Wealth Transfer

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To avoid intestacy

One tries to anticipate all possibilities when drafting a will, but sometimes that’s just not possible. Roberta Jollimore’s 1992 will named her son, Gregory, as her executor and sole heir. It also provided that if the son “has predeceased me I give all of my estate, both real and personal . . . to the Public Archives of Nova Scotia.”
Roberta live with her son, and suffered from Parkinson’s disease. In 2008, after the son failed to report to work for a week, the police were called. Gregory’s body was found near the door, a plastic bag over his head, with a note: “Please bury my beloved mother next to me. No plots purchased yet. Use funds in my account. G.J.” Roberta’s body was found in the basement, surrounded by stuffed animals with her head on a bible. She had been strangled with a man’s leather belt.
The Supreme Court of Nova Scotia ruled that Gregory had murdered his mother. The law generally prevents a murderer from inheriting from his or her victim, and with Gregory’s death he couldn’t inherit anyway. But who does?
Gregory did not predecease his mother. Arguably, that left the final clause of the will invalid. Because Gregory could not inherit, that would mean that Roberta’s property would pass to more remote relatives, perhaps siblings or cousins. A lawsuit ensued between the Public Archives of Nova Scotia and those relatives.
The Court attempted to divine Roberta’s intentions, given that she could not have anticipated her murder. The will was not ambiguous, said the Court. “If Gregory Jollimore did not receive her estate, it was to go to the Public Archives. No other parties were mentioned.” Holding to the literal language of the will, ruled the Court, “would completely ignore Roberta Jollimore’s wishes.”
The estate was awarded to the Public Archives of Nova Scotia.

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

 

 

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Tax-wise land management: Conservation easements

Real property–land and the home or other structures on it–often has special significance to the family that owns it, to the surrounding community or to the ecology of the area. It may: have played a role in a historical event; provide habitat for wildlife; command a magnificent view; or offer access to recreational or educational venues. It is only natural that owners might want to preserve the unique character of their property.
Yet, real estate passing to one’s heirs is valued at its “best and highest use” for federal estate tax purposes. Even if it is open, undeveloped land, it will be taxed at the value that a residential or commercial developer would place upon it. This optimal market value of real property also may affect its assessment for local property taxes.
For these reasons, conservation-minded landowners are choosing voluntarily and permanently to reduce the value of their land. The mechanism that they employ in this process is known as a conservation easement.

Fundamentals of the easement
In legal terms an easement is a right ceded by a property owner to others for limited use of the property, permitting a shared road to pass through one’s land, for example. A conservation easement generally gives to a qualified conservation organization a guarantee that the property in question will not be developed in a way that compromises the interests promoted by the organization.
The unique nature of the property governs the type of organization that may accept the donation of a conservation easement on it. For example: If it has buildings of historical significance, or is part of a battlefield, an organization such as the National Trust for Historic Preservation may wish to enter into an agreement conserving its unique character in perpetuity. Or, an organization such as Ducks Unlimited or the Nature Conservancy may accept an easement protecting a significant wildlife habitat containing special natural attributes.
A conservation easement takes the form of a written agreement between the landowner and the conservation organizations. Easements are quite adaptable to the individual circumstances of the case. Rights that the owner wishes to retain can be written into the agreement–even the right to subdivide, build an additional structure, retain timber, mineral or hunting rights, etc.

Tax issues
An easement is regarded as a charitable donation–the value of the donation being equal to the loss of value of the affected property. This can run from less than 20% to more than 90% of the property’s unencumbered value. Naturally, the more rights retained by the landowner, the lower will be the value of the easement.
The donation is deductible from income taxes up to a limit of 30% of adjusted gross income (AGI). In certain instances, an easement also may reduce the property value in the eyes of local tax assessors, resulting in savings on property tax. Potentially, the biggest advantage of conservation easements involves the estate tax. Easements often are cited as being responsible for keeping in the family valued property that might otherwise have to be sold to pay estate tax.

Additional considerations
In practice, the agreement for an easement must spell out carefully the rights that are being ceded, and those that are being retained, and must be binding on both parties. For this purpose the assistance of an attorney specializing in real estate matters is essential. There must be something special or unusual about the land that you are protecting, although a great variety of properties, large and small, can be found to qualify. The agreement must be with a legitimate charity or government agency. In order to substantiate a tax deduction, the value assigned to the easement must be supported by a qualified appraisal. Often a cash donation accompanies the grant of an easement in order to help the grantee organization maintain the rights ceded to it.
An easement is generally not appropriate when a quick sale is contemplated. The tax benefits notwithstanding, most people who grant conservation easements have a genuine interest in preserving the environment. Although an easement is regarded as reducing the market value of the property on which it is granted, the reverse is sometimes the case. Certain buyers, it seems, actually are willing to pay more for conserved land.
In short, a conservation easement can be a key part of a family’s financial and estate planning. Consult your advisors for more information.

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

 

 

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Succession planning for art and collectibles

Most people are collectors of some kind. Some own art that has been passed down through generations, and their collections may be worth millions of dollars. Others start collections based upon their special interests—as common as coins and stamps or as unusual as musical wind-up toys and fishing lures.
What all collections have in common is value, either in dollars or in the simple pleasure that having the objects brings. In either case, developing what is sometimes referred to as an art succession plan is an important element of a collector’s overall estate planning.
The goal of an art succession plan is to preserve and distribute the collection to heirs with the least possible turmoil and expense. Here are a few suggestions offered by collectors and art succession professionals.

Keep a comprehensive list of the items in the collection
A collector always should maintain a complete and up-to-date inventory of the items in his or her collection.
Along with the inventory, a collector should record all purchase and sale transactions. If available, authentication documents and the provenances (origins or sources of the collectibles and histories of subsequent owners) should be included. If the collection is small, a simple computer spreadsheet might suffice. Specially designed software is available for larger, more complex collections.

Know the collection’s value
The general rule for federal estate, gift and income taxes is that property is transferred at its “fair market value.” When dealing with publicly traded securities, that’s easy enough to determine. For collectibles of any significant worth, an appraisal or valuation of each item in the collection from a qualified professional, one who will meet the standards set by the IRS, may be needed.
When a collector or his or her estate seeks a tax deduction for the transfer to charity of items in the collection, the IRS requires a “qualified appraisal” for property valued at over $5,000, and when the value claimed is over $20,000, the appraisal must be submitted to IRS along with the proper tax form. An IRS Art Advisory Panel reviews appraisals reported on income, gift and estate tax returns to determine their accuracy when the collection or work of art is valued at over $50,000.
When looking for an appraiser, most professionals suggest choosing a member of either the American Society of Appraisers, the Appraisers Association of America or the International Society of Appraisers.

Plan now, not later
Michael Mendelsohn, a principal at Briddge Art Strategies, Ltd., an art succession planning firm, is the author of Life Is Short, Art Is Long—Maximizing Estate Planning Strategies for Collectors of Art, Antiques and Collectibles and recognized by Arts and Antiques magazine as one of the top 100 collectors in the U.S. He has seen at firsthand what can happen when a collector fails to plan adequately for a valuable collection. The following is a short summary of a situation that he related to Registered Rep., a publication for investment professionals:
Collector had amassed a substantial collection of sports cars. Although he had done some general estate planning, it did not include the collection. Succession planning did begin when Collector decided that the cars should be put on display. He met with Mendelsohn and his financial advisors. A plan was put in place hastily. A private museum would be set up to house and preserve the cars. Collector would purchase a life insurance policy on his and his wife’s lives. After they died, part of the proceeds would be used to fund the museum; museum profits would go to a charity for terminally ill children; and the balance would provide income for Collector’s children.
Unfortunately, a few months before the plan was completed, Collector died.
The collection passed to his wife and children. With no completed succession plan and a limited time to pay a hefty federal estate tax on the value of the cars, the wife and children began auctioning off the cars and arguing over who would get what. The unfortunate and unnecessary result was that a cherished collection was dismantled; a charity lost a significant gift; and Collector’s heirs were hit with a large tax bill.

Consider charitable gifts
When philanthropy is one of the goals of an art succession plan, a collector can reap a number of tax rewards. For one, the 28% long-term capital gain tax rate on the appreciation in value of a collectible is avoided when it is donated to charity rather than sold. The collector is entitled to an income tax deduction for the gift as well (subject to certain caps). And, because the collection is no longer part of the collector’s estate, there’s no tax bill looming in the future.
When a collector wants to make a charitable gift and still provide for his or her family, a charitable remainder trust may be a good solution. The collectibles transferred to the trust can be sold free of capital gains tax, and the income from the reinvested proceeds can be paid to the collector or designated beneficiaries for life. The collector receives a partial income tax deduction for the donation (the amount that represents the value of the gift to the charity).
If the collector still is concerned about smaller bequests to his or her heirs as a result of the charitable gift, another trust can be established. This trust purchases a life insurance policy on the collector’s life, often equal to the value of the collectibles that were transferred to the charitable remainder trust. After the collector’s death, heirs can receive the proceeds from the insurance free of both income tax and estate tax (as long as the collector lives at least three years after the trust was created). Of course, this approach comes at a price: the cost of insurance premiums on the policy.

Communicate
Finally, experts recommend strongly that a collector take into consideration what family members have to say. Are they interested in keeping the collection intact? Do any of them want specific pieces in the collection for themselves, or do they prefer to receive the proceeds from sale of the collection? The answers may have a major bearing on the ultimate shape that a succession plan takes.

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

 

 

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Stretching an IRA into a lasting legacy

If you own a traditional IRA, it may be one of your more important estate assets. Your IRA will pass to whomever you have named as its beneficiary. When it’s a substantial sum, there is the opportunity for continued tax deferral, as well as a source of income for many years and, perhaps, for more than one generation, through a technique known as IRA “stretching.”
The first step in the process is to limit what you take from your IRA to the required minimum every year; withdrawals are required after you reach 70½. After your death the stretch options depend upon whom you have chosen as your beneficiary and what your beneficiary decides to do.

When your spouse is your beneficiary
Your spouse has several choices when he or she inherits your IRA. If he or she withdraws everything in your IRA, or a portion of it, regular income tax is paid on the amount withdrawn. Taking everything ends any further “stretch.”
Other choices will extend the life of the IRA and could provide the potential for a substantial legacy for your children or grandchildren.
• Transferring the assets to the spouse’s own IRA (or a new one). If otherwise eligible, your spouse can make contributions to this IRA, boosting the balance even higher for future beneficiaries. He or she needn’t make annual withdrawals until after age 70½, and the withdrawals will be based on his or her life expectancy.
• Remaining a beneficiary. Your spouse’s name is added to yours as the owner of the account. Although contributions are not permitted, there’s an advantage when your spouse is younger than age 59½. Should he or she need IRA funds before then, there’s no 10% early withdrawal penalty. The distribution rules are more complicated, however. If you die before reaching age 70½, your spouse must start distributions when you would have turned age 70½, and they must be based upon his or her life expectancy. If you had started making the required distributions before your death, your spouse can continue to receive them, over your life expectancy or your spouse’s, whichever results in larger distributions.
• Disclaiming (refusing) the IRA. If your spouse has sufficient assets of his or her own, he or she may disclaim your IRA within nine months of your death. The IRA then will pass to an alternate beneficiary whom you have named, without paying gift tax and, perhaps, with the opportunity to stretch the IRA over the lifetime of a younger beneficiary, such as a child or grandchild. Consult your advisors to discuss this option further.

Other beneficiaries, multiple beneficiaries
If anyone other than your spouse is the beneficiary of your IRA, he or she cannot treat the IRA as his or her own. And if your beneficiary wants to withdraw all the money from the IRA, it must be done by December 31 of the fifth year after your death.
If your beneficiary doesn’t withdraw the funds from your IRA soon after your death, distributions must begin no later than December 31 of the year after your death. The best scenario is when a beneficiary is young, and you had not yet begun receiving required distributions at the time of your death, because a beneficiary is entitled to stretch out distributions over his or her lifetime. There’s a very good chance that the required distributions will be less than the investment return of the account, so the IRA can keep growing. If you already had begun receiving required distributions from your IRA, your beneficiary can keep receiving them, calculated over your life expectancy or the beneficiary’s, whichever yields the larger annual distribution. In this case, having a young beneficiary offers no added benefit, because withdrawals will be based upon what was your shorter life expectancy.
If you plan to leave your IRA to more than one person—for instance, to more than one of your children—the annual distributions must be calculated over the life expectancy of the oldest beneficiary. This result yields the largest distributions and the fastest exhaustion of the IRA’s assets. You can avoid this situation by dividing the assets in your IRA into separate IRAs for each beneficiary. Distributions from each IRA will be based upon the life expectancy of the beneficiary of that IRA. This arrangement must be completed by December 31 of the year after your death.

A trust as your beneficiary
Naming a trust as the beneficiary of your IRA may provide an extra layer of protection and a degree of control over the assets in your IRA.
An IRA trust works like this: The trust’s beneficiary is considered the beneficiary of your IRA, and the required distributions must be calculated over his or her life expectancy; if more than one beneficiary, over the life expectancy of the oldest beneficiary. When the IRA beneficiary dies, assets pass as you have directed in the trust agreement.
There are significant benefits to naming a trust as your IRA beneficiary:
• The trustee is given the authority to pay only the required distributions to an IRA beneficiary, maximizing the IRA’s life.
• You, not your IRA beneficiary, control to whom your IRA passes at your beneficiary’s death.
• Because your IRA is in a trust, its assets are less likely to be lost to a beneficiary’s poor investment management skills, divorce or creditors’ claims.
An IRA trust must be set up following a specific set of requirements established by the IRS in order to achieve the desired benefits and to avoid negative income tax consequences. Consult one of our trust professionals for more information.

The Roth IRA alternative
Amounts that you contribute to a Roth IRA aren’t tax deductible. However, presuming that the requirements are met, distributions will be completely tax free. In addition, minimum distributions are not required for the account owner (though they are required for a surviving beneficiary).
The good news is that, if your beneficiaries inherit your Roth IRA, they won’t pay tax on the distributions, and they escape the 10% penalty as well. The distribution rules, however, remain the same.

An invitation
Are you interested in exploring how to make your IRA a legacy for your loved ones? We would be glad to discuss your options with you and help you to integrate a bequest of your IRA with the rest of your trust and estate planning.

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