Once people reach a certain level of financial success, pursuits often become less about accumulating wealth, and more about creating significance, or leaving a legacy. This most often reveals itself through increased involvement in things that benefit their community and the world. In the world of estate and wealth strategies planning, there are many tools that can help families fulfill their philanthropic goals.
For example, there are a variety of charitable trusts that can serve to both benefit philanthropic causes and aid with tax planning. A charitable remainder trust (CRT) is a tax-exempt trust. It is primarily an income tax planning tool with some estate and gift tax benefits. With a CRT, the appreciation in assets can be realized without immediate recognition of the capital gain, a stream of payments is created for the donor and a deferred benefit is provided to a charity or charities. An income tax deduction, gift tax deduction or estate tax deduction is based on the remainder value that passes or is projected to pass to charity at the end of the trust term.
A gift annuity is essentially a bargain sale in which the consideration paid by the charity is in the form of annuity payments. The IRS specifies how the income is categorized; i.e., how much is return of principal and how much is ordinary income. It also specifies how gains are recognized, and limits payments to one or two persons.
A charitable lead trust (CLT) is the opposite of a charitable remainder trust in that the income stream is paid to charity with the remainder going to private individuals. A CLT is primarily an estate or gift tax tool. If it is set up as a grantor trust, it can also provide some income tax benefits.
One strategy that is often considered by affluent families is the creation of a private foundation. A private foundation is a special type of tax-exempt entity that is most often established by a single family to fulfill its charitable mission. There are operating and non-operating foundations, though most private foundations are of the non-operating type.
Private foundations have very specific rules and regulations that must be followed. Most well-known is the rule that mandates a 5% distribution to charity annually. However, there are also rules against self-dealing, holding certain types of investments known as “jeopardy investments,” and rules against creating excessive personal benefits from the foundation. While it is common to have family members on the Board of Directors get paid for their services, pay must be reasonable compared to other similar-sized charities.
Contributions to private foundations generally create an income tax charitable deduction subject to the deductibility limitations. Deductions are available in the year of the gift and can be carried forward for five succeeding years if needed. Contributions may be deductible at fair market value or cost basis, depending on the type of asset contributed. Private foundations are tax exempt under most circumstances, but caution must be taken if assets are being considered that might create Unrelated Business Taxable Income (UBTI).
While there is no legal minimum under the law to establish a private foundation, there is a practical dollar amount needed to justify the cost. While that amount used to be $5 or $10 million, it is now common to see private family foundations established with $250,000 or less.
An alternative to a private family foundation is a donor-advised fund. These funds are established as public charities and contributions are tax deductible as charitable gifts. They can be established with a relatively small contribution (many require an initial gift of only $5000) and the expenses are often charged as an asset-based fee. This makes them substantially less expensive to establish than a family foundation.
Distributions or grants are processed on the recommendation of the donor to qualified charities. The grant can either identify the donor or they may choose to remain anonymous. Donors can also name successor donors to continue the charitable objectives of the fund beyond their lifetime.
Some funds allow the donor to appoint his own money manager or to direct the money management independently. This type of flexibility has become very popular among the giving community since it allows a significant amount of control to remain with the donor. Further, many donor-advised funds allow the fund to remain in force for multiple generations. Contributions to donor-advised funds are deductible in the year of the contribution and for five succeeding years.
I Love My Business, but I Love My Family
Would it surprise you if your professional advisor recommended “special needs” planning when you don’t have any special needs children or grandchildren?
It’s important to think about things that might happen to your loved ones after you’re gone. Especially as they might be affected by your estate plan.
As advisors, we always try to help you plan for unforeseen financial circumstances and build creditor protections for our beneficiaries whenever possible.
The same type of preventive planning can be done to protect loved ones in a tragedy that leads to physical and/or mental disability.
Consider what happened in this situation, taken from the files of one of our colleagues.
John and Elizabeth had one child and several grandchildren. Their estate documents included a living trust that passed their estate to their only son, Jerry in trust.
At John and Elizabeth’s death, the trust was funded with approximately $1,000,000 after taxes and expenses, which Jerry was free to spend as needed.
The trust provided that if Jerry passed away, anything left in the trust was to be distributed to the grandchildren.
One day Jerry was involved in a terrible automobile accident. Jerry was injured so badly that he was no longer able to care for himself.
The person named as his guardian immediately sought help for Jerry’s medical expenses from Medicaid or other means-based government programs. They were shocked to learn that Jerry’s entire inheritance of $1,000,000 would have to be spent on medical expenses before Medicaid would assist him. As an alternative, the guardian learned that the assets could be placed in a special kind of trust to be used for Jerry’s benefit. But at Jerry’s death, that trust must reimburse Medicaid for what was spent for care during his life. The result in either case is that little or nothing will be left for Jerry’s children.
This result could have been avoided by creating a special needs trust. A special needs trust is specially designed to hold the inheritance of a beneficiary, and to be used for needs above and beyond those covered by government programs. These trusts contain instructions that allow the Trustee to meet the needs of the beneficiary, but prohibit the Trustee from providing for those needs if already covered by Medicaid or other programs. It also prohibits the Trustee from using the assets to reimburse any government program after the beneficiary’s death.
The result in Jerry’s case would be that his needs would be met during his lifetime, and anything left over at the time of Jerry’s death could be passed on to his children.
The Coles-Cumberland Bar Association is pleased to announce that it has established the Coles-Cumberland Bar Association Law School Scholarship Program.
The Coles-Cumberland Bar Association is a private organization composed of attorneys practicing in Coles County and Cumberland County, Illinois. The organization has established this scholarship program to recognize and assist law students who have a close connection to the Coles County and/or Cumberland County, Illinois communities. One or more scholarships will be awarded annually, based upon academic and extracurricular achievements, background and financial need.
The Coles-Cumberland Bar Association anticipates awarding one or more scholarships in the amount of $1,000.00 following the application period. The Coles-Cumberland Bar Association reserves the right to modify the amount and number of scholarships awarded based upon the number and suitability of applications received.
The Coles-Cumberland Bar Association Law School Scholarship Program is open to law students having a close connection to the Coles County and/or Cumberland County, Illinois communities who will be enrolled at an accredited United States law school during the 2016-2017 academic year. Applicants are evaluated for their academic and extracurricular achievements, for their background and financial need, and for their
connection to the Coles-Cumberland communities.
An application form can be obtained via Facebook on the “Coles County Bar Association Scholarship Committee” page or by calling the Bar Association’s Secretary at 217-639-7800. Applications are due by February 1, 2017.
The 2016-2017 recipient or recipients will be announced at the Bar Association’s winter “Guest Night” meeting in February.
Beginning April 28, 2014, The Social Security Administration implemented its “Trust Centralization Project” to improve the quality and efficiency of its review and approval of special needs trusts. This Project is the result of efforts by a group known as the “SNT Advocates,” primarily attorneys who work with special needs clients and had concerns about how their special needs trusts were being viewed by the Administration.
As a result of the Project, many cases, including cases in our area, are being reviewed. In some instances, trusts which were previously approved by the Administration are now being rejected. If you or someone you know has received a notice about a trust, you should see an Elder Law Attorney immediately to determine what steps to take to protect eligibility for SSI benefits. It is important to remember that Medicaid benefits follow the same rules, so loss of benefits could mean loss of needed medical care and treatments.
There is a short deadline of only 60 days for appealing a Social Security decision, and the deadline may be shorter for Medicaid. It is important to seek help right away, because an attorney needs time to analyze the case and prepare the necessary appeal documents, something which may not be possible on day 49 or 53 or 59.
A little background:
The Project affects disabled people who receive SSI, which is a needs-based benefit. It does not affect people who receive SSDI, which is an insurance program. SSI rules require that recipients have no more than $2,000 in “countable resources,” which includes cash and accounts which can be liquidated, regardless of cost, penalties or taxation. Recipients are also very limited as to income.
Because of the restrictive SSI rules, families sometimes set up trusts for SSI recipients. These trusts, often called special needs trusts or supplemental needs trusts, are designed to protect the person’s benefits by creating restrictions on the control and use of trust funds such that those funds are not considered as countable resources.
SSI rules require that a recipient who is the beneficiary of trust submit the trust to the Administration for review. The Administration then determines if the trust meets the requirements and is an exempt resource. In the past, the reviews could take many months or a year or two, and the decisions across the country and even within single field offices was inconsistent. So, it is important to remember that, just because the government sends you a notice doesn’t mean the notice is correct.
If you have received such a notice, Kaye Dent at Frisse & Brewster Law Offices will be happy to provide you with a free consultation to help you determine what, if anything, you may need or be able to do.
Read more here.
Your family cabin, cottage, or vacation home may be one of your most significant financial assets. It is also likely to be the one with the most enduring memories and emotional ties. The property may have been in your family for decades with your children and grandchildren experiencing special family gatherings and having spent their summers there. Because of this, you probably have a strong desire to keep the property in your family, to protect it, to pass it down to your children, grandchildren, and maybe even your great grandchildren. This isn’t stocks and bonds; it’s your legacy!
Unfortunately, without proper planning, those inheriting the interests of long-time cabin owners may have too many divergent interests, financial and otherwise, to be workable. These new owners have often never discussed who gets to use the property and when, how to share expenses, handle the maintenance and upon what terms they can be bought out. Disputes can easily occur in these situations. Such family fights are often talked about among cabin (family retreat) owners. Most know at least one family story where after the death of the senior generation the property ended up having to be sold outside the family because the heirs could not work out their differences.
Let’s look at some of the common problems that affect inheritors of cabins and family recreational property.
1. The common right to use. All co-tenants have the same common rights to use the property. If July 4th rolls around and all owners enjoy getting together and space is no issue, great; but what if the relations among the owners have changed due to inheritances and the family gathering dynamics are different? If people do not get along or the cabin is simply too small to accommodate everyone, this common ownership becomes a huge and often unworkable issue. Enter the phrase “cabin hog” into the family lexicon.
2. Non-paying owners. This is where the trouble can really start, because even if a co-tenant does not pay their share, they still have the same common right to use the property as the others. The other owners essentially have to subsidize the non-paying owners because, if they don’t, it affects their own interests.
3. Legal and financial problems of other owners. If a co-owner is getting a divorce or files for bankruptcy, those problems can quickly become the problems of the other owners. They may be forced to transfer their interest to a successful judgment creditor including an ex-spouse.
4. Differing interests. This is the most fundamental of all the ownership problems. Some owners want to sell; some do not. Some need the money and some do not. Some can go to the cabin often while others are too far away to enjoy it. The list goes on and on. The more owners there are, and the more divergent their interests, the greater potential there is for problems and the greater the need to plan to avoid them.
5. Disproportionate physical work, property management, or improvements. It’s not easy to keep up lake homes, beach front properties, or cabins in the woods. Things need to be cleaned, fixed, bills paid, etc. Most owners cannot afford to hire out all this work so it often falls upon the owner who lives closest to the property, creating additional inequality.
6. Unintended and unwanted heirs. Assume Bob and Pat die and leave their cabin to their three children, John, Peter and Susan as equal owners. Assume that their son John dies a few years later and leaves his 1/3 interest to his spouse, Jane. Jane remarries and names her new husband Ted as a joint tenant with her on her 1/3 interest. She does not need to consult with Peter and Susan and is free to do this. Now, even though Peter and Susan never liked Jane and have never even met Ted, they now share the same common rights to use the property as they do. Ted shows up each weekend “to check on things”.
Even though Peter and Susan have told Ted they want their privacy, he continues to do this. Jane and Ted also don’t pay. Peter and Susan have to make up the shortfall and have to continue to deal with Ted stopping in all the time. Since Peter and Susan can’t force Ted and Jane to abide by a schedule for using the property or to pay expenses on time, they may have to bring an action to partition the real estate to end the undesired co-ownership with their former in-law and her new husband.
Luckily, there are ways to plan around most, if not all of these problems. Next issue, we will look at some of the potential solutions to the problems outlined in this article.
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