«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»
Ms. Henderson points out that we have been assuming that Mom is the kids’ biological parent. What if she is their stepmother and doesn’t care about the kids? If Mom is the executor of the estate, and Mom has no assets, she wouldn't particularly care what the tax bill is since the kids, not her, will end up paying it. Do the kids have any right to be involved in the proceeding that determines the liability for which they will end up being responsible? No.
(Note that Mom may have a fiduciary duty to the children, but only if they are interested parties in the estate administration.) Session I-F The Philanthropic Imperative (Charitable Giving Series) Edward J. Beckwith, David E. Ratcliffe, David Pratt Thoughtful planning often projects well beyond our clients and their families. Increasingly, clients care about and seek to address the needs of others and issues both local and global. This session will explore why our clients want us to engage and help guide their charitable ambitions as part of their planning. Our panel will examine why this is a core competency and what each planner needs to know to be relevant and impactful for clients.
Basic tools and techniques will be discussed in the broader context of various life cycle events.
Reporter: Beth Anderson Esq.
The first break out session for charitable planning discussed how to start the philanthropic conversation with your clients. The speakers discussed two surveys from US Trust (The 2014 U.S. Trust Study of High Net Worth Philanthropy, November 2014 and The U.S. Trust Study of the Philanthropic Conversation, October 2013) in which high net worth clients and their advisors were surveyed about giving, amounts and frequency of gifts and whether the communication about the gift strategies was relevant and helpful. The results of the surveys reveal that clients are giving more, more frequently and through the use of more giving vehicles. The motivation to makes the gifts is a desire to make an impact and a difference in the community as well as the fulfillment and satisfaction of making the gift. These sophisticated givers are also looking to increase the frequency and amount of the giving over the next 3 to 5 years which makes the conversations and strategies around giving even more important. The philanthropic conversation study showed clients are not getting a balance communication from their advisors while advisors believe they are providing an equal approach of altruism and technical. Clients want to know more about the nontax aspects of their gifts, and the altruistic factors are more important to them than the tax benefits, yet advisors continue to delve into the technical details before discussing the purpose and motivation about the gift. Also clients want to have the charitable conversation earlier in the planning stage, and advisors tend to push it until later.
Next the presenters discussed how to deliver or start the philanthropic conversation. The goal is to have a “kitchen table” conversation about what really matters to the client about their community, family, allocation of wealth. To have a meaningful conversation with the client you have to develop a relationship with the client. This may be accomplished by finding commonalities with the client – same religion/event/sickness/school that client and advisor can relate, or by using examples about how the advisor has given back to the community. This animates the conversation and helps the client think about what he or she wants to do. Donors may be looking for way to mentor their children and grandchildren about the value of money and how to make an impact in their community and teach the responsibility of wealth.
Behavior differences between the types of clients are important when discussing planning techniques. Turn of the century donors gave later in life as part of their legacy, while “Dotcom” donors and the newly rich are giving earlier and becoming actively engaged in the organizations they support.
Generation Y may not have significant cash yet but they should still start their giving plan with small gifts, serial gifts, and donations of time instead of money. If they invest their time in an organization early they can make money contributions later. Their parents or grandparents may want to consider adding them as advisors to a donor advised fund or setting up a fund in their name as a teaching or mentoring opportunity for the next generation, and to develop early financial intelligence.
The Baby Boomers and Gen X are in their compensation prime right now and growing their wealth, but may not be ready for significant gifts, but are looking for income deductions, and gifts of appreciated assets could be good planning strategies for them to help offset some of their income.
The Pre-Boomers and older are likely retired and may be looking for a steady income stream. Charitable remainder trusts or charitable gift annuities may fit their gifting scheme.
Advisors should start with client’s values, and set a goal to achieve; asking them their objectives and history of engagement; what issues are serious to them (in society at large); and keep them in the center of discussion. Seek out organizations that are a line with their goals and determine what engagement they have or can have with them.
Scope and duration of the gift will be an important decision. Is the donor looking to make a single large gift or serial gifts, and can the donor economically make this gift now or sometime in the future. If the donor is struggling to find motivation or purpose to support, ask the donor about was a defining moment in his or her life and what he or she associates that moment, and why was that an important event, and how can the donor pay that moment forward.
Charitable gifting is not a product but part of the comprehensive process, and advisors must be patient with the client, and make sure all of the advisors are on board with the plan– financial advisors, attorneys, accountants and on the same page as a team for the client.
How you approach and phrase questions about charitable planning pushes the donor’s thought process. For example, instead of asking “What charities do you support?” ask “If you could change one thing in the world what would it be?” In a discussion regarding contingent beneficiaries, talk about legacy and impact on the world. Remind them that “Uncle Sam” is a charity, but one that doesn’t give the donor control over the purpose and spending of their money, and if you take a small amount away from kids you can take out the payment to the government and make an impact on the community.
When is a good time to give? Life events can be opportunities for charitable giving – marriage, remarriage, weddings/parties, birth of child. Instead of giving the event-holder a gift, donate to their or your favorite charity.
Also participate in fundraising events and volunteer to raise awareness on a specific topic that matters to the donor.
The panel briefly discussed some of the technical aspects of charitable giving such as §509 requirement for being a public charity or support charity instead of a private foundation. They also mentioned the three types of gifts – restricted, partially restricted or unrestricted. Donor advised funds are not a fourth type of gift, but a modification of one of the three types with the addition of donor input.
The panel finished their discussion by providing the following websites as additional resources for information:
http://www.irs.gov/charitieswww.irs.gov/charities www.pgdc.com http://www.guidestar.orgwww.guidestar.org www.cof.org http://www.foundationcenter.org/www.foundationcenter.org/ http://nyct.giftlaw.com/?pageID=52 3:50 - 5:20 SPECIAL SESSIONS II Session II-A Planning Strategies That Reduce Both Income Taxes and Estate Taxes (Financial Assets Series, Focus Series) S. Stacy Eastland, Steven B. Gorin, Ellen K. Harrison If a basis enhancing strategy is not used, the panel will explore the break-even growth rate that is required before it is more advantageous to give away a low basis asset. The panel will also focus on the advantages and considerations of different basis enhancing strategies that could be used with estate planning including: various borrowing, disregarded entity, grantor trust, QSST, DSUE, mixing bowl and charitable planning strategies.
The panel will also explore strategies that reduce a complex trust’s income taxes and enhance the basis of a surviving spouse’s assets.
Reporter: Tiffany L Walker Esq.
The presentation by Mr. Eastland, Mr. Gorin, and Ms. Harrison followed Mr. Eastland’s presentation earlier in the week on the same topic, and provided a more in depth discussion on planning strategies to reduce income and estate taxes. Supplemental information can be found in Mr. Eastland’s prior outline, as well as slides and an additional 194 pages of written material accompanying the follow-up presentation. Although most, or possibly all, of the ideas included in the outline were covered in the discussion, the printed materials provide a much greater amount of detail regarding the topics discussed.
Mr. Eastland opened the presentation by discussing basis. More specifically, he provided that if the assumed growth rate is higher than the breakeven rate, it is better to use lifetime gift planning. The discussion also addressed other factors, aside from the above formula, that should be included in the analysis. These factors include asset protection, cash flow planning for retirement, and plans to retain the asset for the client’s lifetime or the family’s desire to sell the asset immediately after the client’s death. The panelists spent the remainder of the presentation discussing various strategies to reduce income and estate taxes.
Ms. Harrison discussed the advantages of grantor trusts, as well as possible repositioning of assets to ensure low basis assets are owned by the individual upon such individual’s date of death. She also addressed a potential concern with the purchase of low basis assets using a promissory note. It is possible that the promissory note may have the same basis as the asset for which it is exchanged. However, Ms. Harrison also highlighted a potential solution to this issue, involving the grantor borrowing from a bank instead of the trust for the asset purchase. If the grantor prefers for the loan to be between the grantor and the grantor trust, Ms. Harrison proposed that the trust might instead purchase the receivable from the bank.
Another planning technique, discussed by Mr. Gorin, involves extracting equity from depreciated assets. Mr. Gorin outlined the three following steps: (1) borrow against the property and distribute cash to the owner; (2) invest the proceeds in taxable income-producing property; and (3) make annual exclusion gifts or otherwise engage in leveraged estate planning techniques.
Following Mr. Gorin, Ms. Harrison discussed sales to spousal trusts. Ms. Harrison touched on the potential for providing the spouse with a testamentary power of appointment and incomplete gifts, mentioning the risk involved in transfers for less than full and adequate consideration. She provided further that the potential risk mentioned above might not be mitigated by the running of the statute of limitations.
Mr. Gorin then mentioned another technique, consisting of the conversion of a Credit Shelter Trust to a Qualified Subchapter S Trust (QSST), the investment by the Credit Shelter QSST in a Subchapter S Corporation and the sale of the Subchapter S stock owned by the surviving spouse to the Credit Shelter QSST. The presenters then pointed out the various income tax benefits of such a transaction. In addition, there is the ability to switch the QSST to an ESBT.
Also noting Section 502(b) of the Uniform Principal and Income Act. In addition, if there is a gift element in the sale, then the presenters provided that the sale instrument should include a disclosure and the trust should agree to hold this amount as a separate share with the addition of a power of appointment.
The panel also briefly mentioned Beneficiary grantor trusts. The panelists noted the potential usefulness of this technique over a QSST when both are available. Mr. Eastland then discussed the sale of an interest in a partnership or S Corporation to such a trust, expanding on the use of lapsing withdrawal rights or the trustee’s power to grant such rights on a year-by-year basis.
Following this topic, the panel touched on exiting from or dividing a partnership, as well as distributions and the anti-abuse rules. In addition, the panel discussed the use of preferred partnerships for a low basis asset with appreciation potential. However, similar to other strategies, the panel pointed out that cash flow might be an issue.
Ms. Harrison reminded the audience that the general planning idea with basis is to preserve exemption for low basis assets. She noted Mr. Eastland’s proposed cascading sale of partnership interests, as well as rolling GRATs.
Noting the goal as locking in gain by substituting cash or short-term fixed-income obligations, and repurchasing low basis assets that depreciated in value to place into a new GRAT. If the grantor becomes ill or there is concern about death during the term of the GRAT, Ms. Harrison suggested purchase of a remainder interest to remove it from the grantor’s estate.
As a final way to remove future appreciation from an estate, Mr. Eastland introduced a technique involving an extremely leveraged single member limited liability company, which is also a disregarded entity, and a grantor trust partner. He also noted that the grantor trust might include a revaluation clause for hard to value assets. Mr.
Eastland then mentioned the topic of CLATs and potential deductions resulting from their use, and then further into the discussion he included CRUTs.
On the topic of the DSUE amount, Ms. Harrison mentioned the potential sale to a grantor trust of assets by the surviving spouse in exchange for a note. She provided that this method avoids disadvantageous income tax results while optimizing GST exemption. Ms. Harrison also noted that this might not be a preferred technique if the spouse was married to someone other than the decedent at some point in time, in addition another drawback is the potential exposure of assets to creditors.