a trust, there are advantages and disadvantages that should be weighed. In some instances, the optimal discounted value may not be attainable, but since real estate is often discounted organically (the value decreases with age) due to market forces, if the property is not renovated, it may present the best financial and emotional option. Those seeking to transfer real estate in a tax-efficient manner should think through several strategies.

Joint tenants with rights of survivorship

Joint tenants with rights of survivorship is the typical ownership between husband and wife, and it affords valuable protections. Property is automatically inherited by and passes by operation of law to a surviving spouse, avoiding the probate process. When one spouse passes away, tax benefits also can be achieved by filing estate tax returns.

Joint tenancy also helps to protect the property from a creditor of one spouse. A home can quickly become an asset at risk if there is a financial reversal of one spouse. Creditors taking over an asset will often want to sell it to a third party, but no buyer wants to own a property in joint names with an independent party. If the purchaser of the property were to pass away, the independent party would inherit their interest, leaving no real value.

Limited liability companies

Limited liability companies (LLCs) offer anonymity and tax planning advantages. Having an LLC as the owner on a property deed can protect one’s identity in many states, but a notable exception is in Arizona where greater than 20% owners must be registered. Additionally, if there is an accident on the property and it extends beyond property and casualty insurance coverage, only the assets in the LLC would be at risk.

Ownership of a second residence can be transferred to an LLC or into two LLCs; one spouse owns the LLC or two LLCs can be set up with each spouse owning one. Having the property in only one spouse’s name means the LLC is considered a disregarded entity and avoids the need to file tax returns every year.

Revocable living trust

A revocable living trust, or a family trust, is established while one is still living. One can make changes at any time, as well as reclaim the property transferred into it. The trust also outlines how the trust property should be managed while the grantor is still alive and how it should be distributed upon the grantor’s death, providing for a succession of authority to manage the residence in trust.

For the many Americans that have property in other states, putting a residence into a revocable trust allows them to minimize probate and eliminate it with respect to the state where they have only a residence (the probate process takes place in the state where the resident lives and where the property is located). Florida, for example, has no income tax, but the state is heavy on probate fees. A revocable living trust is not intended to take a property outside of the taxable estate. For example, it is essential that owners who work in, but live outside of, New York consider putting properties located in New York into trust—giving up control of the property in name—to avoid the income tax on non-New York residents. If an individual works in New York more than 183 days and owns a property in the state—irrespective of if he or she uses it—it is presumed a residence and the state of New York calls the individual a resident, requiring him or her to pay New York income tax.

Qualified personal residence trust

A qualified personal residence trust (QPRT) puts a personal residence in trust for the benefit of one’s spouse and children (or for a charity) and offers great discounts. The trust is created and controlled by the homeowner-grantor, although the property title is transferred to the QPRT. The way the QPRT is structured allows the value of the asset in trust to shrink. This was especially useful when the estate and gift tax exemption amount was $1 million because one cannot give away assets over the maximum exemption amount without paying gift tax. For the balance of 2013, the exemption is $5 million per person and will be adjusted for inflation in future years.

For some clients, this higher exemption amount has removed the need to put the asset in a QPRT to get the discount and shrink the asset for gift tax purposes. Some people say money is cheap with interest rates so low and like the idea of keeping a mortgage on a property. With a QPRT, having a mortgage is not advised, but there is opportunity to gain future appreciation, not just today’s discount. Putting the family retreat into a QPRT allows one to enjoy the right to live in it and maintain control. There is a “mortality risk” with this type of trust, however; if one dies before the trust terms end (10 to 15 years on average), the asset gets clawed back into the estate and is subject to taxation.

How can one hedge his or her bets? Divide the second residence into two deeds and two QPRTs with different spouses and terms, and only half of the asset will be sucked back into the estate if one spouse dies. This is particularly useful when there is great age disparity and different life expectancies for each spouse, because one person can have a longer term on one of the QPRTs.

It should be noted that if the second residence is removed from the QPRT, it must be replaced with an asset of equal value. If one is 60 years old, has a $2 million house and creates a 20-year QPRT, the discount today is approximately $700,000; the grantor, however, must live for the next 20 years. Saving $700,000 in value could save $350,000 to $400,000 in estate tax and significantly more as the property appreciates. In order to sell, however, the asset must be replaced with one of equal value or a separate trust must be created for the shortfall on the proceeds. For example, selling a $2 million house that has increased in value to $3 million and then buying a $2.5 million house would leave an excess of $500,000 that must go into a separate trust.

Lifetime credit shelter trust

A lifetime credit shelter trust (LCST) is an irrevocable trust for the benefit of one’s spouse, children, and grandchildren. Unlike with a QPRT, LCSTs do not allow discounts beyond market discounts, but there is much more flexibility than with the QPRT. There is no trust term that the grantor must outlive, and if one decides to sell real property that is in a LCST, it does not have to be replaced with real property (if the residence in a QPRT is sold during the term of the trust, the funds need to be used to purchase another residence, or there are negative tax consequences).

If one gives the family retreat away via trust to a spouse, he or she still has access to the property. It is, however, necessary for the donor of the trust to create a lease with his or her spouse and children for an amount of their fractional use of the property that correlates with expenses for things like maintenance. There is a built-in depreciation in using this strategy, because real estate is currently valued low.

After the parents pass away, lifetime trusts offer asset protection for children in their marriages. In the event of a divorce, the child’s spouse is not entitled to any of the assets in trust. Otherwise, the home may be at risk when given to one’s child in common with siblings who may have to give a disproportionate amount of other assets to the divorcing child’s spouse in order to keep the family retreat. The exemption from generation-skipping transfer tax is also worth the effort with LCSTs, because the trust will pass tax-free to grandchildren upon the death of the children. To protect from creditors, divorce situations, and plaintiffs’ lawyers, the asset should remain in trust for children, either with a trust for each child as trustee or with a pod trust, which assures a governing board to help manage the asset, avoiding the perils of revolution and insurrection within the family. If children have different goals for the property, it may be necessary for one child to buy out the other—or, if all of the children are in agreement, they can sell the home and invest the proceeds in a different asset.

Other strategies and concerns

What strategies should be considered if there is a worry about who will pay the bills to fund the expenses of a second residence? Renting a residence out allows for an income stream to pay for such costs. Funding a trust with life insurance also allows the policy payout to provide liquidity to cover expenses. Having the family home preserved in trust for generations provides a plan to minimize the burden of expenses and maintenance on the children to achieve the goal of creating generations of happy family members at the retreat.

A family mission statement for a vacation residence also has a positive impact on family dynamics. It helps to manage expectations, such as who gets to enjoy the home when. Often a family member will leave guests at the retreat a letter telling them where all household items can be found. The family mission takes this notion to the next level.

Finally, it is critical to confirm that all deeds have been retitled, tax forms filed, and lease agreements executed. These steps are extremely important, because if they are not completed, the IRS will not acknowledge the formality of the trust, and the tax exemption that the trust structure was intended to provide would be lost. Not only must the trust be created, but the deeds must be transferred into the trust immediately afterwards. One’s property and casualty insurance carrier should also be notified when ownership of the property is transferred to the trust. Giving away a home into trust often creates diverging insurable interests due to ownership of valuables like artwork and furniture in the home. Carriers need to understand one’s insurance structure and should be informed when there are two separate carriers for the home and assets within it. Executing a lease agreement ensures protection of ownership in the house once it has been given away and guards against trustees deciding they want to sell it.

 Conclusion

 Using real estate as a funding source when considering the opportunity to leverage the flexibility to transfer assets extended by the fiscal cliff deal could be not only the logical choice, but the sentimental one. By putting the family retreat into trust, one can create greater assurances that this cherished gathering place, or even a successor home, will remain in the family for many generations to enjoy.

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Conference Call: ‘These are a few of my favorite things’ – Top 10 Considerations when Planning for Tangible Personal Property

From jewelry to art, cigar collections to fine china, dividing tangible personal property equitably among loved ones after death can be a major challenge for an executor. In order to keep the court from stepping in to divide the pots and pans –a task no judge desires– direction on how to allocate specific items should be given (rarely explicitly mentioned in wills).

In a new conference call led by McManus & Associates Founding Principal and top AV-rated Attorney John O. McManus, learn about unique ways to plan for division of specific personal tangible property and special planning considerations for unique items such as music, art, wine, scotch and even gun collections.

LISTEN HERE: “‘These are a few of my favorite things’ – Top 10 Considerations when Planning for Tangible Personal Property”

After listening to the discussion, you’ll have answers to the questions below. Don’t hesitate to give McManus & Associates a call at (908) 898-0100 if we can be of further assistance.

1. Is it appropriate to use a personal property memo to capture personal items? Can enforcement of such a memo be guaranteed?
2. How do we catalog our personal property in a memo? Should items be specifically insured?
3. How to plan for art, jewelry and the use of a life estate for personal property, especially in a second marriage.
4. Are you a history buff with collection of Revolutionary and Civil War rifles? Who can you leave them to? Details on fiduciaries who need special licenses or permits.
5. How will pets, especially rare or exotic species be provided for?
6. How do you transfer and value intellectual property, Copyrights, projected sales, music and art?
7. Illegal transportation across state lines? Expensive transportation? Wine or gun collections, a grand piano? How to plan for covering expenses and proper transportation.
8. If you are named a fiduciary, what tasks should you consider taking now to ensure you are protected during probate?
9. Do you have bank accounts worldwide? Considerations to simply the probate process? Are you filing annual disclosures for FBAR?
10. What strategies can you use to ensure an equitable distribution of personal property when considering certain highly valuable assets?

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McManus & Associates in New York Times article, “Growing Up With A Trust”

The New York Times today published an article with the headline “Growing Up With A Trust,” written by well-known “Wealth Matters” columnist Paul Sullivan. The story appeared online and in print, as well, on page F9 of the publication’s New York edition.

McManus & Associates worked hand-in-hand with Sullivan on this story, both in facilitating a conversation with one of our clients who shared insight on an anonymous basis and in providing expertise on preparing heirs for inheritance. From the article:

Steve, whose wealth was earned in financial services rather than inherited, is still working out a plan with his wife for telling their three sons about their inheritances. He asked that his name be withheld because he did not want his neighbors in the New York area to know about his money.

In his 40s and retired for more than a decade, he appears to be a model client for any trust and estate planner: he has already put more than $10 million in various trusts. “He’s a thoughtful, meaningful guy, and he has more time than our normal client,” said John O. McManus, his lawyer at McManus & Associates.

He is proud of the provisions written into the trusts for his children, which will keep them from having full access to the money until they are 35. Yet, though he has not done so, talking to his sons about his wealth is also important, even though all three are not yet 10.

To read on, visit http://www.nytimes.com/2013/03/26/your-money/trust-fund-children-need-an-education-about-money.html?pagewanted=all.

Top AV-rated Attorney John O. McManus was happy to weigh in on this important topic, because the firm is committed to helping its clients transfer not only assets, but also family values. As discussed in the piece, conversations with beneficiaries about wealth are part of an ongoing process, not just a one-time event. Through the creation of a Family Mission Statement, McManus & Associates can help you initiate these critical discussions and best prepare your heirs for a productive life filled with success that positively impacts society.

McManus & Associates is ready to talk you through this challenging, yet important process. Give our office a call at (908) 898-0100 to get started.

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