As important as a will is to the transfer of your assets, it does not necessarily control how all of your assets will be distributed to your beneficiaries. You are likely to have designated beneficiaries for specific assets during your lifetime. And just as you review your will, review of your beneficiary choices for these assets is extremely important.
Because distributions under your will are subject to approval by a probate court, these assets often are referred to as “probate property.” Then there are the assets for which you have designated a beneficiary in a separate document and that are not subject to the probate process. This nonprobate property includes property owned in joint name (the family home, bank accounts, etc.) that passes automatically to the other individual joint owner. Similarly, if you have established a trust, you have named an income beneficiary to receive the earnings from the trust’s assets and a remainder beneficiary to receive the assets themselves at some future date.
For purposes of discussion here, we will focus on a nonprobate asset that is particularly important in the estate planning process: your retirement plan assets (company retirement plans, Keoghs and IRAs). Because your retirement plan assets are likely to be substantial, you’ll want to give special attention to integrating them with your will and overall estate planning goals.

Beneficiaries and retirement plan assets
Your employer or the trustee of your retirement plan will have asked you to fill out a form naming a primary beneficiary and, probably, a secondary, or contingent, beneficiary at the time that your account was created. The trustee of your IRA also will have a form for you to fill out.
Generally, if your spouse is not the named beneficiary of at least 50% of your vested account balance in your company retirement plan assets, he or she will have given “spousal consent,” agreeing to the designation of the beneficiary that you have chosen.
If you haven’t revisited the beneficiary designations for your company retirement plan or any of your IRAs in the past few years, you may want to do so—especially if you have divorced, remarried or had children since you became a participant in your company’s retirement plan. Perhaps you named a charity as your beneficiary. Is the charity still in existence? Is there another charity that you may want to name as a beneficiary of your retirement plan account?

The U.S. Supreme Court speaks on beneficiary designations
How important is it to make adjustments to your beneficiary designations as your personal circumstances change? A landmark U.S. Supreme Court decision provides the answer. Husband named his wife the beneficiary of both his life insurance and pension plan. The couple divorced, and two months later Husband died,without having changed his beneficiary designations for either his insurance or his pension. Because state law automatically revoked beneficiary designations after a divorce (as it does in many states), the state’s Supreme Court said that the money from the two resources went to Husband’s children from a prior marriage.
The U.S. Supreme Court, in a 7-2 decision, disagreed with the state court. To pay benefits according to a state law, rather than the individual designated in the plan or insurance documents, would require, potentially, a plan administrator or insurance company to be familiar with 50 different state laws. That result is unacceptable, said the Court, when federal law (the Employee Retirement Income Security Act of 1974) clearly states that payments must be made to a beneficiary who is designated by a participant or by the terms of the plan. Result: The ex-wife was entitled to the insurance and the pension, and the children lost out.
What can you do to prevent this kind of result? One potential solution is to name a trust as the beneficiary of your retirement assets. The trust agreement can name your spouse as the income beneficiary and your children as the remainder beneficiaries. Please feel free to make an appointment for a planning discussion as well as for answers to questions that you may have about this complicated, but important, area of estate planning.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

The American Family Business Institute, an advocate for small businesses, has long argued that the burden of death taxes (estate and inheritance taxes) impairs the ability of keeping family businesses going after the death of the founder. They note that 70% of family businesses do not survive to the second generation, and 90% fail to reach a third generation. A recent study by the American Family Business Foundation concluded that repealing the estate tax entirely would add $119 billion to GDP and increase the incomes of American workers by $79 billion. Another study, by the former director of the nonpartisan Congressional Budget Office, Douglas Holtz-Eakin, found that death tax repeal would create 1.5 million small business jobs and decrease the national unemployment rate by nearly one percent.
Legislation to repeal the federal estate tax permanently is unlikely any time soon, given the new permanence of the $5 million federal exemption (inflation-indexed to $5.34 million in 2014). The higher exemption is welcome, but probably not sufficient for many family businesses to stay in business. Business owners are going to have to take action if they want to gain control over their death tax exposures. That’s what the Wandry family did.

Gifts of partial interests

Joanne and Dean Wandry created a limited liability company (LLC) to facilitate giving gifts to their heirs. On January 1, 2004, each of them gave to each of their four children $261,000 worth of units in the LLC. They gave $11,000 worth of units to each of five grandchildren as well. At that time, the annual gift tax exclusion was $11,000 and the lifetime federal gift tax exemption was $1 million. Thus, Joanne and Dean fully utilized these legal protections and owed no gift tax.
The exact number of LLC units (similar to shares of stock) covered by those dollar amounts was not determined at that time, but was to be calculated by an independent third-party professional at a later time. Most importantly, the document executing the gift also provided for an adjustment in the number of units in the event of an IRS audit.
When the $1,099,000 worth of gifts was reported on the federal gift tax return, the attached schedule described the children’s interests as a 2.39% LLC interest, and the grandchildren’s as a 0.101% interest. Upon audit, the IRS determined that the LLC was worth more than reported, so the 2.39% interest and the 0.101% interest were worth more as well. Enough more to trigger the requirement for a gift tax payment.

Careful lawyering

The Wandrys contended instead that the 2.39% and 0.101% fractions should be reduced until they matched the dollar amount of the intended gift. In an important Tax Court decision earlier this year, they won their point.
When stipulations have been attached to gifts that attempt to void or partially reverse a taxable gift in the event of an IRS audit, those stipulations have been held to be without effect for gift tax purposes. The Tax Court found that the improper “savings clauses” were not the same as the “formula clause” used by the Wandrys. A formula clause is permissible. The key difference is that no property is taken back with a formula clause. Although the value of each membership unit was unknown on the date of the gift, the value of a membership unit on any given date is a constant, and it is not changed by the revaluation of the firm as a whole upon audit.

The importance of the decision

This is the first time that the Tax Court has approved what estate planners call a “defined value” gift formula. With assets that are hard to value, such as an interest in a family business,
it can be tricky to make a gift of so exact an amount. A defined-value clause may resolve this problem in appropriate circumstances.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

In a desire to be fair to everyone, some parents assume that the solution is an equal division of what they own among their offspring. Too many times chaos ensues. Here are the stories of two families with whom we are familiar. They are based upon real situations, but the names are fictitious and some facts slightly altered.
Story one: Home front as war front
Alden left the family home equally to six children. Cassie has lived there her whole life, caring for her widower father and disabled brother. She wants to stay there. Two siblings flew in from across the country for the funeral, almost literally expecting to go home afterward with checks in their pockets from the sale of the house. The other two just want peace in the family.
Did we mention that Cassie is the executor of her father’s estate?
The battle lines were drawn even before Alden passed on. Cassie doesn’t have the funds to buy the others out. The others are half convinced that Cassie’s actions over the years prove her incapable of “thinking straight” about the house or handling the division of family assets properly. Everyone is contacting lawyers.
Is it too late? Cassie herself actually does understand that she cannot manage the settlement of her father’s estate alone. Her thinking is clearer than her brothers and sisters believe. She has enlisted a corporate fiduciary (in the role of “agent as executor”) to handle the administrative and investment responsibilities involved in settling her father’s estate.
Otherwise, it is too late to satisfy everyone in Alden’s family. This story, then, can serve only as an object lesson.

Story two: Don’t invite them all to dinner
Beatrice made offhand remarks such as these all the time: “You may want the pearls when I’m gone.” “The china should stay in the family, it goes back generations.” “Dad’s matchbook collection reminds me of our best times together.” The comments raised expectations about inheritances, and paved the way to conflicts.
Beatrice’s will divided her estate “equally” among her four children. The failure to identify who was to get what from a substantial estate that included valuable antiques, works of art, and jewelry (not to mention items of sentimental value) was disastrous, leading to arguments so fierce that one sibling remarked to another, “At least after this is over, we won’t have to see each other again.”

A more formal approach. There are no simple solutions when it comes to the division of personal property among heirs. Beatrice could have used the annual Christmas gathering to give everyone the opportunity to discuss inheritance preferences. She could then have been the arbiter, with specific will instructions (Suzy gets the pearls; Arthur takes custody of the matchbooks; etc.). Alternatively, they could have come up with a process to resolve conflicts amicably. It also would have been a good time for Beatrice to make “annual exclusion” gifts (up to $14,000 per child in 2014), removing the gift amounts from her estate and from
potential taxation.
A glimmer of hope. Beatrice’s sister, unhappy with how things have turned out, has “brokered a deal” with her nieces and nephews. Everyone has agreed to formal appraisals of the most valuable items and informal prices for other pieces.
Prior to a get-together, everyone will receive a complete inventory of Beatrice’s possessions (including those with sentimental value). They may hold an “auction,” with each of them having “bidding money” that is equal to one-fourth of the value of the appraised items. The winner of each item has its value subtracted from his or her inheritance. (Online auctions are possible when beneficiaries are far-flung.)
Another option that some families consider is to pull numbers from a hat. Number one chooses what he or she wants and then on down the line. After the first round, the order is reversed.
Foolproof? No. But if everyone perceives that the process is fair, who knows? The process of estate settlement could put the heirs on the way to mending some fences, rather than exacerbating divisions.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

“I sincerely ask that all beneficiaries are sensible and do not argue.”
This wish, expressed by Australian coal-mining billionaire Ken Talbot in his will, has gone unfulfilled. Talbot’s will was drafted in 2002, when his fortune was estimated at $130 million. At his death in an airplane accident in the Congo in 2010, his wealth was believed to be just over a billion dollars.

Talbot apparently was concerned about the effect that his wealth could have on his four children. Accordingly, they can access 10% of their inheritances at age 30, the balance at age 36. But before they do so, they must “obtain written confirmation from three independent doctors that they are not alcoholics or drug users.”
The Talbot Family Foundation was slated to receive 30% of Talbot’s estate. The balance of the estate was to be divided 48% to the children of Talbot’s first marriage, 52% to his surviving spouse and the two children that he had with her.

This might seem like a sensible and fair division. However, when the math is worked out, the two children from the first marriage will have a 24% share, the surviving spouse an 18% portion, and the two youngest children will receive 17%. That would come to an estimated $119 million for each of them, falling well short of the $168 million that the older children will inherit. Perhaps Talbot assumed or directed that the younger children eventually will inherit their mother’s share. We can’t know for certain, because a two-page memorandum that Talbot provided to the family explaining the philosophy behind his estate plan has not been made public.
Despite Talbot’s pleas, a will contest has erupted. The surviving spouse’s father, grandfather to the younger two children, has challenged the apparently unequal treatment of all the children. His affidavit states: “I seek an order from this court that adequate provision be made for Alex and Claudia out of the estate of the deceased.”
Avoiding family squabbles is perhaps the thorniest aspect of estate planning. To reduce the chances of misunderstanding, some planners recommend sharing the outlines of the estate plan with heirs well in advance, to avoid surprises and hurt feelings.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.