Wealth Preservation, Trusts and Estates

Do you have a power of attorney?

Is it a medical or financial power?

Is it a springing power or durable power?

Does it name the right agents?

Is it recent and valid under Pennsylvania law?

If you’re not sure of the answers to these important questions about
having a power of attorney in Pennsylvania, then take four
minutes to watch this video.  Knowing this information is
vital and can save you and your family time, trouble and legal fees.

David Frees is Chairman of the Trusts, Estates and Wealth
Preservation Section of Unruh, Turner, Burke and Frees.

David can be reached at 610-933-8069 and his youtube channel
Paestaeplanners.com is loaded with other estate planning,
asset protection, and elder law information

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Family Limited Partnerships

A family limited partnership can clearly be a great estate and business-planning tool but if it is drafted or implemented incorrectly it could cost you money and headaches.  Family Limited Partnerships allow families to own and operate a business or series of investments as part of an executor estate plan to protect both parents and children. In addition, it offers the owners of real estate and closely held business a powerful tool for protecting whole businesses from dissolutions, excess taxes, and claims in divorce or lawsuits.

2011 Pennsylvania Estate Planning News:

In the Estate of E.V. Jorgenson the decedent (the person who just passed away) transferred substantial assets to two family limited partnerships and claimed that the retained powers and interests were minimal. The IRS assessed an estate tax deficiency and Tax court found that the decedent had retained the economic benefits and control of such property and that the transfers did not involve a bona fide sale for full consideration. Estate of E.V. Jorgensen, 2011-1 USTC

Why did the taxpayer lose?

Because she had written checks on partnership accounts to pay some personal expenses and make some family gifts.

What does that mean?

Because she maintained too much control of these assets and used them for personal purposes  the value of the family partnership assets were taxed in her estate.

The estate tried to argue that the amounts involved were so small that she really did not have control of the assets but the court did not agree and believed she had access to the funds.

To find out more about tax planning options that could offer significant family tax relief click here to read $ 5 Million Gift Tax Exemption Makes Gifting of Small Business Easier.

What does this mean for you and or your family limited partnership (FLP)?

Transfers of marketable securities, cash or other assets to family partnerships need to have a significant non tax purpose or the court, as it did here, will not consider them a bona fide sale for adequate and full consideration and they will remain in your estate. You and your attorney need to be aware of the heightened scrutiny involved in transferring this type of asset into Family Limited Partnerships FLP’s and its tax and other consequences. The FLP should have a bonafide business purpose and retained control should be minimal.  Using such assets to pay personal expenses will likely cause the technique to fail.

Here are a few questions to think about in considering creating an FLP or transferring or funding your FLP:

• If you were considering funding the FLP with residential or vacation real estate do you want to continue to be able to use that real estate? If so this is not the right tool.  Think instead about a qualified personal residence trust or an outright gift since property values are at historic lows.

• Do you instead need a qualified personal residence trust to implement your above desires?

• What powers or sources of income can be retained without including the FLP in your estate?

• Should you consider a GRAT – Grantor Retained Annuity Trust where some of the assets can be returned to you for your personal use?

If you are not sure of these answers or want to find out more about family limited partnerships contact a wealth preservation attorney to discuss what might work best for you and your unique situation.

Family Limited Partnerships can be a useful tool if they are created and implemented correctly. Figure out what you want to do and then think about the questions above and talk to your attorney or seek an attorney who specializes in wealth preservation to give you all the options available and what possible consequences each of those options may pose.

David M. Frees III, JD For more information about these techniques, call:
610-933-8069  or email dfrees@utbf.com

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The Romney’s 2010 tax return (which is quite  lengthy and can be viewed in it’s entirety by clicking Mitt Romney’s Tax Return) gives us a few hints about trust and estate planning techniques of the wealthy that may have relevance for you – even if your net worth is closer to 1 million dollars than 150 million.

Article By: David M. Frees III, JD

As a matter of side interest, the Romney’s assets were held in a “blind trust” which arguably eliminates or minimizes conflicts of interest for a politicain or officeholder since they no longer know what investments are held by the trust and make no direct investment decisions.

However, the existance or not of a blind trust makes no difference from an estate tax planning perspective.

Why?

Any trust which allows you to continue to use the assets, and/or to control or revoke the trust will generally be included and taxed in your estate.

So what can we tell from his income tax return that might hint as his estate planning and why do you care?

Well, you should care if your assets, including real estate, IRAs and life insurance, business interests and investments exceed $1 million dollars since at the end of this year the amount that can be passed to your heirs without federal estate tax falls back to only $1 million dollars.

And, to make matters worse, the effective rate rises again from 35% to 42-55%.

Since Romney presumably has paid for some very  savvy lawyers, there might be a few lessons here that could matter to you and should be reviewed with your own lawyer before the end of the year.

First, there appears to have been a Grantor Trust established as the return shows income from a trust reported on his return.

If you own a business, certain types or real estate, and other assets and your estate exceeds certain limits, a Grantor Trust, or the sale of assets to a defective grantor trust might be an excellent way to transfer the asset and the growth on the asset out of your estate and further benefit the next generation by continuing to pay all of the taxes due on that income.

It also appears that the Romney’s funded a CRUT or Charitable Remainder Uni-Trust.

The CRUT can be an excellent way to transfer appreciated assets, to get a charitable deduction, and to retain income from those assets for some period of time.

There are lawyers, financial advisers, and accountants who advise the use of these trusts for tax planning alone.  Personally, I believe that they are best suited for those clients with a true charitable intent.

But, if you need income but would like to make a sizable gift to a charity that is important to you, consider and discuss this technique.

The 203 page return reveals the truly complex and seemingly insane level of energy required to comply with the intricacies of the Internal Revenue Code but I’ll take lessons and get ideas for my clients wherever I find them.

If you need information about Grantor Trusts, GRATs or CRUTs or any other planning techniques to protect your surviving spouse or herirs, we are pelased to offer a consultation to determine if you would benefit from an enhanced estate plan.(TM)

Please feel free to call 610-933-8069.

By:  David M. Frees III, JD

dfrees@utbf.com

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Picking an executor is a critical part of any sophisticated or even simple and effective estate plan. Having the wrong executor or someone that does not fully understand your wishes can wreak havoc on your estate’s administration and more importantly on the execution of your wishes. In fact, other than the decision to create and execute an estate plan; executor selection may be one of the most important estate planning decisions you will make. Consider the Pennsylvania case below.

In a recent 2011 Pennsylvania case a co-executor removed decedent’s safe and financial records two days before the death and failed to return or disclose this to the beneficiaries or list the items on the inheritance tax return. The Orphans Court removed and surcharged the co- executor for attorney fees and costs of the estate. Jonik Est. (O.C. Div. Phila.), 1 Fiduc. Rep. 3d 296.

Would your executor do this to you?

Do you have the right executor?

How do you pick the right person or institution to do this job?

Click here to read more about how to select the right executor for your estate plan.

Being an executor is a tough job. The executor must find your legal and financial documents, gather your assets, pay off all your debts, keep the beneficiaries informed, make financial decisions, and implement your wishes as if you were there.

Many times we see executors who are overwhelmed by the amount of work required by law to be an executor in Pennsylvania.  For that reason, it is important to pick someone who can handle it and even more importantly can get the job done the way you would want your estate administered.

Furthermore we often see even dedicated executors make the same simple but dangerous mistakes. To educate yourself and or your executors click below to get a free copy of our resource for executors.

The Ten Most Common Mistakes Executors Make… and how to avoid them

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One of the Irrevocable Trusts we prepare for clients who enter into

Nursing Home Asset Protection planning is referred to as the Medicaid Intentionally Defective Grantor Trust (MIDGT).  One of the tax features of the MIDGT is that the person, usually an elderly parent, who transfers assets to the irrevocable trust will continue to be responsible for paying the income tax due on the trust earnings even though he or she has severed all other ties to the assets.  One of the significant benefits of the parent, in this scenario, retaining the responsibility to pay the income tax is that he or she will be able to offset the income earned by the trust using possible long term care costs.

Below is a brief review of the Medical Care Costs that you or a loved one might incur and which might be used to offset income or gain.

It is important to maximize all income tax deductions available to you or a loved one.  Medical expenses are deductible only to the extent they exceed 7.5% of a taxpayer’s adjusted gross income (AGI). You can only use medical expenses that are not reimbursed through insurance or other means.  It is infrequently the case that the common medical expenses can be used as deductions because either the costs are covered by insurance or they do not rise to the necessary percentage of gross income.

That being said, the entire cost of a long-term care facility, including meals and lodging, can be a deductible medical expense. The care cost is fully deductible if the principal reason for entrance into the facility is the provision of medical care.  The retained ability to take such a large deduction could result in significant income tax savings.

A person living in an assisted-care facility can only deduct a portion of the cost of the payment to the care facility.  The IRS does not view the entire payment as a medical care cost considering the taxpayer is only being “assisted” and is not receiving complete care.

You can also take medical deductions if you are spending significant dollars to upgrade your home in order to remain at your residence comfortably.  Equipment and home modifications to accommodate the handicapped (no age limit) that do not increase the market value of the home are deductible as a medical expense.  Examples of such deductible improvements include additions of handicap accessible bathrooms or hospital beds.

So you can see, the income tax savings could be significant if the care recipient is claiming the income and offsetting it with care costs.  This would potentially let the trust assets to grow income tax free for years.

As a side note, these medical deductions can even be taken at the estate level after a person’s death.  When a person dies owing medical expenses, and those expenses are paid by the estate within one year, a medical expense deduction can be taken on the decedent’s final income tax return (Form 1040) or on the federal estate tax return (Form 706).

For a more detailed review of the Medicaid Intentionally Defective Grantor Trust click here.

For additional information on Elder Law Planning and the use of Elder Law, asset protection planning please contact Douglas L. Kaune at 610 933 8069 to schedule a client conference to determine if the Firm can be of assistance. For a review of Doug’s bio page click here.

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If Your Spouse Dies in 2011 or 2012
You May Think That There
Is No Estate Tax Return Due

You Might Right And You Might
Be Surprised To Know You Should
Still File

Most people now know, that if they die during the calendar
year 2011 or 2012 that there is a five million dollar exemption
from federal estate taxes.

And, it would be logical to therefore assume, that if you lose a spouse
during 2011 or 2012, and if your spouse’s assets are less than
five million dollars, that you would not need to file a return.

In fact, that’s true.  You don’t have to file.

But, because of something called federal estate tax
PORTABILITY, you will certainly want to.

If you fail to file, then you do not “inherit” your deceased
spouse’s remaining credit amount.

Perhaps an example will help to make this strange idea
of portability a bit clearer.

If spouse A passes away and has three million dollars worth
of assets that pass directly to surviving spouse B who has
his/her own assets of one million dollars and they
also have 2 million of joint assets, the surviving spouse
ends up with assets totaling six million dollars.

However, if the surviving spouse fails to file a federal
estate tax return at the death of the first spouse, she only
has her own five million dollar exemption.

That amount will not cover the six million dollar estate
that she will have at her death.  One million dollas will
be taxable.

To avoid this result, all the surviving spouse has to do
is file the federal estate tax return at the death of the first
spouse.

Now this type of return can be expensive – as hiring
lawyers almost always is.  They are complicated, they are
time intensive, they require obtaining extensive amounts
of information about assets and their valuation, but
by filing the return she inherits the five million dollar
exemption of the first spouse and this alone might save
their children or heirs hundreds of thousands or even
millions of dollars of federal estate tax at the death of the
second spouse.

Complicated.  Yes.  Oversimplified here?  Yes.

But the basic theory is simple.  If a spouse passes away in
2011 or 2012 be sure to seek advice from a knowledgeable
a lawyer who keeps current in these matters about the need
to file a federal estate tax return.

For more information on this important topic read FORBES
on the federal estate tax and portability.

by:  David M. Frees III, JD
610.933.8069

dfrees@utbf.com

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Is Being An Executor or Trustee More Dangerous Than You Think?
Yes! Even your own kids might sue you.

By: David M. Frees III JD

In many cases it might be. But, if you own your own business
you might want to pay particular attention to this case.

If you’re a business owner who wants the trustees of a trust to
keep the stock of your legacy then it’s very important to protect them
from liability so that they don’t feel compelled to sell it to
shield themselves from law suits like this one.

However, the exact rules and circumstances should be carefully
reviewed and discussed as part of your estate planning.

A review of the case is useful:

In a recent Pennsylvania case involving executor liability for investments
the Superior Court ruled in Estate of Warden, which can be found at
2010 PA Super 121 (July 9, 2010), the Pennsylvania Superior
court found in favor of trustees who failed to sell a business
predominantly because of specific language in the will to protect them.

The facts are interesting.

Under his will, Mr. Warden established a testamentary trust that was
funded with 110,000 shares of stock in his company, Superior Tube
Company, with a value of $1.5 million at the time of Mr. Warden’s
death in 1951. Superior Tube became SGI.

The trust terms provided that the trustees were not liable for any
actions taken in good faith. Does your will have this clause?

Should it?

Read on and then chat with your lawyer.

Mr. Warden expressed a preference for long-term investment performance
with respect to trust investments, and restricted the sale of the company
unless all trustees consented to the sale at a certain price. And, the trust
continued to hold the stock of the company through mergers and other
stock exchanges and name changes.

In 1987, Mr. Warden’s grandson successfully petitioned the court to be
appointed as successor trustee of the trust, to serve along with
Wachovia Bank, N.A.

No beneficiaries objected to the appointment.

Mr. Warden’s great-grandchildren, who held a 12.5% interest in the
trust income, thereafter filed objections to the trustees’ accountings
and sought to surcharge their father and Wachovia Bank as co-trustees.

The other beneficiaries, apparently satisfied with the investments,
did not file objections.

At the time the beneficiaries filed the suit, the value of the SGI stock
had increased from $1.5 million at Mr. Warden’s death to at least
$189 million.

The beneficiaries filed the suit after attending a family meeting where
they learned of an SGI operating loss of $66 million sustained from
2000 through 2003 that would result in a major reduction in their
dividend payments.

Following a 13-day trial, (imagine the legal fees on this one) the
trial court overruled the objections. They essentially ruled in favor
of the trustees. The beneficiaries appealed- more legal fees.

On appeal, the Pennsylvania Superior Court affirmed the trial court on
the grounds that:

(1) the higher standard of care for a corporate fiduciary does
not apply where the trust instrument explicitly mandates a different
standard of care such as the good faith standard;

(2) because Mr. Warden indicated a good faith standard in the trust
instrument, the trustees only breach their duty if they do not act in
good faith, which means if they intentionally acted with a
dishonest state of mind;

(3) the allegations that Wachovia failed to follow its policies, attend
SGI board meetings, review financial statements, or meet with the
co-trustee did not rise to the level of intentionally
dishonest behavior;

(4) because the trust terms required the consent of all co-trustees to the
sale of SGI stock, and did not provide a mechanism for breaking a tie
between Wachovia and the co-trustee, Wachovia
did not have a duty to compel the co-trustee to sell the SGI stock;

(5) the trustees were authorized by the trust terms to hold assets even
if they did not generate returns;

(6) a trust investment may fluctuate in value in a short-term time
period over the administration of a trust, but a short-term decline in
value is not a loss where the overall long-term performance of the
stock shows an increase in value;

(7) here, the asset increased from $1.5 million to $189 million, and
the beneficiaries’ focus on the alleged $300 million loss in value between
the 1990s and 2003 was inappropriate;

(8) the beneficiaries’ claims were barred by laches (a legal concept
designed to give people a fair time within which to bring their claims or to
be barred) because their grandmother never objected to the trustees’
actions, no other beneficiaries objected to the administration prior to 2004,
the beneficiaries did not demand an accounting until four years after
succeeding to their grandmother’s interest in the trust, and they were
aware of the high concentration of SGI stock 13 years before becoming
beneficiaries and four years after becoming beneficiaries before requesting
an accounting; therefore, the beneficiaries had an affirmative duty to inquire
and bring their claims sooner.

The bottom line?

If you Own a closely held business it might be sold upon your death.
But, if you want it to be held in a trust you’d better consider some
specific provisions to give the trustees guidance and to protect them
if they follow your rules.

For more information about estate planning, succession planning,
and exit planning for the owners of closely held and family owned
businesses, call or email me at 610-933-8069 or at dfrees@utbf.com

Thanks also to the firm of McGuire Woods Fiduciary Advisory Services and Steve
Leimberg for calling this case to our attention and for their savvy analysis.

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When a person dies without a will, (intestate), his or her property will go through a court supervised intestate process.

That process is a set of inflexible rules created by state law that dictates how the deceased person’s property and assets are distributed.  Only a will, or a non probate beneficiary designation (a combination of the two is usually best) will prevent these state rules from applying to your assets.

Want to avoid the intestate process?  Make sure to execute a will and make sure to coordinate your will with your non probate property such as IRAs and life insurance payable under a beneficiary designation.

Here’s a brief video from Bloomberg on why it’s important to have a will. You can skip the ads.

If you have a will click here to read Is It A “Probate Asset” Or Not”? to find out more about which of your assets go through probate.

The Pennsylvania Intestate Process

If there is no will the intestate process begins with the Orphan’s Court appointing a personal representative to pay creditors, to receive legal claims, and manage the estates expenses. Estate expenses range from the decedents (person who has died) unpaid bills, loans, administrative fees, costs, and payments to the administrator for their service.

After the court appoints the administrator and the expenses are paid the intestate law will identify heirs for distribution of assets. Here is a summary of Pennsylvania intestacy statutes, which dictates to the court and the estate as to the heirs of a given estate when there is no will:

State	Priority Under Intestate Laws	When there are Children of Different Generations (grandchildren)
PA	1. Spouse and no children or parents – everything to spouse. 2.Spouse and parent (no children) — everything to spouse. * 3. Spouse and children — spouse takes 1/2 the estate. If the children are also the spouse’s, the spouse also takes $30,000. If they are not, spouse only takes 1/2. Children divide the remainder equally as long as they are in the same generation. 4. Children and no spouse — the children take all. Shares are divided equally among the children in the same generation. 5. Parents, no children or spouse — parents share equally. 6. No spouse, children, or parents –brothers, sisters, or their children take all. Shares are divided equally as long as those eligible are in the same generation. See 20 Pa. Con. Stat. Ann. §§ 2101, et. seq. (2002).	The estate is divided into as many shares as there are living members of the nearest generation of children to the victim, including deceased children in the same generation who left behind children. Each surviving heir in the nearest generation to the victim receives one share and the share of each deceased person in the same generation is divided among his or her descendants in the same manner. See 20 Pa. Con. Stat. Ann. §§ 2101, et. seq. (2002).

• Pennsylvania intestate statute was amended on October 3, 2003. See 2003 PA Legis. Serv. 26 (West).

• This is a general summary only.  It does not include distributions when none of the relatives set forth in these charts is alive.  This is not a substitute for state law, and to the extent state law varies with this chart, state law controls. For more information, an attorney familiar with state statutes and case law should be consulted.

If no heirs can be identified the estate and its property and assets will be given to the state.

If there are heirs the administrator will distribute the assets to the heirs according to Pennsylvania’s probate laws.

If you do not have a will and die the probate court will distribute your estate according to intestate law. And, Pennsylvania’s intestate law may vary significantly from your actual wishes.  This is especially true if you have children from a prior marriage, want your spouse to have all of the assets, want to include other people or charities.

Why?  No close friends are factored in and family to whom you are not close to may inherit the most.  No charities are included and your spouse may not even get to receive or use your assets.

In the end, administering an estate without a will may not do what you want, it may not select the administrator that you desire, and it may be considerably more expensive than probating an estate with a will.

Questions about having a simple will, trusts for children and grandchildren, special needs trusts?

Please email me at dfrees@utbf.com

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Is It Time To Get A Will or To Update Your Existing Will, Trust or Estate Planning Documents?

By: David M. Frees III JD

Has it been a few years since you last updated your will trust, or power-of- attorney?

Are you unsure that your IRA and 401k beneficiary designations still work with your will and trust?

Has an executor, guardian or trustee changed?

Need to make a change in the document?

Have you radically increased or decreased your life insurance coverage, retired or recently inherited money?

Tired of guessing how much it should cost and where to go?

We have recently developed a quick quiz to let you know if you’re ok, if it’s time to update or upgrade, or if your situation is urgent.

After you take the quiz, this article will also tell you:

What you need to do,

How much it will cost, and

How and where  to get it done.

The advice ranging from using Legal Zoom, to hiring a local general practice firm, to getting the right level of legal experienc for your particular situation is spefically responsive to your ciustom score and your particular needs.

Whether you have

Children or grandchildren,
A family or other business,
Commercial real estate,
A home or vacation home

This valuable quiz and estate planning assessment tool will help you to answer your most pressing estate planning questions.

Interested?  Just click here or click below:

Dave!  I’m interested in getting a will or updating a will or estate planning documents and I’d like more information about my estate planning situation.

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As many of you know, the present Federal Estate Tax Law allows for a surviving spouse to carry forward the Federal Estate Tax Exemption available to his or her deceased spouse at his or her death.  To garner the benefits of this “Portability” provision, the Internal Revenue Service (also referred to as “IRS”) does not require a surviving spouse to establish a credit shelter trust like those utilized in many estate plans in years past.

Now that you know that the Portability provision exists, we can tell you the mechanics of making the proper election.  The IRS Notice 2011-82 issued on September 29, 2011 explains that the executor of the first decedent spouse’s estate must timely file a Form 706 “on which the executor computes the deceased spousal unused exclusion amount ["DSUEA"] and makes a portability election.”

The Internal Revenue Service makes it clear through its statement that “most (if not all) married decedents dying after December 31, 2010, will want to make the portability election.”  Although the surviving spouse or other executor of the surviving spouse’s estate might have to do a bit more work to prepare and file the federal estate tax return, the benefits for the future generation could be significant.  It is calculated that the additional $5,000,000 of federal estate tax exemption resulting from the portability election could result in a federal estate tax savings of $1,750,000.

Again, we believe it is important for virtually all surviving spouse’s to file for the Portability of their deceased spouse’s estate tax exemption.  While a surviving spouse’s estate value might be under the present $5,000,000 exemption per person, one of the following could happen:

1)  The surviving spouse’s estate value could rise significantly and ultimately exceed his or her exemption at his or her death.

2)  The Federal Estate Tax Exemption could be reduced below the surviving spouse’s estate value.

3)  There could be a rise in the estate value and a decrease in the exemption amount.

Regardless of which of those occurs, the extra $5,000,000 of exemption that could be carried forward from the decedent spouse would go a long way toward protecting some or all of the second deceased spouse’s estate from the 35% tax that now would apply.

While the preparation and filing of the Form 706 can be complex and time consuming it is likely well worth the effort when considering the potential tax savings.

IMPORTANT NOTE: For decedents dying on January 1-3, 2011, the deadline for filing a 706 is Monday, October 3, 2011. You may secure an automatic six-month extension by filing Form 4768 by the original due date for the 706.

Click on the link below to view or download a copy of this important Notice. http://www.irs.gov/newsroom/article/0,,id=246604,00.html

To read our article on the Federal Estate Tax’s Future click here

Will the Federal Estate Tax Law Be Modified in 2012? Obama Gives Us A snippet of Insight.

For assistance in preparing and filing a Form 706 and making the necessary Portability elections, please contact Douglas L. Kaune, Esquire at 610 933 8069 or dkaune@utbf.com.

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