Category: Conference Call

As we have emphasized over the last two years, the Estate Tax Exemption Amount and the Lifetime Gift Exemption Amount currently at $5.0 million per person will end December 31^st, 2012, and revert to $1.0 million.

President Obama has already indicated in his Green Book for the 2013 Budget that the Lifetime Gift Exemption will remain at $1.0 million and the tax rate will be 55% for transfers above that $1.0 million amount.

The opportunity, therefore, to transfer assets into a protected trust before year-end while retaining flexibility is unprecedented.  The additional benefit is that the future appreciation of the assets will be sheltered from both federal and state estate tax.

Read on or LISTEN HERE: “President Obama’s Green Book — The Future of Estate Planning”

When considering transfers of greater than $1.0MM in real estate, securities, partnership interests, or other assets, we strongly advise that a properly structured trust is the ideal recipient.

Given the potential value of the trust, it is specifically designed so that you and your spouse are able to enjoy a measure of flexibility to continue to access and control the transferred assets.  Among other things, this is accomplished by:

• Retaining the power to remove and appoint Trustees or to receive loans from the trust;
• Granting your spouse the right to receive distributions and serve as Trustee; and
• Authorizing your spouse to determine how assets will be divided between your children.

Additionally, through the trust’s provisions, the assets receive an exceptional degree of protection against financial reversals and liability that you, your spouse, your children, and your other descendants may encounter during your lifetimes.

Again, after the expiration of the $5.0MM exemption at the end of 2012, only an act of Congress may increase the exemption from its $1.0MM level.  While it is unknown how Congress may respond after the election, the exemption is still likely to substantially decrease due to the current economic and political climate.

The nation is facing a “fiscal cliff” – the coinciding action of tax increases and spending cuts in order to remedy escalating budget deficits.  The result is that this special $5.0MM planning opportunity may never resurface during our lifetimes and be forever lost.

The prospective constraints on the present amount gifted will exponentially diminish the future amount that may be exempt from estate tax.  This concern is compounded by the fact that certain assets may currently be undervalued due to current market conditions and may reasonably be expected to experience accelerated growth in the coming years and decades in the protected trust.

To highlight the long-term estate tax advantage of making a significant lifetime transfer to a trust, consider an example in which a $3.0MM gift is made, both spouses pass away in year 2032, the gift appreciates at a very modest 4% per annum, and President Obama’s proposed estate tax plan is adopted.  The value of the assets will have doubled.

The consequences of failing to make such transfer now are at least $650,000.00 in state estate taxes and $2,600,000.00 in federal estate taxes, reducing the amount received by the children by more than 50%.  Naturally, this negative effect is diminished if more assets are gifted away, if each spouse lives longer, or if the estate appreciates in value at a greater rate.

The firm will close for the year on December 15; therefore, to be effective, all work must be commenced and completed within the month of November. We invite you to call or e-mail our office to review your specific circumstances.

The Dog Days of summer are past us and the recent return to school for so many reminds us of the simple task of protecting our young adults and our minor children. McManus & Associates is pleased to share the recording of our “Back to School” edition conference call, which addresses issues associated with the well-being and care of young adult and minor children.

LISTEN HERE: “Top 10 Planning Issues for Recently Emancipated Children (over 18) and Minors”

Below please find a list of topics that attorney John O. McManus, founding principal of the firm, covers in the discussion.

1. Legal and medical risks for children upon reaching age 18, legal adulthood. What happens if they are in a car accident or are hospitalized? How can we access medical and school records?

2. Overseas travel and study abroad. What are the necessities when your child is overseas?

3. Upon attaining age 18, does your child require a will?

4. Your child is 18. Should you appoint him or her as your representative in your incapacity planning?

5. Your child is 18 or 25. Should you make outright gifts to them? What are the risks of these gifts and custodial accounts?

6. Your 25 year old (or younger) child is getting married. Should you review with them whether a prenuptial agreement is necessary to protect the family assets?

7. Your child is under 18. What are the medical risks if you are unavailable?

8. Your child is under 18. What if both parents pass away or become incapacitated? What must a comprehensive plan to protect this child address in addition to appointing guardians?

9. Your child is under 18 and your selected guardians reside overseas. What are the risks to getting them “Home?”

10. Passports for children. What is the relevance of children of foreign nationality having a passport in the foreign jurisdiction? If your children are foreign born or going overseas, are passports current in the event of an emergency?

Please contact us — McManus & Associates, a trusts and estates planning law firm — at (908) 898-0100 if we can help with any questions.

John O. McManus, who founded McManus & Associates in 1991, has outlined the most important things that those in retirement, as well as those planning to retire, should carefully consider to protect themselves and their families. During a new conference call — part of a complimentary educational series provided by the firm — John explores the 10 issues below. Click the link to hear the 30-minute discussion.

LISTEN HERE: “Top 10 Considerations for Those in Retirement and Those Planning to Retire”

1. Re-titling retirement accounts rolled out of a group plan and revisiting your financial plan with your advisor.
2. Medicaid trusts and the eligibility period for elderly parents.
3. The value of long-term care insurance and replacement of group term insurance.
4. Effective gifting to descendants to retain access and/or control in trust.
5. Moving out of state and the resulting domicile and residency issues.
6. State estate taxes (a preview of the best states to move to for estate tax purposes and which have the best quality of life).
7. Creating a family mission statement and all that it entails.
8. Increased charitable giving (planned gifts, charitable lead trusts, charitable remainder trusts, foundations, and consideration of board memberships).
9. Issues surrounding part-time consulting work and creating a business entity.
10. Issues pertaining to real estate investments (ownership in an LLC or trust or sale to children in trust).

We’d love to help you learn more. Please give us a call at (908) 898-0100 or reach out via our Contact page.

There are just a few months left to address what some practitioners are calling the end of the “golden age” in estate planning. During a conference call in August 2012, John O. McManus, trusts and estates planning attorney and founding principal of McManus & Associates, discussed the “Top 10 Topics on the $5MM Federal Gift Tax Exemption” below.

LISTEN HERE: “Top 10 Topics on the $5MM Federal Gift Tax Exemption – Is It All Hype?”

1. The propaganda – why is it called the “golden age”?

• Gift tax exemption was always $1.0MM, meaning any gift in excess of that amount was subject to gift tax at a rate of up to 55%.
• The exemption was increased to $5.0MM, dramatically increasing the ability to make tax-free gifts.

2. The deadlines – what actually happens on January 1, 2013?

• Exemption retreats back to $1.0MM.
• It will take an act of Congress to increase the exemption over $1.0MM.

3. Future tax rates – what is the new estate tax rate starting January 1, 2013?

• There will be a 55% rate for estates in excess of $1.0MM.
• This is an increase of 20% over the current 35% estate tax rate.

4. Future tax benefits – what about projected appreciation of the gift?

• Once transferred, it is not just the gift that enjoys the exemption, it is also the growth that is outside the estate.
• The entire amount is free from both federal and state estate tax.
• Depreciated real estate and securities enable a gift of underappreciated assets.

5. State Estate Tax – what is the net state tax benefit if the $5.12MM Federal Exemption Amount remains unchanged?

• NJ: 8-12% on average, with the top rate at 16% for an estate over $10MM.
• NY: 3.5% to 12.45% for estates from $1.1MM to $15MM.
• CT: over $2MM a 7.2% rate; up to 12% for estate over $10MM.

6. State gifting limitation – is Connecticut’s $2.0MM gift tax free limitation the beginning of a trend?

• CT was the first state to reduce its estate tax exemption and is the only state that currently imposes a gift tax.
• 7.2% rate on gifts over $2MM; up to 12% for estate over $10MM (same as estate tax).
• Of the states that impose an estate tax, CT was one of the more liberal with respect to estate tax exemptions. There is a concern that states with more confiscatory tax regimes will consider following suit, particularly if the federal estate tax exemption does not retreat back to $1.0MM.

7. Gifts transferred into trust – is there any opportunity to access the gift or to change the beneficiaries?

• Yes, the grantor can appoint the spouse as trustee and beneficiary, which we recommend.
• The grantor may retain the option to borrow from the trust.
• If drafted correctly and with precision, there can be an opportunity for the grantor to receive the assets back after the spouse beneficiary dies and if there has been dramatic reversal in his or her personal finances.
• For years, we have had clients who wanted to move $1.0MM out of their estate to take advantage of the exemption, but they were concerned about access to the trust assets.  Now that the exemption is increased to $5.0MM, this concern is exacerbated. As a result, we have developed a structure that allows for significantly greater flexibility.
• We also support procuring an insurance policy on the life of the spouse who is the trustee and beneficiary of the trust. If the spouse dies, there are then meaningful liquid assets available to the grantor to replace the spouse’s access to the trust as trustee and beneficiary.

8. Asset protection – can the gift truly be protected from creditors and plaintiff’s lawyers?

• Yes, and the spouse can serve as the trustee.
• We favor institutional trustees to accomplish this aim, and, at a minimum, we must preserve the right to transfer the situs of the trust to another state with stronger asset protection statutes.
• The trust can protect the assets from attack for those in high-risk professions, such as physicians, or those in second marriages, where the spouse wants to ensure the assets pass to the children of the first marriage.

9. Planning limitations after the gift is made – are there any additional strategies or is it just “one and done”?

• No, additional gift tax-free funding can take place provided that there is an unused amount of credit available. For example, if the gift tax exemption settles at $3.5MM in 2013, and a $2.0MM gift was made in 2012, there would still be a $1.5MM gifting opportunity.
• The trust can also purchase certain components of the family wealth which exceed available credits using the assets of the trust as down payments. These more valuable assets may constitute the more aggressive portion of the overall portfolio, so all prospective growth is outside of the estate.

10. What does President Obama say about the exemption? What does Candidate Romney say about the exemption?

• Mr. Obama wants to return to the 2009 levels. That would mean an estate tax exemption of $3.5MM and a gift-tax exemption of $1.0MM. The proposed top tax rate for both would be 45%.
• Romney wants to eliminate the estate and gift tax all together. He is taking the Republican party line to broaden his appeal to conservatives, even though he comes from one of the most liberal states in the nation.
• We have a mounting deficit, which will need, in part, to be bailed out with taxes.

BONUS

11. What assets you use to fund the trust and why now if you wish to gift only $1.0MM?

• Many of those that we represent who are rushing to get some assets into the trust are using their residence or cash and then determining their approach for investing the money later. The residence can also be sold and the cash used for other investments or to purchase another piece of real estate.
• Others are using cash to buy large life insurance policies to “supercharge” the trust, and guarantee a significant return or investment after they pass away.
• Clients who want to give $1.0MM may say that there is no rush, but we always believe in the merit of (i) getting assets off the balance sheet; (ii) having those assets protected in a trust; and (iii) enjoying future growth that avoids federal and state estate tax.

McManus & Associates would welcome further discussion as you consider taking advantage of the “golden age” by December 31, 2012.

This year presents a wonderful opportunity to take advantage of the $5MM exemption (combined $10MM between husband and wife) to move businesses, private equity ownership, stock portfolios, or cash out of your name and into trust for the benefit of loved ones. The chance to transfer real estate into trust is a very popular choice, as well.

For years, there have been numerous strategies available to transfer real estate in a tax-efficient manner, but this year there is increased flexibility. The advantages and disadvantages to choosing one’s second residence as a funding source for the $5MM exemption should be considered. For many, a second residence serves as a place of rich memories, a place for the family to still gather, and a place you hope your children and grandchildren will continue to enjoy. By putting this asset into trust, you will have created greater assurances that this home or a successor home will remain in the family for many years.

Strictly from a financial standpoint, is real estate the best asset to transfer? The answer may be that in some instances we are not able to get the best discounted value. On the other hand, since real estate is naturally discounted due to current market forces, it may present the best financial and emotional option.

McManus & Associates invites you to investigate these and other relevant planning issues for second residences.

LISTEN HERE: “Preserving the Family Retreat: Top 10 Planning Strategies”
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The following are the topics that are covered during the discussion:

1. Joint tenants with rights of survivorship (the typical ownership between husband and wife) – what protections does it afford?

2. Planning with LLCs – what are the strategies for anonymity and tax planning?

3. Revocable Living Trusts – is it just about avoiding probate for out-of-state summer homes?

4. Qualified Personal Residence Trusts – allow for great discounts, but is it an appropriate strategy to use with the $5M exemption?

5. Lifetime Credit Shelter Trusts – don’t allow discounts other than market discounts, but is the flexibility with the trust worth the loss of discounts?

6. Funding a trust with life insurance or other assets to provide liquidity – who pays the bills to fund the expenses for the residence and how does this affect the family dynamics?

7. Lifetime trusts for children after parents pass away – is the asset protection for children in their marriages and the exemption from general skipping transfer tax worth the effort?

8. Use of the trust as a vehicle to hold properties located in New York by owners who work in, but live outside of New York – are there strategies to avoid the income tax on non-New York residents using a trust?

9. The family mission for seasonal/vacation residences – does having the family home preserved in trust for generations lead to more stress and divisiveness for your children or does it achieve your goal of creating generations of happy family members at the retreat?

10. Important, but often overlooked, clean-up paperwork related to real estate transfers – how critical is it to confirm that all deeds have been retitled, all tax forms filed, and lease agreements executed?

McManus & Associates would love to help you determine the best way for you and your family to take advantage of the $5MM exemption.