Sometimes, Estate Tax Planning Can be a Challenge, Even for a Judge

Five and a half years into the case, the question of whether six life insurance policies at their cash surrender value should be included in the deceased woman’s taxable estate is one question, and the second is whether the estate is liable for the tax underpayment penalties. The policies were purchased for $30 million, reports Bloomberg Tax in the article “$30 Million Estate Tax Going To Be ‘Hard,’ Judge Says.”

The final ruling may also have an impact on the overall attractiveness of using this type of arrangement in estate planning. Known as a ‘split-dollar’ arrangement, this is an agreement between parties to split the cost and benefits of a life insurance policy, where a party paying premiums gets an interest in the payout.

The estate in this case is connected to a set of family businesses, described as the “Interstate Group,” accumulated over the decades after Arthur Morrissette began a moving company in 1943. Arthur’s surviving spouse Clara used her revocable trust to transfer $29.9 million to three trusts for the benefit of each of her three sons. That happened in 2006. The trusts then used the funds to make lump-sum payments for six permanent life insurance policies. Each son’s trust held a policy that insured the lives of the two other brothers.

The transactions were governed by split-dollar arrangements between Clara’s revocable trust and her son’s trusts. When an insured son died or an arrangement was terminated, Clara’s trust received either a policy’s cash surrender value or all of the premium payments on it, whichever was greater. If the policy remained in place until an insured son died, Clara’s payout would be taken out of the death benefit, and the son’s trusts would receive any remaining death benefit.

The first issue at trial was the motivation for setting up this type of split-dollar arrangement in the first place. In order to exclude the cash-surrender value of the life insurance policies from the taxable estate, tax rules require demonstration of a bona fide sale or business transactions. In other words, there needs to have been a significant non-tax reason for the arrangement to be put into place.

Attorneys representing the IRS said that the primary reason for the arrangements was to lower estate taxes, where having to wait to be repaid until the sons passed, lowered the present value of the rights Clara’s trust received in exchange for the $30 million.

One of the sons said that the family entered into the arrangement, so that money from a policy’s death benefit would help the surviving son buy each other’s shares at the time of their deaths, while also repaying their mother. He said that the policies paid a better return than the family was getting by putting the $40 million in investment accounts.

If the Morrissette’s argument about motivation prevails, the tax code also requires proof that Clara’s trust received something that was worth the $30 million that she put in. Experts debate what was the best real-world exchange with which to compare the split trust arrangements.

At the end of the trial, U.S. Tax Court Senior Judge Joseph Goeke said, “I look forward to your briefs, because for me this is going to be a hard case.”

This is a complex case, and estate planning attorneys will be watching it to learn if the split-dollar arrangement has a future.

Reference: Bloomberg Tax (October 14, 2019) “$30 Million Estate Tax Going To Be ‘Hard,’ Judge Says”

Have Your Will Done? Be Aware, That’s Not An Estate Plan~

A last will and testament is an important part of an estate plan, and every adult should have one. However, there is only so much that a will can do, according to the article “Estate planning involves more than a will” from The News-Enterprise.

First, let’s look at what a will does. During your lifetime, you have the right to transfer property. If you have a Power of Attorney, or POA, it gives someone you name the authority to transfer your property or manage your affairs, while you are alive. In most states, this document expires upon your death.

When you die, a will is used to transfer your property, according to your wishes. If you do not have a will, the court must determine who receives the property, as determined by your state’s law. However, only certain property passes through a will.

Individually owned property that does not have a designated beneficiary must be transferred though the process of probate. This includes real property, like house or a land, if there is no right of survivorship provision within the deed. The deed to the property determines the type of ownership each person has.

Couples who purchase property after they are married, usually own the property with the right of survivorship. This means that the surviving owner continues to own the property without it going through probate.

However, when deeds do not have this provision, each owner owns only a portion of the property. When one owner dies, the remaining owner’s portion must be passed through probate to the beneficiaries of the decedent.

Assets that do not have a designated beneficiary do not pass through probate, but are paid directly to the beneficiary. These are usually life insurance policies, retirement accounts, investment and/or bank accounts. Your will does not control these assets.

Beneficiaries through the will only receive whatever property is left over, after all reasonable expenses and debts are paid.

If you wish to ensure that beneficiaries receive assets over time, that can be done through a trust. The trust can be the beneficiary of a payable-on-death account. A revocable trust avoids property going through the probate process and can be established with your directions for distribution.

A will is a good start to an estate plan, but it is not the whole plan. Speak with an estate planning attorney about your situation and they will be able to create a plan that addresses distribution of your assets, as well as protect you from incapacity.

Reference: The News-Enterprise (September 30, 2019) “Estate planning involves more than a will”

Ignoring Beneficiary Designations Is a Risky Business

Ignore beneficiary forms at your and your heirs’ own peril, especially when there are minor children, is the message from TAPintoChatham.com’s recent article “Are You Read to Deal with Your Beneficiary Forms?” The knee-jerk reaction is to name the spouse as a primary beneficiary and then name the minor children as contingent beneficiaries. However, this is not always the best way to deal with retirement assets.

Remember that retirement assets are different from taxable accounts. When distributions are made from retirement accounts, they are treated as Ordinary Income (OI) and are subject to the OI tax rate. Retirement plans have beneficiary forms, which overrule whatever your will documents may state. Because they have beneficiary forms, these accounts pass outside of your estate and are governed by their own rules and regulations.

Here are a few options for beneficiary designations when there are minors:

Name your spouse as the primary beneficiary and minor children as the contingent beneficiaries. This is the usual response (see above), but there is a problem. If the minor children inherit a retirement asset, they will need a guardian for that asset. The guardian named for their care and well-being in the will does not apply, because this asset passes outside of the estate. Therefore, the court may appoint a Guardian Ad Litem to represent the child’s interest for this asset. That could be a paid stranger appointed by the court, until the child reaches the age of majority, usually 18 in most states.

Elect a guardian in the retirement plan beneficiary form. Some custodians have a section of their beneficiary form to choose a guardian for minor. Most forms, unfortunately, do not provide this option.

Make your estate the contingent beneficiary of the retirement account. While this would solve the problem of not having a guardian for the minor children, because it would kick the retirement plan into the estate, it may lead to adverse tax consequences. An estate does not have a measuring life, so the retirement asset would need to be fully distributed in five years.

Leave the assets to the minor children in a trust. This is the most effective means of leaving retirement assets to minor children without terrible tax consequences or needing to have the court appoint a stranger to oversee the child’s funds. Your attorney would either create a separate trust for the minor child or build a conduit trust under your will or a revocable trust to hold this specific asset. You would then change your beneficiary form to make said trust or sub-trusts for each minor child the contingent beneficiary of your retirement plan. This way you control who the guardian is for this asset for your minor child and are tax efficient.

Whichever way you decide to go, speak with an experienced estate planning attorney to determine which is the best plan for your family.

Reference: TAPintoChatham.com (Sep. 8, 2109) “Are You Read to Deal with Your Beneficiary Forms?”

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