Estate Talks

Administration Expenses May Reduce Marital Deduction for Decedents Who Died Before December 2 2015

The U.S. District Court for the Central District of California recently held that administration expenses charged to a marital bequest may reduce the estate’s marital deduction if the decedent died before December 2, 2015, depending on whether the administration expenses are charged to principal or income or are interest payments.

This case involved a gross estate of about $180 million. Three years prior to the decedent’s death, he gave his wife money to pay gift

estate tax
Real Estate Concept

taxes associated with the funding of an insurance trust. Because of this, the IRS issued a notice of deficiency against the estate.

The district court determined that

1. Under §2056, administration expenses charged to the principal of the marital bequest reduced the estate’s marital deduction dollar-for-dollar;

2. Administration expenses charged to the income of the marital bequest did not reduce the estate’s marital deduction because they were under the 5% threshold of Justice O’Connor’s materiality test [Comr. v. Hubert Est., 520 U.S. 93 (1997)];

3. Under Rev. Rul. 93-48, 1993-2 C.B. 270, the estate’s interest payments on the tax deficiency did not reduce the marital deduction, regardless of whether they were a material limitation on the marital bequest.

Retroactive Estate Tax Increase Was Constitutional

The Appeals Court for the Federal Circuit held that §13208 of the Omnibus Reconciliation Act of 2003, which retroactively increased the top estate tax rate of 50% to 55%, is not unconstitutional.

On August 10, 2003, President Bush signed the Omnibus Budget Reconciliation Act of 2003 (OBRA) into law. Section 13208 of Title XIII of OBRA permanently increased the estate tax rate for taxable estates over $3 million from 50% to 55%, effective retroactively to January 1, 2003. The increase was made retroactive because President Bush had pocket-vetoed legislation in late 2002 that would have extended the 55% rate effective January 1, 2003. Since that bill was pocket-vetoed, the 55% rate lapsed to 50% until OBRA was signed.

In March 2003, Ellen Clayton died with a gross estate of more than $28 million. At that time, the applicable estate tax rate was 50% for estates over $3 million. The estate tax return for Ellen’s estate was filed after OBRA went into effect, so the executor (NationsBank, N.A.) paid the tax under the 55% rate, then sought a refund, arguing that the retroactive estate tax increase was unconstitutional because it violated several provisions of the Constitution, including

1. The separation of powers doctrine

2. The apportionment clause,

3. The ex post facto clause,

4. The takings clause,

5. The due process clause, and

6. The equal protection clause.

The Court of Federal claims disagreed and held that OBRA did not violate the Constitution. The Court of Appeals for the Federal Circuit affirmed that decision.

But what is the side effect of all this?

Low AFRs Mean Lower Gift Tax for GRATs

Question: I’ve heard that falling interest rates are beneficial for certain financial planning tools, particularly Grantor Retained Annuity Trusts (GRATs). Is this true? And if so, how does it work?

Answer: Yes, certain financial planning tools, including GRATs, can be more effective when interests rates are falling.

With a GRAT, the grantor transfers assets to the trust for a term of years. During that time, the grantor receives an annuity payment, and when the trust terminates, the assets are distributed to a noncharitable beneficiary, usually the grantor’s children.

The taxable value of the gift to the GRAT’s beneficiary is reduced by the value of the grantor’s annuity interest. These values are determined by the Applicable Federal Rates published monthly by the IRS. When the AFRs are low, the value of the grantor’s retained interest increases, and the taxable value of the gift decreases.



NYC FPA Meeting

Here is the lowdown for the FPA meeting next week:

Financial Planning Association of NY Invites Allied Professionals to Network

The New York chapter of the Financial Planning Association of New York (FPANY) is hosting an event on November 10, 2016 at the Public House, 140 East 41st Street (just East off of Lexington Avenue) from 6:00 to 8:00 PM where professionals in various service industries can network with each other and members of the financial planning community.

The event is being organized by the Allied Professionals Committee of FPANY (of which I am a member), and the goal is to bring together financial planners and accountants and lawyers and investment advisors and bankers and in generally really any other profession where the client may be better served by coordinating the actions of the client’s various advisors, versus having each advisor working independently and without seeing whether if what they’re recommending is in line with all of the client’s other goals and objectives. The client is always best served when all of their advisors are on the same page, obviously.

In any event, see if you can come to this event on 11/10/09, which is next Thursday. The Public House is a pretty cool place, and the event is free if you’re not going to drink. Open bar is a good deal too. Check it out.

The Million Dollar Annuity

Two years ago I referred a retired couple who had come to me for estate planning to financial advisor Mario Govic, who is now out of Sarasota, Florida. The couple had about $3 million invested in more than 16 different financial institutions, qualified and nonqualified accounts, with ownership and beneficiary designations twisted and turned, and a portfolio of holdings which made no sense at all. Their RMD’s were causing a severely negative tax hit, and positions were bought and sold without regard to basis and tax liabilities. After a month of intensive work, Mario consolidated their holdings into a handful of annuities with various GMIB and GMWB riders and non-qualified accounts, and in general straightened the client’s nightmare portfolio into a well-managed and tax efficient retirement plan.

Continue reading The Million Dollar Annuity

Different Types of Damages that Can Be Claimed in Personal Injury Lawsuits

Personal injury lawsuits strive to obtain financial compensation, also called damages, for the plaintiff in order to make up for the injuries and other effects he suffered from his accident. Three types of damages are available: economic, non-economic, and punitive.

Economic damages compensate for costs that can be objectively expressed in financial terms. This can include medical bills, lost wages after the accident, or the cost of hiring someone to help around the house. In addition to what you have already paid, you can also receive compensation for future costs. If you will require continuing medical treatment, you can receive damages to pay for it. If you will be unable to work, or unable to work as much as you could before your injury, you can also receive damages to compensate for this. Plaintiffs will usually receive full compensation for these losses, even if that requires very large awards.

Non-economic damages compensate for subjective losses that cannot be verified in monetary terms, like pain and suffering, loss of enjoyment of life, disfigurement, loss of companionship, and other factors that affect quality of life. In some states, awards for non-economic losses are capped, usually at less than one million dollars, in an effort to prevent plaintiffs from becoming wealthy from these awards. This idea of tort reform is controversial, and not all states have adopted it. Continue reading Different Types of Damages that Can Be Claimed in Personal Injury Lawsuits

Life Annuities

Thanks to Prudential for inviting me to a presentation (and dinner!) by Prudential Regional Vice-President Gary Woodward on Prudential’s HD (Highest Daily) Lifetime 7 Plus Variable Annuity product. As you well know, the primary purpose of a variable annuity is as a mechanism to save money during a person’s working years which can then be used to draw upon as an income stream during retirement. It’s not available as a lump sum, obviously.

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Financial Planning

I had a breakfast meeting this morning with Alli Joseph, creator of Seventh Generation Stories, who shared with me her vision as to the meaning of the word “legacy.” Customarily, in the financial professions and in the estate planning field, we generally think of “leaving a legacy” in financial terms, or otherwise with respect to property and inheritance. When used in this context we believe you should consider forming a domestic asset trust to protect your financial treasures.

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Online Wills & The Ethical Dilemma

My friend in the insurance business sent me last week an article from the Wall Street Journal which generally came out favorably towards online Will preparation systems. Usually I would have gone on a rant as to the ignorance of people who believe they can get an estate plan done over the internet for $15, but at that particular moment I instead found myself in an ethical dilemma.

The reason is that by and large will and trust preparation is simply not a good profit center in my practice for couples in the $100,000 – $300,000 income bracket, and with assets less than than a few million dollars (including the house and 401(k)’s). This is because those folks, generally couples in their 30′s to 50′s, simply are not going to (by and large) pay $3,500 or more (depending on complexity) to have their Wills, Trusts, and Advanced Directives drafted. But I know from experience that such a couple is going to come into my office for a first interview and talk to me for an hour or more about their assets and issues and ask a ton of questions; and then I’ll draft their documents, and the couple will want to come in again and review and ask more questions and make changes, and then I’ll have to draft the documents over again; perhaps another telephone conversation, and another draft of the corrected documents, and then the execution ceremony, where things perhaps need to get changed again.

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Estate Planning

An excellent way for your clients to save money (perhaps a lot of money) on their estate planning engagement is to have much of the preliminary work done ahead of time. In other words, much of the cost of having an estate plan prepared is caused by the time and effort it takes for the attorney to educate the client about the options available, gather and sort the various documents which are needed to develop the plan, and then discuss your clients’ goals and objectives. Many run estate planning practices by Continue reading Estate Planning

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