Perlin Estate Planning

What’s Your Legacy Plan?

“Your legacy differs from your estate, in that it represents more than the things you own—it embodies your purpose. At the end of your life, your legacy will be the imprint you leave on this earth and the meaning your life leaves behind.”

Forbes’ recent article, “Why You Should Consider Using a 'Purpose' Trust for Your Legacy Plan,” suggests using a “purpose” trust to protect, preserve, and continue to celebrate your legacy.

A purpose trust is a trust that exists to carry out a purpose, rather than a trust that exists for the benefit of individual beneficiaries. Several states now have laws permitting purpose trusts. You must be sure that the trust exists for a “valid” purpose.

Three common goals of legacy planning are perpetual existence; separating the principal of the legacy assets from the revenue those assets generate; and separating the management and control of the legacy assets from those who benefit economically. A purpose trust can accomplish all of these goals.

Many states–such as Delaware, South Dakota, Nevada and Wyoming–now allow “perpetual” trusts. These trusts can last forever or for an extraordinarily long period of time, like 1,000 years.

Separating the principal of the legacy assets from the revenue those assets produce and separating the management and control of the legacy assets from those who benefit economically, can be achieved by creating up a multi-tiered trust structure.

While your purpose trust can own the legacy assets through a corporate entity, the legacy trust can provide that all of the income received be paid to one or more traditional family dynasty trusts of which your family can be beneficiaries. This lets your family or other beneficiaries benefit economically from your legacy assets, without necessarily involving them in the management and control of those assets. By creating a separate vertical for the management and control of your legacy assets, you also allow yourself to be intentional with the succession of that management and control and to integrate family members or outside advisors who are best qualified to oversee your legacy.

In a traditional dynasty trust structure, the ever-increasing pool of potential beneficiaries is a big issue. Even if you create maximum protections for the trustees and give them complete discretion as to how and when (if at all) to make distributions to beneficiaries, the trustees of the traditional dynasty trust still have fiduciary duties to those beneficiaries. As a result, the beneficiaries can file a lawsuit against the trustees, which can pressure trustees or frustrate the system, which may wreak havoc with your legacy plan.

With a “purpose” trust there are no beneficiaries, so the trustees don’t owe a fiduciary duty and don’t need to worry about lawsuits. With a purpose trust, you appoint someone (also known as a “protector” or “enforcer”) who will ensure that the purpose of the trust is being fulfilled. The trustees are free to focus on carrying out your legacy plan as you wanted.

Reference: Forbes (May 14, 2018) “Why You Should Consider Using A 'Purpose' Trust For Your Legacy Plan”

Some Ideas for Charitable Giving

“Charitable planning can provide financial benefits, in addition to the satisfaction in helping others…”

Investopedia provides us with some things to evaluate, when considering charitable giving in the article “A Primer on Philanthropic Vehicles.” There are many strategies and techniques that can be incorporated into an estate plan, but many people prefer to focus on how they can contribute during their lifetime.

Cash is the most basic donation and is one most people know about. That’s as simple as writing a check to the charity or other tax-qualified organization of your choosing.

Gifts of appreciated securities, like shares of individual stocks, mutual funds, ETFs, or closed-end funds, can be made to qualified organizations. After contacting the organization directly to confirm they can accept such gifts, transfer the shares from your account to the brokerage account of the organization. You get the tax benefit of the charitable contribution, based on the market value of the shares at the time the contribution is made, and you won’t be subject to the capital gains that would incur, if the security was sold outright. This can be a large amount for securities that have been held for some years, with an extremely low-cost basis.

You can also choose to gift non-securitized assets. With real estate, stock in a privately held business, art, or collectibles, the value of the asset at the time of the gift is deductible, like publicly traded securities. Similar to publicly traded securities, you also won’t be subject to capital gains tax due on the amount of unrealized appreciation of these assets. However, the charity needs to be able to take these types of assets as gifts. Contact the organization and make sure that this is the case.  You’ll usually need to have a third party conduct an appraisal of the asset to be donated, to determine its value.

Giving directly to the charity is one of the most common forms of giving.

Donor advised funds are philanthropic funds created as public charities. Many major custodians offer a version of these funds that take donor gifts and invest the money on the donor’s behalf.

Depending upon the fund, donors can select from investment options offered by the fund or have the money invested in a way suggested by an advisor.

Reference: Investopedia (April 16, 2018) “A Primer on Philanthropic Vehicles”

Fight Over Estate of Napa Businessman Plays Out in Court

“A family dispute is playing out in Napa Superior Court between two daughters of Ed Keith, a Napa landlord, vintner and businessman, over what happened to their father’s $92 million estate, including  $38 million earmarked for a foundation intended to benefit disadvantaged youth.”

In 2016, ten years after Ed Keith died, Lisa Keith filed suit to compel her sister, Celeste K. White, to provide a full accounting of millions of dollars that she controlled as co-trustee of the Ed’s estate. Ed Keith was a self-made businessman who owned 500 apartment units in Napa and many other holdings.

In “Wealthy Napa businessman's heirs seek answers about $92 million estate,” the Napa Valley Register reports that Lisa Keith questions the propriety of a variety of financial decisions made by Celeste White. This includes $15 million invested in a for-profit real estate company, the purchase of a $2.4 million condo in Santa Barbara, the acquisition of a Land Rover for a winery and the construction of a stable for their polo ponies.

Lisa Keith is one of Ed’s five children from two marriages. Her sister, Celeste, lives in Napa with her husband, Dr. Robert White, who was named the executor of Ed’s estate.

Lisa alleges that the Whites made questionable decisions regarding the money from their father’s estate and argues that an estimated $1.8 million in trustee fees paid to Celeste should be refunded to the trust.

A Napa County Superior Court judge recently ruled that Lisa had no standing to ask for an accounting of foundation funds, because she’s not a director or beneficiary of the foundation.  However, since she’s a beneficiary of the trust, she continues to ask for an accounting of Ed’s trust funds.

Upon Ed Keith’s death, a number of early distributions dictated by his trust were made, including $1 million to each of his five children, $2 million to his 12 grandchildren, and $10 million to a winery. This reduced the estate to $76 million. According to the trust, half of that – $38 million – was to be placed in the Edward A. Keith Foundation, which was created to provide financial and other assistance to disadvantaged youth or children “otherwise in need.”

The other $38 million was to be divided equally among Keith’s five children. After all the bills were paid, there was $9.2 million left to be split among the five siblings.

Lisa looked into what happened to her father’s foundation and found several facts that led her to become concerned. Celeste reportedly paid herself and her husband more than $300,000 annually from the foundation and $15 million from the foundation was invested in a for-profit real estate investment company managed by Celeste. Of that $15 million, $2.4 million was used to buy a condo in Santa Barbara.

Lisa says the foundation was “shortchanged to support Celeste and her husband’s lifestyle,” according to court documents.

Lisa claims that after her father’s death, Celeste had Lisa and her other siblings removed as directors of the foundation, leaving just Celeste and her husband in charge. She also claims the foundation then dropped any requirement that it benefit disadvantaged youth or children in need. However, Celeste’s attorneys said Ed removed Lisa as a director of the Foundation before he died.

According to court documents, the Edward Keith Foundation distributed $38 million to charities. But Lisa believes that if her father was alive, he wouldn’t have chosen to support some of those charities.

If there is one thing the family can agree on, it’s this: Ed wouldn’t have wanted a battle over his estate.

Reference: Napa Valley Register (February 3, 2018) “Wealthy Napa businessman's heirs seek answers about $92 million estate”

Hobby Lobby Trust Loses Big Tax Deduction

“The Tenth Circuit overruled a district court decision that granted the trust that owns Hobby Lobby a $3.2 million refund. The refund claim was based on charitable contributions of appreciated property.”

Hobby Lobby describes itself as the largest privately owned arts-and-crafts retailer in the world, with more than 800 stores and 32,000 employees in 47 states, reports The Wealth Advisor in “Hobby Lobby Trust Loses $3.2M Tax Deduction.”

Hobby Lobby started as a home business by David and Barbara Green in 1970. They created the David and Barbara Green 1993 Dynasty Trust Agreement (DBGDT), with their son Mart named as the trustee. The Trust included a clause that it was intended to "carry out the mission of our family to serve the Lord."

Putting everything into the trust is a great estate planning strategy because future appreciation won’t be included in the Green estates. They might have used an "intentionally defective grantor trust" (IDGT), which would have avoided the income tax complications of fiduciary returns during their lifetimes. However, having the trust as a separate income tax entity has some significant advantages, like being able to distribute income to descendants based on current needs and a generous entity level charitable deduction. But there was an unexpected charitable deduction problem that gave rise to the litigation.

The beneficiaries of the trust are the descendants of the Greens, with one possible exception: "Any child or descendant who is born to persons out of wedlock shall not be considered as a "child" or "descendant" of such persons for purposes of this Trust Agreement.”

For 2004, DBGDT paid $8.4 million on its original return. There was $57 million included in income in flow through from the trust's 99% interest in Hob-Lob Limited Partnership, which is where most of the stores were. The refund of $3.2 million was based on increasing charitable deductions by $9.1 million to $29.7 million. Contributions by trusts are generally unlimited, but there’s a limitation based on Unrelated Business Taxable Income (UBTI). That wasn’t at issue, but rather it was the ability to take deductions at fair market value.

A charitable deduction by an individual will typically be based on the fair market value of the property. In this case, there were three properties, but the bulk of the appreciation was contained in one of them in Virginia, which was donated to the National Christian Foundation. The jury found the property to be worth $28,500,000. The property had been acquired less than a year before, with a basis of less than $11 million.

The IRS argued that charitable deductions for trusts are limited to basis, because the trust's charitable deduction is from gross income, and the inclusion of unrealized appreciation in income is questionable. The district court ruled in favor of the trust, but the Tenth Circuit did not buy in.

The Court of Appeal found the IRS’s arguments unpersuasive and said that the district court misconstrued the statute, relying in part on §642(c)(1)'s use of the phrase “without limitation.” The Supreme Court held that the phrase “without limitation,” as used in the predecessor statute to §642(c)(1), was intended only to make clear that the percentage limits outlined in §170 that apply to charitable deductions made by individuals and corporations do not apply to charitable deductions made by estates and trusts. The Tenth Circuit said that presumably the same holds true for §642(c)(1). Thus, §642(c)(1)'s use of the phrase “without limitation” can’t be construed as a signal by Congress to authorize the extent of the deduction sought by the Trust in this case.

The district court also relied on a Supreme Court decision for the proposition that charitable giving should be encouraged and thus, that §642(c)(1) should be construed in a broad manner. But the Tenth Circuit said this statement was made solely in the context of deciding whether the authorized deduction should be limited to amounts “paid from the year's [gross] income.”

Finally, the district court concluded, in part, that because §170 in certain instances allows individuals to claim a deduction for the fair market value of donated property, it’s okay to interpret §642(c)(1) in the same way. Not so. The language of §170 expressly discusses the fair market value of donated real property, the court said, whereas §642(c)(1) merely refers to gross income and does not otherwise incorporate §170's discussion of the fair market value of donated real property.

If Congress intended for the concept of “gross income”, in this instance, to extend to unrealized gains on property purchased with gross income, it would’ve said so, the Tenth Circuit held.

If this had been an IDGT, there wouldn’t have been a problem using the fair market value, although there would have been a 30% limitation to deal with, which might have been a problem for the Greens, who are committed to being very philanthropic.

Reference: Wealth Advisor (January 26, 2018) “Hobby Lobby Trust Loses $3.2M Tax Deduction”

Questions Abound with Audrey Hepburn’s Will

“Audrey Hepburn's will has been revealed for the first time in her son's battle against her children's charity over the Hollywood star's name and likeness.”

Sean Hepburn Ferrer sued the Audrey Hepburn Children's Fund last fall for infringing trademark and other rights belonging to him and Luca Dotti, his half-brother, according to The Daily Mail’s recent article, “Audrey Hepburn's Will Revealed!”

Court documents show that Ferrer has responded to the charity's attempt to have the suit dismissed and has provided excerpts of his mother's will in which both sons were named as principal heirs to her estate and intellectual property after she died in 1993. The will shows that the star left her most precious jewels to her closest family and friends, including the daughter of actor Yul Brynner. Hepburn's will lists French fashion designer Hubert de Givenchy as an executor of her estate.

Hepburn died of cancer at 63 years old and had been in a long-term relationship with Dutch actor Robert Wolders at the time of her death. She left him two silver candlesticks which were worth about $500 at the time. Brynner's daughter Victoria received $1,500 worth of tangible personal property, specifically a “Tiffany (Schlumberger) small flower, diamonds and platinum, brooch.”

Hepburn owned three properties in Switzerland. The home was later sold in 2000 for an undisclosed amount. In addition to her estate, the Hollywood icon left her son Sean, Bulgari gold and diamond earrings—a gift she received from his father, Mel Ferrer, on his birth. The brothers also inherited the film rights and royalties pursuant to Hepburn's film contracts, as well as her name and likeness rights and any other similar rights.

Ferrer and Dotti founded the children's charity in their mother's name the year she died and agreed to jointly own and manage her registered trademarks and moniker.  However, the charity experienced legal troubles after Ferrer stepped down as chairman in 2012. Ferrer said he resigned after becoming 'disillusioned' with the fund, but he and Dotti continued to approve of certain uses of Hepburn's likeness on a case-by-case basis. Issues arose when Ferrer ended the charity's license, which allowed them to use Hepburn's name. He claimed it has continued to use his mother's intellectual property for years without permission.

Ferrer's lawsuit, filed in October 2017, came some months after the charity sued him for “intentional interference with contractual relationships.” It claimed he’d become increasingly “hostile” to its use of Hepburn's IP that interfered with their fundraising.

Ferrer had also accused the fund of improperly retaining possession of his property, such as legal and financial records, contracts, samples of merchandise bearing Hepburn's name, image, and trademarks, scripts, and other documents.

Reference: Daily Mail (December 15, 204) “Audrey Hepburn's Will Revealed!”

Philanthropist Provides for Medical Center in Estate Plan

“Simonetti was staunchly devoted to Chilton for at least 15 years–as a leader, volunteer and benefactor.”

The late Emil Simonetti was an extremely dedicated philanthropist in New Jersey, who supported Atlantic Health System’s Chilton Medical Center and his community for many years. Those who knew him say that he was generous, compassionate and a visionary.

Simonetti wanted to extend his charitable commitment well beyond his lifetime, through planned giving. After he died on August 1, 2015, much of the former Butler, New Jersey resident’s estate was donated to the causes and institutions he valued most. These included Chilton Medical Center, which received $1.2 million to benefit its Emergency Department. The hospital said that an area of the facility will be dedicated to Emil and his wife Carol.

Tap Into Montville’s recent article, “Former Butler Resident Bequeathed $1.2 Million to Chilton Medical Center,” reported that Emil Simonetti lived a life of service. Simonetti was born in Paterson, New Jersey, and served his country as a member of the U.S. Army during World War II. He also was a Councilman and Police Commissioner of Butler, as well as an advocate for Morris County residents with disabilities.

Simonetti also showed a strong interest in health care: he was involved with several health-centered organizations. He was appointed to two governing boards at Chilton Medical Center, where he contributed his financial expertise and participated on the hospital’s Senior Advisory Committee. In that capacity, he helped to develop programs for the community’s senior population.

“Emil held Chilton in high regard and had great confidence in what we do. He attended many of our fundraising events and was a member of Chilton’s Legacy Circle, expressing his desire to support the hospital through estate planning,” commented Mario R. Rosellini, Jr. of the Chilton Medical Center Foundation Board of Trustees.

Rosellini also mentioned that Simonetti talked about leaving a legacy and leaving something to Chilton. The medical center had no idea of the magnitude of his generosity until recently, when it learned of his $1.2 million bequest.

Simonetti’s gift is aimed at helping the hospital’s continuing efforts to equip Chilton’s emergency department with cutting edge imaging and diagnostic technologies, along with modernizing its facilities to optimize efficiency, capacity and the overall experience of patients and families.

Reference: Tap Into Montville (October 18, 2017) “Former Butler Resident Bequeathed $1.2 Million to Chilton Medical Center”

How Do I Give My Required Minimum Distribution from a 401(K) To Charity Without Being Taxed?

 

“You can't give your required minimum distribution from a 401(k) to charity without triggering a tax, but you can donate your 401(k) RMD tax-free, if you roll the money over to an IRA.”

Required Minimum Distributions (RMDs) are minimum amounts that a retirement plan account owner is required to withdraw each year, beginning in the year that he or she reaches 70½ years of age or—if later—the year in which he or she retires.

 However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs have to start once the account holder is age 70 ½—even if she’s not retired.

A recent Kiplinger article, “Making Charitable Donations From Your Retirement Accounts,” explains that retirement plan participants and IRA owners—including owners of SEP IRAs and SIMPLE IRAs—must take the correct amount of RMDs on time every year from their accounts, or face big penalties.

What about when a plan owner dies? What are the rules for distributions to their beneficiaries? There are different RMD rules that apply. The entire amount of the owner’s benefit usually must be distributed to the beneficiary who is an individual either:

1. Within five years of the owner’s death; or
2. Over the life of the beneficiary, starting no later than one year following the owner’s death.

Roth IRAs don’t require withdrawals, until after the owner’s death. The tax-free transfer of an RMD to charity only applies to IRAs. However, there’s a way to give money from your 401(k) to charity tax-free: you need to roll over money from your 401(k) to an IRA and then donate it to the charity.

To do this, you’d have to take your RMD from the 401(k) for this year, before you can do the rollover. You can then roll over 401(k) dollars to the IRA for future charitable transfers. If you do this by the end of the year, you'll be able to begin moving some of the money to charity in 2018, which may fulfill some or all of the RMD from your IRA.

If you're 70½ or older, you can donate up to $100,000 from your IRA directly to charity. The contribution counts towards your RMD and isn't included in your adjusted gross income (AGI), so that may make you eligible for tax breaks linked to your AGI and reduce or eliminate taxes on Social Security benefits.

Reference: Kiplinger (September 22, 2017) “Making Charitable Donations From Your Retirement Accounts”

Donating IRAs to Charity

“Donating IRA money directly to a charity can satisfy your required minimum distribution and lower taxes, but IRA administrators vary on how to deliver your gift.”

It’s a great idea to give your required minimum distribution (RMD) from an IRA to one or more charities. If you’re think of doing this, make sure that you understand the steps you need to take so you’re not taxed on the RMD.

Kiplinger’s recent article, “How to Ensure Your IRA Donation to Charity Is Tax-Free,” explains that folks older than 70½ can transfer up to $100,000 annually from their traditional IRAs to charity. This move can satisfy the RMD, but isn’t taxable, if they follow the rules for a qualified charitable distribution (QCD).

The gift is not a part of your adjusted gross income, if you make a direct transfer from your IRA to the charity. That means it will not count as a tax-free transfer, if you withdraw the money first and then make the charitable donation. You should speak with your IRA administrator about the required steps. These procedures are different with different firms.

Some will have several options. For instance, if you have check-writing privileges on your IRA, you may be able to simply write a check directly from the IRA to the charity. You may also have the option to use the IRA’s QCD form and direct the money from your account.

You should be timely in submitting the form or writing the check, so it is processed in the current year. November 30 is a good cut-off to give the IRA administrator sufficient time for processing.

If your IRA sends the money, the check will be written out to the charity and include your name. You should give the charity a head’s up that it should expect your donation. You’ll also want to give them your address, so the organization can send you a receipt for your tax records. Another way to go about this is to have the IRA administrator cut the check payable to the charity and mail it to your home address. You can then forward the donation to the charity yourself.

For example, Vanguard requires you to either complete a form or call them to request the transfer, so the donation will be counted as a QCD. Vanguard will make out the check to the charity and send it to you to forward. You should be certain to make your request with ample time to receive the check and deliver it to the charity.

Vanguard and other IRA administrators typically have a minimum amount that you can transfer to each charity. There are generally no limits on the number of charities you can support each year. However, note that you can’t transfer more than $100,000 tax-free from your IRAs in any one year.

Reference: Kiplinger (July 28, 2017) “How to Ensure Your IRA Donation to Charity Is Tax-Free”

Estate Planning for My Pets

“A pet can't inherit property, but you can arrange for care after your death.”

You want to plan for the care of your pets, in the event you pass before they do. Many people wonder if they can leave an entire estate to a pet and what happens after the family pet is deceased.

The answer is no. You can't leave an estate directly to your pet.

NJ.com’s recent article, “Can you leave an estate to a pet?”, explains that animals can’t own property. Your cat doesn’t have the necessary legal capacity. However, your estate or part of an estate can be left for the benefit of a pet. There are two options.

Pet Trust. This is a trust document that establishes the purpose of the trust, who it will benefit and how the assets held in the trust are to be administered for the beneficiary. Think of Leona Helmsley. She was a hotel heiress who left $12 million to her dog. Technically, she left the money in trust and a trustee managed the funds for the life of her Maltese.

The trust should also state who receives any money left in the trust, when the pet dies. That’s known as a remainder beneficiary.

From a legal standpoint, animals are considered property, even though pet lovers consider them furry friends or family members. You need to name someone to take ownership and care for your pet.

You can also forego a trust and simply leave your pet and a sum of money to care for the pet to a designated person without a trust. But there’s no guarantee that after you die, the person you selected won’t just pocket the money and give the pet away. There’s less structure and certainty in this, but it’s a less expensive option to set up.

Animal Charities. There are organizations that care for animals when their owners die. You can donate to the organization and leave your pet to them. They will do the rest. You can add these instructions to your will. However, be sure to research the organization and the housing arrangements before choosing this option. You want to be totally comfortable with the group that will care for your pet after you’re gone.

Reference: NJ.com (July 12, 2017) “Can you leave an estate to a pet?”

Create a Lasting Legacy in Your Community

“A charitable gift annuity provides a meaningful gift to charity, while improving your financial situation in two ways for the rest of your life: a steady stream of income and tax benefits.”

In addition to making a meaningful gift to a charity, you can create a lasting legacy in your community, says Hawaiian Business in its recent entry, “5 Steps to a Lasting Legacy.” Here are some ideas to consider when creating your lasting legacy.

1. Consider the Charitable Organizations or Causes That You Feel are Important. Think about how you’d like to make your community better for future generations. A legacy gift will benefit a specific nonprofit or cause.
2. Find out if you satisfy the Requirements. The charity may have some rules about its legacy giving. For example, the Hawaii Community Foundation requires that you be age 60 or older and able to donate $20,000 or more. That gift can consist of cash, funds earning low interest, or appreciated assets (securities and real property). For those younger than 60, they suggest a deferred annuity in which the payment is triggered at 60 or older, to allow you to coordinate your payment with your retirement.
3. Work with an Expert. Talk with an experienced estate planning attorney about how a charitable gift annuity would benefit you and meet your objectives.
4. Tailor the Agreement to Meet Your Goals. In many instances, a gift, such as an annuity, is simple to create. It’s a contract between you and the charity. The charity may offer to work with you and your attorney to customize an annuity that is based on your personal situation and charitable investments. One key decision is how to use the remaining balance upon the death of annuitant(s) designated by the original donor. Decide if the remaining balance is to be used for broad charitable purposes or to support a specific cause.
5. Enjoy It. You’ll get an immediate charitable tax deduction for a portion of the gift and a fixed annual payment for the rest of your life. Some of the annuity payments may be tax free, and there are no capital gains taxes owed on appreciated property used to start a charitable gift annuity. The reportable capital gains (if any) are spread out over the annuity payments.

Reference: Hawaiian Business (June 2047) “5 Steps to a Lasting Legacy”