Bielski Law Office, Ltd.

Making Charitable Contributions Work

While you're alive and have philanthropic goals, give appreciated assets held in a taxable account to charity. For charitable bequests, designate your IRA or tax-deferred employer retirement plan. Why? Suppose a hypothetical Al Cole wants to give $10,000 to charity this year. Instead of cash, he donates $10,000 of ABC Corp. stock that he bought for $2,000. As long as Cole's holding period is more than one year, he'll get a full $10,000 charitable tax deduction. Yet those shares might be worth only $8,000 to Cole after paying tax if he sold them himself. The retirement planning and estate planning benefits are big. Say Cole has $1 million of securities: $500,000 in a taxable account and $500,000 in a traditional IRA. Cole wants to leave $500,000 to charity and $500,000 to his son Bob, who is in a high income tax bracket. If Cole leaves the taxable account to charity, Bob will inherit the IRA. Bob will have to take distributions, which will be highly taxed on top of his other income. Instead, Cole can leave his $500,000 IRA to charity. The charity or charities can cash in the IRA bequest and owe no tax, as they are tax-exempt. Now Bob will inherit the $500,000 taxable account. He won't owe any income tax on money he withdraws. He also won't owe any capital gain if he happens to sell securities in the account right away, before they gain more value. That's because he gets a cost basis step-up to market value on those assets.

Investor's Business Daily's recent article, "How You Can Squeeze Tax Breaks From Charitable Giving," says that this maneuver works very nicely if the taxable account holds appreciated securities. A Partial Payout strategy applies whether you want to bequest all or just some of your IRA. Experts suggest that it's better to use your IRA for donations in your estate plan. But you have to decide how you want to do it.

Consider the following scenario as an example: Ida Bass has a $500,000 traditional IRA, and she wants to leave $50,000 to charity from that IRA. The rest of the IRA is to be split evenly between her two children (Many IRA beneficiary forms require percentage allocations for multiple beneficiaries). Another way to do it would be for Ida to just leave 10% of her IRA to charity. The IRA form could designate that each of her kids will inherit 45% of the amount in the account at her death. This would leave the dollar size of her charitable bequest indefinite—potentially leaving more to the charity if the IRA grows or less if its value decreases.

Whether you implement the fixed amount or the percentage approach, problems can arise. Those who will inherit the balance of the IRA need to ensure that the charity is paid in full before September 30^th of the year after the death of the donor. If you do that, those getting the balance can stretch out required distributions of the IRA balance and extend their tax deferral. However, if you miss the September 30^th deadline, the taxable distributions will be accelerated. So individual beneficiaries should be aware of what they need to do if a charity also is on the form.

One other idea is to split the IRA. Bass could transfer $50,000 from her $500,000 IRA to a new IRA account, so that her favorite charity would be the beneficiary of the new IRA. That way her children won't have to worry about the charity if they want to claim the maximum tax deferral from the IRA they inherit.

Speak with an experienced estate planning attorney to learn more and to see if this strategy is right for you.

Reference: Investor's Business Daily (October 02, 2015) "How You Can Squeeze Tax Breaks From Charitable Giving"

What to Do to Reduce Estate Taxes

While you're alive and have philanthropic goals, give appreciated assets held in a taxable account to charity. For charitable bequests, designate your IRA or tax-deferred employer retirement plan. Why? Suppose a hypothetical Al Cole wants to give $10,000 to charity this year. Instead of cash, he donates $10,000 of ABC Corp. stock that he bought for $2,000. As long as Cole's holding period is more than one year, he'll get a full $10,000 charitable tax deduction. Yet those shares might be worth only $8,000 to Cole after paying tax if he sold them himself. The retirement planning and estate planning benefits are big. Say Cole has $1 million of securities: $500,000 in a taxable account and $500,000 in a traditional IRA. Cole wants to leave $500,000 to charity and $500,000 to his son Bob, who is in a high income tax bracket. If Cole leaves the taxable account to charity, Bob will inherit the IRA. Bob will have to take distributions, which will be highly taxed on top of his other income. Instead, Cole can leave his $500,000 IRA to charity. The charity or charities can cash in the IRA bequest and owe no tax, as they are tax-exempt. Now Bob will inherit the $500,000 taxable account. He won't owe any income tax on money he withdraws. He also won't owe any capital gain if he happens to sell securities in the account right away, before they gain more value. That's because he gets a cost basis step-up to market value on those assets.

Investor's Business Daily's recent article, "How You Can Squeeze Tax Breaks From Charitable Giving," says that this maneuver works very nicely if the taxable account holds appreciated securities. A Partial Payout strategy applies whether you want to bequest all or just some of your IRA. Experts suggest that it's better to use your IRA for donations in your estate plan. But you have to decide how you want to do it.

Consider the following scenario as an example: Ida Bass has a $500,000 traditional IRA, and she wants to leave $50,000 to charity from that IRA. The rest of the IRA is to be split evenly between her two children (Many IRA beneficiary forms require percentage allocations for multiple beneficiaries). Another way to do it would be for Ida to just leave 10% of her IRA to charity. The IRA form could designate that each of her kids will inherit 45% of the amount in the account at her death. This would leave the dollar size of her charitable bequest indefinite—potentially leaving more to the charity if the IRA grows or less if its value decreases.

Whether you implement the fixed amount or the percentage approach, problems can arise. Those who will inherit the balance of the IRA need to ensure that the charity is paid in full before September 30^th of the year after the death of the donor. If you do that, those getting the balance can stretch out required distributions of the IRA balance and extend their tax deferral. However, if you miss the September 30^th deadline, the taxable distributions will be accelerated. So individual beneficiaries should be aware of what they need to do if a charity also is on the form.

One other idea is to split the IRA. Bass could transfer $50,000 from her $500,000 IRA to a new IRA account, so that her favorite charity would be the beneficiary of the new IRA. That way her children won't have to worry about the charity if they want to claim the maximum tax deferral from the IRA they inherit.

Speak with an experienced estate planning attorney to learn more and to see if this strategy is right for you.

Reference: Investor's Business Daily (October 02, 2015) "How You Can Squeeze Tax Breaks From Charitable Giving"

Gift Giving and What to Do About IRS Form 709

Most people give gifts all the time without even thinking about the potential tax ramifications. Yet technically, whenever you give something to someone, you have to follow the gift-tax rules. Fortunately, those rules don't require you to file a gift tax return every single time someone celebrates a birthday or other special event, but it's important to understand when you'll need to become acquainted with IRS Form 709. Let's take a closer look at gift tax rules with an eye toward helping you avoid the need to deal with the IRS.

The Motley Fool's article, "Form 709: Do You Need to File a Gift Tax Return?"says that the purpose of IRS Form 709 is to report gifts that are subject to gift and generation-skipping transfer taxes. Now this might sound cumbersome, however, there are some favorable rules make the many gifts exempt from reporting requirements.

The annual exclusion lets you give up to $14,000 in cash or property to another without having a taxable gift, which prevents most of the regular holiday or birthday gifts from being taxable. Unlimited gifts to spouses are also typically permitted without having to file Form 709. This annual exclusion applies to each person receiving a gift—so if your child is married, you can give $14,000 to your child and another $14,000 to her spouse without any gift tax. The same thing works for your spouse: he can make $14,000 gifts to as many people as he wants, regardless of the gifts that you've made.

A special rule allows a spouse in a married couple to make double-sized gifts and have them viewed as made equally by both spouses. This might keep you from paying a tax, but you'll still have to file a gift tax return in order to claim it. There are other exclusions that will keep you from having to file Form 709, such as the educational exclusion and the medical exclusion. These aren't considered taxable gifts, so no gift tax return is necessary. However, you must make the "gifts" directly to the institution, not the beneficiary, to qualify for this valuable exclusion.

Even if you made a taxable gift, the tax code gives you some help. The federal gift and estate tax provides for gifts made during your lifetime to be treated the same as gifts made from your estate after your death. Each person has a lifetime exemption from gift and estate tax which stands at $5.43 million in 2015. So even after you use up your $14,000 annual exclusion, any remaining gift amount applies towards your lifetime exemption amount.

Gift tax returns are frequently needed for more complex estate planning strategies, so talk with a qualified estate planning attorney about future interests and generation-skipping issues. He or she can create a wise strategy for your situation and will take care of preparing the Form 709 so that you meet all the requirements.

Reference: The Motley Fool (October 3, 2015)"Form 709: Do You Need to File a Gift Tax Return?"

Want to Spare Your Kids From a Family Fortune?

From shirtsleeves to shirtsleeves in three generations, goes the early 20th-century American proverb. Then there's the 19th-century British version: Clogs to clogs in three generations. And from Italy, date uncertain: From the stable to the stars and back again. You'll find similar sentiments in almost every language, all expressing the same thought: It's nearly impossible to pass on family wealth and have it last beyond your grandkids. Statistics back up the folklore. Studies have found that 70% of the time, family assets are lost from one generation to the next, and assets are gone 90% of the time by the third generation. That's because a crucial element of successful inheritances is often neglected. Traditionally, the focus has been on the givers of wealth, but it should rather be on the receivers. Investing assets wisely and crafting a good estate plan are crucial to success, but so is preparing the heirs. "Estate planning is a process to transfer wealth, but it doesn't help the family develop an infrastructure to sustain it, or keep the family unified from one generation to the next," says Debbie Dalton, a Bay Village, Ohio, resident, whose family is learning how to successfully steward the wealth that her father, a chemical engineer, amassed as founder of cryogenic equipment maker Chart Industries.

The recent article in Kiplinger's Personal Finance, "5 Strategies to Keep Your Heirs From Blowing Their Inheritance," explains that preparing the next generation has a lot to do with financial literacy. In addition, it means passing down and putting into practice values that will sustain your family as well as your fortune. A successful inheritance requires parenting and money management – regardless the eventual estate size.

There are a number of challenges that come with a family windfall. Inheritors can lack self-esteem if they suspect that their success stems from their inherited wealth instead of their own efforts. Or they may feel guilty and have trouble accepting good fortune that wasn't earned, and their emotional development can be delayed if they never have to face important life challenges. They can get bored, which puts them at risk for substance abuse or other self-destructive behaviors. Lastly, heirs can get frazzled with too many options or be paralyzed by a fear of losing their wealth.

It's no wonder that rich folks like Warren Buffett and Sting have said they will "spare" their children from inheriting fortunes. They're going to give most of theirs away or spend it. Buffett said the ideal inheritance for kids is "enough money so that they would feel they could do anything, but not so much that they could do nothing." Sting told Britain's Daily Mail last year, "I certainly don't want to leave them trust funds that are albatrosses round their necks." But that attitude is rare among wealthy parents. Most parents don't want to disinherit their kids, but they want a game plan that will not only keep the family assets intact but also keep the kids grounded, healthy, and productive. There are programs to help prepare the next generation for the riches they'll inherit that are more than just money managers' advice.

Get over the money taboo. Family finances are often an unpopular topic of discussion, particularly when the parents think that family wealth might spoil their kids. Young people without preparation who suddenly come into a trust fund when they turn 21 or if both parents die in an accident can go totally out of control, just like some lottery winners. (The same goes for spouses.)

Heirs who are not ready frequently believe that their parents thought they were incapable of handling the information or couldn't be trusted with it. Be up front about the wealth you have and your plans for it.

Embark on a mission. Make sure your legacy is about more than money. Try writing a mission statement, and have family members write down the values they want to emphasize in their lives, such as education, philanthropy or self-sufficiency. This helps the family identify the long-term purpose of their wealth.

Raise money smart kids. Teach kids from an early age about budgeting and saving. Get kids a piggy bank with three slots or three separate piggy banks—one for spending, one for saving and one for giving. Tell grandparents who like to give cash to make them in multiples of three. In addition, allow older kids to budget an allowance to cover their expenses. That means looking at the monthly average spent on his or her car insurance, cell phone, and other "essentials." Give them an allowance to pay those bills. Without a budget, kids won't learn to prioritize or make decisions about money.

Give Your Kids "Financial Training Wheels." Don't wait and withhold all access to the family fortune in order to preserve it. Seed an investment account when children are in their late teens and let them make investment decisions and agree to match a percentage of the returns earned over a specific time period. The child can withdraw money from the account, but the parent can't add to the principal, which will teach them about investing and spending. It will also show them the power of compound growth as well as the opportunity cost of robbing a nest egg.

Assemble a good team. In addition to an experienced estate planning attorney, bring in mentors for the next generation, such as board directors and other successful businesspeople. This de facto advisory board is nice when your kids' friends and classmates start asking them for contributions to investment schemes or business start-ups. They want to help their friends, but the best way is to defer… so if the committee says "yes," they're a champ. But if it's "no," then it's not his fault.

You'll have the best chance of preserving both your wealth and your family with a multigenerational effort that starts when your kids are born, not when you die.

An experienced estate planning attorney can help guide you throughout.

Reference: Kiplinger's Personal Finance (November 2015) "5 Strategies to Keep Your Heirs From Blowing Their Inheritance"

Estate Planning for Your Works of Art

Art investors are nearly always advised not to invest in art at all, but to collect it. Buy what you like, the conventional wisdom goes, not what you expect to increase in value. But collectors still must contemplate financial matters, especially related to inheritance, advisers say. It's essential for them to consider what will happen to their art when they are no longer around to appreciate it. "As somebody's art portfolio gets more valuable, it becomes a more significant item in their financial and tax lives," said Michael Delgass, managing director of Sontag Advisory, a financial planning firm in New York. Like collecting itself, the planning surrounding it has tangible and intangible aspects, especially involving legacy issues, Mr. Delgass said. There are often unpleasant tax consequences for heirs, who may not be related to the collector and who may not be connoisseurs if they are. "If you have a very valuable art collection, you may feel responsibility to the public to preserve it," he said. Meanwhile, "It's not a given that just because you love it, your kids will love it. Do you want to allocate family resources to hold that forever?"

The New York Times article, titled "Estate Planning Can Get Tricky When Art Is Concerned," explains that that there are specialist advisers to handle these issues, concentrating on tax and legal concerns in estate planning and philanthropy. Their art expertise is typically "a niche within that niche." They fill a different role from art advisers who help clients find works of specific artists based on their tastes, budget, and the state of the market.

Because it's tough to put a price on art, that can work to investors' favor when doing estate planning. While it isn't an asset that's going to solve lifestyle or retirement goals, it has a distinct advantage as a wealth-transfer tool. If you'd like to pass your Monet to your kids, it's better if it's valued as low as possible because transfers to heirs are taxed at high rates in many countries (but the dollar figure usually has to be pretty big for the tax to kick in). Use an independent appraiser and remember that rules on valuation and tax treatment vary from country to country.

A lack of liquidity can help in estate planning, but it can also hurt. When you sell your stock, the transaction is recorded in a public market, but when you give that Picasso to your lucky kids, it may create a taxable event which will one day catch up with the new owners.

Transference of property should be documented properly to avoid major issues down the line.

Financial planning for collectors can involve certain techniques for transferring ownership of art without transferring the art itself. For example, collectors can sell art to heirs for cash or a promise to pay—or place it in a trust or similar entity like a corporation—then lease it back. These strategies can have tax advantages, but are based on the laws of the state and country. Experts say that without the leasing agreement, these types of arrangements may not survive scrutiny by the tax authorities.

Trusts or corporations can also help collectors and their heirs avoid what the article calls "tragically bad luck" as many tax codes say that the property is subject to estate tax wherever it is situated when the owner dies. So if an asset is located in the U.S. but you're not a U.S. taxpayer, when you die it will be subject to U.S. estate tax because it's physically here. Good planning can avoid such a result.

Collectors wanting to donate to a charity and get a tax break while maintaining ownership of a piece of art (at least for a while) may be able to lend the work to an institution or remain a part-owner and donate the rest. Under American law, a collector can allow the institution to use the artwork for part of each year and take a prorated charitable deduction based on its value. However, the collector has to give away the artwork entirely within 10 years or at death, whichever comes first. The tax deduction is based on the value then or when the fractional interest was donated, whichever is lower. And penalties are due if deductions are found to have been excessive.

Talk to your estate planning attorney if you have some Picassos or Monets that you plan to give to your children. He or she will be able to work through the details and make sure it's done legally and with the least amount of tax impact.

Reference: The New York Times (October 3, 2015) "Estate Planning Can Get Tricky When Art Is Concerned"

Will Declared Invalid Because of Missing Signature

When people write their own wills without the assistance of attorneys, they often forget important steps and risk having their will invalidated. Such is the case with the will of one man from Minnesota.

Gary Kruger was very close to his cousin. The two shared a birthday and referred to each other as soul mates. Despite living in different states, the two talked often and traveled together.

Three years before passing away, Kruger made out a handwritten will that left his home and checking account to his cousin. He went to the bank and had the will notarized. What Kruger intended for his assets after he passed away seemed clear. However, his cousin did not receive the home or checking account. Instead, Kruger’s nieces split the assets between themselves.

Kruger’s handwritten will was invalidated because under Minnesota law, a will must be witnessed by two people. The notary counted as one witness. There was not a second witness to Kruger’s will. As he had no living parents, siblings or children by law his estate went to the nieces.

CBS Minnesota reported this story in “Missing a Signature, Minneapolis Man's Last Will Invalidated.”

While many states will accept these handwritten wills and forgive some technical flaws in their execution, Minnesota will not do so. This illustrates the danger of not hiring an estate planning attorney to draft your will. An estate planning attorney would have known that the law required two witnesses to the will. A notary public may not know that, which appears to have happened in this case.

By writing his own will Kruger may have saved some money at the time, but it came at the cost of not being able to have his final wishes obeyed.

Reference: CBS Minnesota (September 22, 2015) “Missing a Signature, Minneapolis Man's Last Will Invalidated.”

Special Needs Trust Fairness Act Passes in Senate

People with special needs have won an important victory in the Senate where the Special Needs Trust Fairness Act passed unanimously. However, the fight is not over.

For people with disabilities, special needs trusts are often a vital way to protect assets and ensure that they have the resources needed to meet their expenses. It has become common for parents of children with special needs to make these trusts a part of their estate plans.

But if a person with special needs wants to set up their own special needs trust, they cannot do so without first going to court and going through a long, complex process to get permission.

The Social Security Act provision that allows for these trusts is written such that only a person’s parents or grandparents can create the trusts. So, disabled people without living relatives able to create the trusts for them face a long, uphill battle to create the vital trusts.

Thus, it was a resounding victory for people with special needs when the Senate unanimously passed the Special Needs Trust Fairness Act that would allow people to create the trusts for themselves.

Special Needs Answers reported this development in “Senate Passes Special Needs Trust Fairness Act; Focus Shifts to House.”

Unfortunately, this legislation appears to be currently stuck in a House subcommittee. It is not expected to make it out of committee in the House without additional support. People who are interested in seeing this legislation passed should contact their representatives and encourage support of the Special Needs Trust Fairness Act.

Reference: Special Needs Answers (September 24, 2015) “Senate Passes Special Needs Trust Fairness Act; Focus Shifts to House.”

Homeless Man Claims His Inheritance Is Being Wrongfully Held From Him

A homeless man in New York City claims that he was left an inheritance of $100,000 that the executor of the estate has refused to give him for three years.

Winfield Huppuch, a publishing executive, let his friend Raphael Lebron live with him for 12 years. When Huppuch passed away, his brother, acting as the executor of the estate, locked Lebron out of the apartment.

Lebron unsuccessfully sued to be allowed back in the apartment and became homeless. Now, a new dispute over the estate between Lebron and the executor has made its way to court.

Huppuch’s will left Lebron an inheritance of $100,000, money which Lebron says he needs to find a new home. However, in the three years since Huppuch passed away, the executor has refused to give the money to Lebron.

The executor’s attorney claims that Huppuch had second thoughts about his will and shortly before his death, went to the attorney and asked for a new will to be drafted. To provide guidance, Huppuch marked up his then current will with the changes that he wanted to make.

One of the changes was removing the bequest to Lebron. But before the new will could be drafted and executed, Huppuch passed away.

DNAinfo reported this story in “Homeless Man Says He's Been Waiting Three Years to Get $100,000 Inheritance.”

This is one of those cases that presents courts with problems. Even though it might be clear that Huppuch intended to not leave anything to Lebron, ordinarily the will that was in effect when a person passes away is the ultimate say about who gets what. Consequently, the will legally in play would leave an inheritance for Lebron.

While exceptions can be made, it is not yet clear whether that is appropriate in this case.

Reference: DNAinfo (September 25, 2015) “Homeless Man Says He's Been Waiting Three Years to Get $100,000 Inheritance.”

Estate Planning Attorney Pleads Guilty to Fraud and Other Charges

A Wisconsin estate planning attorney who faced 33 federal charges stemming from fraudulent activity and stealing her wealthy clients’ money has reached a deal and will plead guilty to five of the charges.

Wisconsin attorney Sarah E.K. Laux ran two businesses. The first business was an estate planning service where she targeted wealthy clients through free seminars and lunches. The second business purported to be an insurance agency.

For several years, there were complaints that her estate plans were not very effective. However, it was the alleged theft of nearly $3 million that landed her in trouble with federal investigators. Two of her wealthy clients claimed that she converted their money for her own personal use.

Apparently, she would convince her elderly clients to transfer their money to her so she could invest in annuities supposedly offered by her insurance business. However, she spent the money on herself. Laux was indicted on 33 charges and has agree to plead guilty to five of them, one count each of bank fraud, mail fraud, wire fraud, money laundering and filing a false tax return.

The Milwaukee Wisconsin Journal Sentinel reported this story in “Estate planning lawyer facing prison in fraud plea deal.”

While the overwhelming majority of estate planning attorneys are honest and work in their clients’ best interests, there are bad apples such as Laux that people need to watch out for.

One big clue that Laux was not on the up and up that her clients missed was that she was also running an insurance company and asking her clients to invest with it. It is always advisable to seek a second opinion if an attorney requests that you invest in a business he or she owns. The attorney cannot give you unbiased legal advice about investing in her own business.

Reference: Milwaukee Wisconsin Journal Sentinel (September 27, 2015) “Estate planning lawyer facing prison in fraud plea deal.”

Why People Do Not Have Estate Plans

A recent survey reveals something that we already know: most Americans do not have estate plans. However, the survey also reveals the reason why people do not get estate plans is because they feel they lack the financial know-how to even get started.

A recent survey by Everplans concluded that only 34% of Americans have created a will. This is not a surprising result, as numerous previous surveys have reached the same conclusion.

The usual reason given for why so many people have not created estate plans is that death is a taboo subject in American culture. People do not want to think about their own deaths and what will happen to their families and property afterwards.

However, only 18% of the respondents to the survey gave that as a reason that they did not have an estate plan. Instead 95% of those without wills cited a lack of information about creating estate plans and services to create them as part of the reason they have not acted.

Fox Business reported on this survey in an article titled “The Sad State of Estate Planning: Why Only 34% Have a Will in Place.”

It is unclear why people think they do not have the information needed to create an estate plan. People are not required to make their own estate plans or draft their own wills. In fact, it is extremely inadvisable to do so. Instead, people should seek out experts who have the information and can do all the required drafting.

And those experts are not hard to find. They exist in all but the smallest, rural communities. They are estate planning attorneys.

If you think that you do not have the information that you need to draft your will, contact an estate planning attorney who will be happy to help you.

Reference: Fox Business (September 28, 2015) “The Sad State of Estate Planning: Why Only 34% Have a Will in Place.”