Category: Bylines

Trust & Estates Publishes Article by McManus on Evergreen Estate Planning Techniques

July 19, 2018 - Bylines, Media Clips

The below article written by John O. McManus was published in Trust & Estates‘ newsletter “The Estate Planner” and on wealthmanagement.com.

 

 

 

Five Estate Planning Tips that Remain Relevant Regardless of Shifting Political Winds

Add them to your clients’ to-do lists.

By John O. McManus | Jul 18, 2018

There are important estate planning techniques that aren’t directly affected by legislation and changes in tax law, but that can still make a big impact on wealth preservation. From regularly updating a will to consistently moving assets off a balance sheet, here are five estate planning items that should be added to your client’s to-do list.

Schedule Routine (Estate Planning) Checkups

Make sure clients regularly update their health care documents and wills.

Ask clients to consider whether the individuals named in their documents are still appropriate. Think about positions including power of attorney (POA), health care agent, guardian for minor children, trustees of an irrevocable or testamentary trust, trust protectors and trustee appointers (if any).

Ask the client questions, such as:

Has the client’s relationship with any of the people named changed?
Has the client’s life situation of any of those named changed?
Has the health of any of those named changed? If a client’s parents were initially named as guardians for minor children, but the parents are now older and in poor health, for example, alternative guardians who can keep up with kids may need to be named instead.
Are all of the people who have been named still geographically appropriate? For example, if a client’s trusted POA moved across the country and can’t now serve in an emergency, a new POA should be named.

Next, clients should also consider whether the beneficiaries named are still proper. Ask the client questions, such as:

Are the amounts left to each beneficiary still appropriate?
Again, how’s the client’s relationship with each beneficiary? For instance, has there been a falling out with any of them?
Are there new beneficiaries (nieces, nephews, charities, etc.) the client now wishes to include? Or have the client’s documents been drafted cover new children and grandchildren automatically?
Are any of the beneficiaries at risk with inheriting assets? Are they the target of a divorce, legal action or the victim of financial strife or addiction, for example?
Finally, think through whether the current trust provisions make best use of the law for asset protection purposes.

“Do it for the Kids”

Set up trusts for your clients’ children and grandchildren.

While the lifetime exemption amount has changed several times in the last decade, the annual gifting exemption has remained fairly constant. Setting up a trust for a client’s children and grandchildren allows him to tap into this reliable wealth transfer mechanism without the damage of gifting assets to them outright. With this strategy:

Assets will be held in a protected vehicle, meaning they can be passed on to the next generation outside of the children’s estates, as well.
A trustee can manage and control the assets while the children are minors.
The client’s spouse should be added as a beneficiary, and the grantor should retain the power to take loans from the trust.

Move Assets off Your Clients’ Balance Sheets

Have the client sell the family business, real estate, life insurance, investment accounts and more into a trust.

A family business is typically a long-term investment, so have the client sell it into a trust. This provides an income stream to older individuals who may wish to surrender the day-to-day operations of the business without losing access to the economic security of the asset. It also puts the asset in a protected vehicle that’s exempt from estate tax.
Have the client sell business interests when the value is modest so that growth takes place outside of his estate. Selling a business interest also allows for valuation discounts, with greater equity going into trust.
Real estate can be sold into trust for a similar purpose as family businesses.
Life insurance can be sold into a trust to avoid the 3-year look-back. If a client gifts life insurance into his irrevocable trust and passes away within three years, the Internal Revenue Service will claw that asset back into his estate. The sale prevents this.

Make the Switch

Swap low basis assets out of your client’s trust.

Assess the income tax benefits of holding assets inside a client’s estate versus the estate tax benefits of pushing them outside of his estate.
With a critical eye, consider swapping estate assets for the trust’s assets, and vice-versa, to maximize the income tax basis step-up.
A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
When an asset is gifted to an individual or trust, there’s a carryover of the original basis – meaning there’s no step-up. Although the asset is now outside the grantor’s estate for estate tax purposes, on the sale of the asset, capital gains tax will be due.
When an asset is included in a descendant’s estate, the asset receives a step-up in basis to the date of death value at that time. The asset can be sold to avoid any capital gains tax.

The opportunity to achieve the step-up is available now and should be seized. It’s highly likely that the strategy will be advantageous to undertake at any time in the near future, with minimal downside risk.

Give Precedence to Giving Back

Use foundations and charitable trusts to make philanthropy a focus for your client’s family and to help him achieve income tax benefits.

Family unity can be created through a consistent emphasis on giving back.
Foundations and charitable trusts also both have income tax benefits. The tax rates may change, but income tax is unlikely to go away, so this will always be an important piece of a good planning strategy.
Donations should be reviewed annually to assess portfolio performance, confirm that the foundation is meeting minimum distributions for charity and verify that the donative patterns are still desirable.

NYT Selects McManus’ Comments on End-of-Life Op-Ed as “Times’ Pick”

January 8, 2018 - Bylines, Guidance, Media Clips

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.

Dear Karen,

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.

McManus WealthManagement.com Byline on Protecting Private Foundation Benefits

December 19, 2017 - Bylines, Guidance

 

 

 

Ten Tips for Protecting Private Foundation Benefits

Discuss these with your clients who are considering charitable gifts.

John McManus | Dec 12, 2017

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.

http://www.wealthmanagement.com/philanthropy/ten-tips-protecting-private-foundation-benefits

WealthManagement.com Publishes Byline by John O. McManus on Avoiding Raising Kids with Affluenza

November 15, 2017 - Bylines, Media Clips

Wealth Management

Ten Ways to Prevent Affluenza

An ounce of prevention is better than a pound of cure.

John McManus | Nov 14, 2017

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.

  1. Include requirements to pay off any debt, calculate income and living expenses, and create a realistic budget.
  2. 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.
  3. 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.

  1. 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.
  2. 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