What a Super Bowl! As a very long suffering Jet Fan I am still envious of Atlanta even in losing. Congratulations to both the Pats and Falcons for a very entertaining few hours.
 
Here is, unfortunately, a true story I read in an Article provided by Merrill Anderson Co. Anne wrote her will on an “E-Z Legal Form” on April 5, 2004. She carefully inventoried all of her property on the preprinted form, and she left all of her possessions to her sister. She also provided that if the sister died before she did, “I leave all listed [property] to her brother." The will was duly signed and witnessed. It was legal and unambiguous. However, it did not contain a “residuary clause” for disposing of any property not specifically mentioned in the will. Anne may not have appreciated the importance of that omission. Had she died soon thereafter, it might not have made any difference.

But as it happened, her sister died first and Anne inherited a considerable amount of property from her sister. This property was not, of course, mentioned in Anne’s will. She then wrote an addendum to her will that acknowledged her sister’s death and said, “I reiterate that all my worldly possessions pass to my brother.” Under local law the note could not be considered a valid will or codicil, because it lacked the signature of a witness. 

After Anne died, two nieces challenged the will. They argued that the brother’s inheritance must be limited to the items named in the first will, and that the balance of the estate must pass under the laws of intestacy (the rules that govern inheritance in the absence of a will). The Courts, with some regret, sided with the nieces, although they acknowledged that this was almost certainly not Anne’s intention. 
The Florida Supreme Court summed up the outcome with these words: “Obviously, the cost of drafting a will through the use of a pre-printed form is likely substantially lower than the cost of hiring a knowledgeable lawyer. However, as illustrated by this case, the ultimate cost of utilizing such a form to draft one’s will has the potential to far surpass the cost of hiring a lawyer at the outset.” The costs of litigation, and having the estate tied up for years, as well as the possibility of failing to have one’s intentions accurately carried out, make the investment in consulting an estate planning attorney a wise one indeed. Over the years, I have personally witnessed what happens when a person decides to forego an estate attorney in favor of becoming a “do-it-yourselfer”. The results are almost always the same as what happened in Anne’s estate.

My advice, always engage a professional for your will plan even if it is for a simple codicil to your will.
I’m not sure what is worse for me seeing the Pats win again as a Jets fan, or having six more weeks of cold weather because Punxsutawney Phil saw his shadow on Groundhog  Day.
 
Sincerely,
 
  Ira J. Brower, Founder
NEW PERSPECTIVES ON REVOCABLE LIVING TRUSTS
One of the most useful and flexible wealth management tools is the revocable living trust. Traditionally, we like to point to three basic benefits that these trusts offer.

Professional asset management. After studying your goals and circumstances we will map out a diversified investment program appropriate to your requirements. Our objective is not only to add to your financial security, but also to give you more opportunity to enjoy it.

Uninterrupted family financial protection. A living trust agreement can instruct us to perform a wide variety of special tasks when the need arises. With proper planning, living trusts can do much to avoid the financial management problems that arise during a prolonged period of incapacity—problems that might otherwise have to be dealt with by a court-appointed conservator.

Probate avoidance. Assets placed in a living trust are said to avoid probate because these assets are removed from your “probate estate”—the estate controlled by your will. Trust assets are distributed to beneficiaries, or held in continuing trust, as you direct in the trust agreement. Thus, using a living trust as the core of an estate plan usually leads to reduced settlement costs. More importantly, delays are avoided. 

MORE BENEFITS

But living trusts can do more. Noted estate planner Martin Shenkman explored new perspectives on trust benefits in an article in a professional journal last year [“How to Avoid Complicated Trust Issues,” Bank Investment Consultant]. Among the emerging benefits he pointed out:

Minimizing identity theft. The problem of identity theft has exploded in recent years. A funded revocable trust may have its own tax ID number, rather than using the settlor’s own Social Security number. In the event that the settlor’s Social Security Number is compromised, the trust assets still will be protected.

Protecting aging retirees. More and more retirements are lasting longer than 20 years, and more and more elderly are developing some level of cognitive impairment. A living trust can provide for successor trustees as the beneficiary’s abilities decline. Checks and balances can be built into the plan, in the form of co-trustees or trust protectors. A care manager plan also might be included, to provide annual or quarterly assessments of how the beneficiary is doing.

Serving disabled loved ones. A revocable trust may contain special-needs language to provide for an ill relative or incapacitated adult child. The trust also may provide for successor trustees should the caregiver become incapacitated. 

Asset protection in divorce. If gifted or inherited assets are segregated into a trust, they won’t be commingled with other marital assets. As such, those assets won’t be vulnerable in a subsequent divorce proceeding.

Notwithstanding the decline in estate planning attributable to the increase in the federal exemption from estate taxes, attorney Shenkman predicted that the traditional and emerging benefits associated with revocable living trusts will make them an essential part of late-stage life planning for years to come.

TO GET STARTED

To set up a living trust with us, you give us your instructions in a trust agreement, prepared by your attorney, and transfer the stocks, bonds, investable cash or other assets that you with to place in your trust. Because the trust agreement is revocable, you can cancel the arrangement if ever you find it unsatisfactory. You also remain free to add assets, withdraw assets, or modify the terms of the trust.

Can resourceful management and responsive financial services eliminate all threats to financial security? Not quite. Always there remains an element of luck. But as a wise person has said, you can’t hope to be lucky. You have to prepare to be lucky.

We look forward to assisting you in your preparations.
© 2017 M.A. Co.  All rights reserved.
JEOPARDY FOR FAMILY LIMITED PARTNERSHIPS
Valuing a publicly traded company is a fairly easy proposition. Every day, shares trade hands between willing buyers and willing sellers. The price of that trade, times the number of shares outstanding, provides the capitalized value of the company. For any shareholder’s stake, the value of that interest is the number of shares held multiplied by the price.

Valuing privately held companies is far more difficult. The standard is, fundamentally, the same: What would a willing buyer pay, and what would a willing seller accept, if neither were under any requirement to buy or sell? Putting that standard into practice is very different, because there is no public market for the shares. In particular, with closely held firms the issue of control becomes paramount. If one stakeholder controls the enterprise, his or her share may command a premium, while the minority shareholders’ interest will be discounted. The minority interest may get an additional discount if there are restrictions on selling it, as is usually the case.

These principles of tax law are nothing new. The new twist came in utilizing them in the context of a family limited partnership or, alternatively, a family-run limited liability company. These are legal entities used to manage family wealth, and also to move wealth to younger generations in a planned, controlled fashion. By employing discounts for illiquidity and lack of control, the transfer tax costs (gift taxes or estate taxes) could be significantly reduced. The IRS gets particularly unhappy when the new legal entity is essentially a repository for a portfolio of marketable securities. There are many sound nontax reasons for employing a family limited partnership to manage any kind of wealth, but the IRS believes that no one would go to the trouble for a portfolio of securities except to secure additional tax benefits.

Accordingly, the IRS has effectively declared war on family limited partnerships, by proposing a new set of regulations under Internal Revenue Code 2704 last year, which deals with intra-family transfers. The proposal is detailed and abstruse, and it is not limited to securities portfolios. There has been much resistance to the proposal from business owners.

Speaking to estate planners at the Heckerling Institute on Estate Planning, Catherine Hughes from the Treasury Office of Tax Legislative Counsel reported that the IRS will be moving ahead on finalizing the controversial proposed Regs. She reported that more than 10,000 comments were received, and no doubt the vast majority were in opposition. The December hearing on the proposal lasted more than six hours, which Ms. Hughes thought to be a record for recent times.

Contrary to the reactions of many commentators, the proposed Regs. were not intended to eliminate all minority discounts, Ms. Hughes asserted. The final Regs. will make that point very clear, as well as addressing other misunderstandings identified during the comments period.

Elimination of the federal estate tax might not render the §2704 Regs. moot. They could come into play if the federal gift tax is retained, or if there will be a capital gains tax imposed at death.
© 2017 M.A. Co.  All rights reserved. 
IRA ERRORS
James Theissen and his wife worked for Kroger or its subsidiaries for 30 years. They lived in Colorado, and in 2002 Kroger informed Mr. Theissen that his job would be moved to Ohio.  As the Theissens did not wish to move, they retired and rolled their 401(k) money into “his and hers” IRAs, totaling some $432,076.41.

Because Mr. Theissen was interested in metal fabrication, he began shopping for a company to buy.  He planned to use the IRA money to fund the purchase and let the IRA own the new company.  A corporation was formed, Elsara, and the couple’s IRAs purchased all the Elsara stock.  A suitable metal-fabricating firm was found.  The price was $601,000.  The couple contributed $60,000 from their savings; Elsara paid $341,000; and Elsara also provided a promissory note for $200,000, to be paid over five years at 7% interest.
Unfortunately, the Theissens also personally guaranteed repayment of the note.

Apparently, the note was properly repaid according to its terms.  However, in 2010, six years after the transaction, the IRS challenged the financial structure used for the acquisition of the business.  According to the IRS, the personal guarantee of the note was a prohibited transaction. It amounted to an extension of credit to the IRAs by the beneficiaries of the accounts.
Federal law has some very strict rules concerning transactions between qualified retirement plans, which includes IRAs, and those who are the beneficiaries of such plans. The public policy being served is the preservation of the money in the plan for retirement.  

Before adopting this structure for their business purchase, the Theissens consulted with a CPA firm and an attorney. They didn’t come up with this idea on their own.  Nevertheless, the Tax Court ruled that they had, in fact, committed a prohibited transaction when they personally guaranteed the loan.  That caused two unfortunate consequences.  First, the IRAs stopped being tax qualified in 2003.  That meant the entire amount in them was deemed distributed to the Theissens in that year and subject to ordinary income tax, which came to nearly $190,000.  Second, because neither was yet 59½ at the time of the distribution, they owed an additional 10% penalty tax!  Plus interest since 2003.

It’s not entirely clear how this will enhance the Theissens’ retirement income security, but perhaps that was not the point.

ANOTHER PROBLEM

Dr. Mark Vandenbosch decided to loan $125,000 to a radiology technician whom he had befriended, John Carver. Carver needed the money for an investment opportunity.  The source of funds was Dr. Vandenbosch’s Simplified Employee Pension (SEP).  However, the SEP did not distribute funds to Carver, nor did it execute a promissory note for the loan.  Rather, the money went into Vandenbosch’s personal checking account, and the loan document showed the doctor and his wife as the lenders.

The couple argued that they were acting as conduit, and that the loan to Carver was essentially a tax-free IRA rollover.  The Tax Court held that it was not.  The $125,000 was a taxable early distribution to the doctor, subject to income taxes and the 10% penalty for early distribution.  Fortunately, the balance in the doctor’s SEP was not tainted by the transaction, so it continued to be tax deferred.  
© 2017 M.A. Co.  All rights reserved. 
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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2016. All rights reserved.