Estate Planning Lessons from the Movies – Part I

I like to draw inspiration for my blogs from articles and other blogs that I read. Anytime those sources pull from real life, it piques my interest. After all, Estate Planning focuses on real life and the most real and inevitable part of life, death. Earlier this week, a headline titled “Eight Lessons from Killers of the Flower Moon” caught my eye, and the idea for this blog took hold. The article talks about the movie titled “Killers of the Flower Moon” that hit theaters late last month to critical acclaim, but that’s not all it discusses. The article lays out the many real-life Estate Planning lessons that we can learn from watching the movie. This first part of a two-part series will delve into the plot of the movie and start introducing the lessons. The second part will finish exploring the lessons.

Before we get into the lessons, it’s important to understand a bit about the plot of “Killers of the Flower Moon.” The film focuses on the “Reign of Terror” which was the name given to the period when white “caretakers” murdered members of the Osage Indian Tribe to steal their rights to the oil under their reservation. After the oil was discovered, each member of the tribe received a “headright” or share in the oil money. The tribe members could devise or distribute, but not sell, that right. Anyone could inherit the headright which meant that outsiders sought to marry into the Osage tribe or otherwise become an heir to one of the members of the tribe. This led to the murder of countless Osage tribe members. As if the murders were not tragic enough, the federal government decided to impose restrictions on the tribe’s financial autonomy and required tribe members to take a test regarding their competency to manage their own estates. Every tribe member failed, and the Bureau of Indian Affairs assigned each a white guardian to oversee their spending. It’s unclear whether the guardians had any training, but the article makes clear that the guardians were corrupt and completely unnecessary.

The story alone is fascinating, but it becomes even more interesting when viewed through an Estate Planning lens and with an eye toward learning from mistakes of the past. The first lesson we can take is understanding and appreciating the importance of fiduciary duties. Setting aside the question of whether the guardians were necessary, guardians or trustees, as we know them, have fiduciary duties that they must uphold. Without question, those tasked with guarding the Osage failed miserably in this regard, especially because many of them ended up murdering their charges. In the Estate Planning world, fiduciary duties are sacrosanct, and the fiduciary must always put the beneficiary’s needs before the fiduciary’s own self-interest. Choosing the right person to serve as fiduciary makes a plan; likewise choosing the wrong person to serve as fiduciary breaks it.

The second lesson is to know your beneficiaries. Any time that an individual serves in a fiduciary capacity, it’s important that they know and understand their beneficiary. The trustee/guardian relationships served no purpose for the Osage. The government established those relationships in bad faith, and the relationships were borne out of greed and racism. Prior to the creation of these relationships, the Osage negotiated ownership of their land and contracts with the government relating to the oil rights so it’s clear that they needed no help in managing their finances. A fiduciary must recognize what their beneficiary needs and determine how to address those needs either through the trust or another entity. Undoubtedly, a Trustee must exercise their discretion for the benefit of their beneficiaries.

Third, sudden wealth destabilizes. We have all heard stories about how lottery winners end up penniless, or that even those that come from wealth end up losing the family fortune. A sudden change in fortune changes things. People have unique views about money and just because an individual’s fortunes change, doesn’t mean that their view on or relationship with money does. Many a relationship has ended because the parties disagreed about how to spend their funds. If we know how a beneficiary views money, and understand their need for it, we can create a plan that addresses that need and viewpoint. This lesson piggybacks off the first two and underscores why choosing the proper fiduciary and understanding your beneficiary both matter. The relationship between the fiduciary and beneficiary will change because of the money involved.

The final lesson from this first part of the series is perhaps the most sobering. Addiction knows no tax bracket. Some movies and television shows cast alcohol and drug abuse as problems of the poor, but nothing could be further from the truth. Those with unlimited resources or who never hear the word “no” run just as much a risk for addiction as those without resources. Again, this underscores the importance of choosing a proper fiduciary and understanding the beneficiary. If the beneficiary struggles with addiction, the fiduciary needs to know that and the trust needs to have the tools to address that beneficiary’s addiction.

While the movie sounds intriguing because of the plot, I’m excited to watch it through the lens of an Estate Planning professional. The lessons discussed in this first part of a two-part series have real-life application. If you have concerns regarding your Estate Plan or any of its provisions, make it a point to talk to contact me so that we can discuss the nuances.

Take Advantage of Your Annual Per Donee Exclusion Amount

As we gather with our family, friends, and loved ones to celebrate Thanksgiving, let’s take a moment to savor the food and our time together.  This time of the year offers a special opportunity to show our loved ones just how much we care. We can do this in any number of ways, including gifting.

Let’s make this year the year we give gifts that benefit both the recipient and the donor. Annual exclusion gifts provide a benefit not only to the recipient but also to the donor. Annual per donee exclusion gifts allow the donor to make gifts to multiple individuals without incurring any transfer tax consequences provided that the total gifts to an individual are present interests and do not exceed the threshold amount. Internal Revenue Code (“Code”) Section 2503(b) sets the amount that an individual taxpayer can gift to any other person at $17,000 for 2023 ($18,000 for 2024). Giving now allows individuals to reduce the value of their taxable estate without impacting the lifetime exclusion amount of $12.92 million in 2023 ($13.61 million in 2024). In addition to allowing the donor to avoid use of any applicable exclusion amount, annual per donee gifts remove future appreciation on the assets gifted from the donor’s estate as well.

The Code imposes no limit on the number of annual per donee exclusion gifts per taxpayer meaning that an individual taxpayer may gift up to that $17,000 amount to an unlimited number of individuals without ever worrying about estate or gift tax consequences. Gifting the funds or assets removes them from the donor’s taxable estate without ever impacting the lifetime exclusion amount. It’s one of the few totally “free” estate planning techniques. Because annual gifts reduce the size of the taxable estate, they also reduce the potential tax liability. For married couples, the benefit doubles because each spouse can gift the annual per donee exclusion amount to the same individual, and if the recipient has a spouse, then the donors can double the impact of their gifting again. Let’s review an example that demonstrates effective use of the annual per donee exclusion amount.

Assume that Mike and Carol recently met with their attorney who suggested that they start reducing the value of their taxable estate. Mike and Carol were preoccupied with the pending nuptials of their daughter, Cindy.  They realized that they better act quickly to utilize their 2023 annual per donee exclusion amounts. They decided to give each of their six now-married children, Greg, Marcia, Peter, Jan, Bobby, and Cindy an envelope containing $68,000 ($34,000 from each of Mike and Carol to each child, plus an additional $34,000 for each spouse of each child) at Cindy’s wedding on New Year’s Eve 2023. After the clock strikes midnight, the family rings in 2024, and Mike and Carol hand out another set of envelopes, this time, with $72,000 ($36,000 from each of Mike and Carol to each child, plus an additional $36,000 for the spouse of each child) cash in each envelope.

In the example above, in just a few hours, Mike and Carol gave away over $800,000 without incurring any estate or gift tax consequences. Mike and Carol each gave $17,000 to each of their six children and their spouses, totaling $408,000 in 2023, and Mike and Carol each gave $18,000 to each of their six children and their spouses, totaling $432,000 in 2023, for a total of $840,000. In fact, Mike and Carol could each also gift $17,000 to a grandchild in 2023 and $18,000 to that same grandchild in 2024. The foregoing example demonstrates how quickly these gifts can add up and make a huge impact on an estate. In addition to using the annual exclusion gifts, the Code gives taxpayers a tax-free pass when they pay the medical bills of another individual or pay the tuition bills of a student. The Code imposes no limit on the amount of these medical and tuition gifts, as long as the amounts are paid directly to the provider. The Code also allows contributions to charitable exempt organizations. The Code imposes no limit on the amount of these contributions for gift tax purposes, which provides another easy option for those who want to do some easy estate planning. Such charitable contributions may also qualify for a charitable income tax deduction, up to certain percentages of the taxpayer’s adjusted gross income.

The upcoming holiday season presents the perfect time to consider these and other estate planning issues. Options may exist for the use of annual exclusion gifts in conjunction with trusts and a long-term Estate Plan. Giving now, rather than waiting until death provides several estate planning opportunities in the form of tax-free distributions, reduction of the gross estate, and appreciation outside of the taxable estate, not to mention the benefit to the recipient that the donor will witness while alive. I can help you explore these opportunities and to determine whether they make sense for your family situation.

It’s a Great Time to Consider a Donor Advised Fund

Charitable gifts offer a great opportunity to reduce income tax liability. When a taxpayer makes a charitable contribution, typically they get an offsetting charitable income tax deduction. Unfortunately, that offsetting deduction doesn’t always end up reducing the total tax burden. To take a charitable income tax deduction, the taxpayer needs to itemize their deductions. If the charitable contribution and other itemized deductions don’t exceed the standard deduction amount, then it makes sense to take the standard deduction and forego the itemized deductions.

Let’s look at an example. Assume that Charlie Charitable has taxable income of $100,000 each year. He files as a single taxpayer with a standard deduction of $13,850 (in 2023). He has $10,000 of state and local taxes (an itemized deduction and the most one could take as a deduction for such taxes under current law). In addition, he makes a charitable contribution each year of $2,500 to his alma mater. His itemized deductions would be $10,000 plus $2,500 = $12,500, i.e., less than the standard deduction amount of $13,850. It doesn’t make sense for Charlie to itemize his deductions since they would be less than the standard deduction he could take without itemizing.

If Charlie Charitable spoke with an advisor, he would discover that by making several years’ worth of charitable contributions in one year, he would increase his charitable deductions to an amount exceeding the standard deduction amount. Charlie could refrain from making charitable contributions in the “off” years and simply take the standard deduction amount. Charlie likes that idea and decides to make a charitable contribution of $10,000 in 2023. That raises his itemized deductions to $20,000. This saves him the tax on $20,000 (his itemized deductions) less $13,850 (the standard deduction) = $6,150. Assuming he’s in a combined state and federal bracket of 40%, that would result in savings of nearly $2,500. In the “off” years of 2024, 2025, and 2026, he’d take the standard deduction amount each year and the strategy would not impact his taxes in those years. In 2027, he could repeat the large charitable contribution for another itemized deduction.

Another way for Charlie to optimize his charitable deduction would be by using a Donor Advised Fund (“DAF”). Contributions to DAFs give an immediate income tax deduction to the donor while creating a reservoir of assets for distribution to charities in the future. In addition, DAFs provide an opportunity for donors to invest contributed funds and make suggestions regarding which charities should receive the distributions. Donors may change their recommendations regarding the charitable distributions allowing great flexibility coupled with immediate benefits. In our example above, that means that Charlie could continue to make charitable contributions to his alma mater, but Charlie could decide to switch to a different charity altogether. In the interim, Charlie could invest the funds as he determined was appropriate prior to their distribution to a charity.

Donors may combine DAFs with other strategies to produce even better results. For example, if a donor gave highly appreciated public stock to a DAF, the donor would receive an income tax deduction for the full value of the appreciated stock without ever paying tax on the gains. Going back to our Charlie example, assume that Charlie gave $10,000 worth of publicly traded stock in which he had a basis of $1,000 to the DAF. If Charlie had sold the stock, he would have had to pay tax on the $9,000 gain. Assuming a state and federal combined capital gain tax rate of 30%, he’d owe $2,700 on the gain. If he then contributed the proceeds to charity, he’d only have $7,300 to contribute to charity. By giving the appreciated publicly traded stock directly to the charity (or DAF), he increases the amount that he contributes to charity which increases the deduction he receives.

DAFs complement any charitable giving strategy already in effect and provide a great opportunity for those new to charitable giving to discover the benefits it provides. It allows one to maximize the tax benefit from charitable giving, while retaining a say over the timing and distribution of the money. I can help you decide if a DAF is right for you.

The Seedier Side of the Holiday Season

It’s my favorite time of the year. Temperatures fall and spirits rise as we approach the holiday season. While we count down the days to year-end and enjoy gathering with our loved ones, it’s a great time to remind ourselves and our loved ones about the seedier side of the holiday season: scams. Scams run the gamut in ingenuity and range in form from charity scams to debt collection scams and from grandparent scams to imposter scams. Each scam has its own unsavory elements, but the grandparent scams strike me as the most deplorable of all by preying upon a grandparent’s natural concern for the welfare of their grandchildren.

Imagine that you are a grandparent and receive a late-night call from your grandchild pleading with you to send them money. The grandchild admits to having been arrested, maybe in a foreign country, and begs you to refrain from mentioning the call or the arrest to mom or dad because they will be upset with the child. Worse yet, imagine that you receive a call from a stranger purporting to be a lawyer, doctor, or arresting officer and discover that your grandchild has been arrested, hospitalized, or hurt in some other manner. This probably tops the list of nightmare possibilities about which grandparents worry. Many receiving this call would not think twice and be only too happy to help their grandchild by sending funds…except those funds never make it to the grandchild and by the time the grandparent realizes the ruse, the scammer has moved on to their next victim.

The grandparent scam has existed for several years and only continues to grow in popularity. With the near ubiquitous use of social media, scammers have more means through which they can obtain and use personal information both about the grandparent and the grandchild. Some social media sites encourage listing family members and connections which only makes determining pressure points easier. Often, unsuspecting users post private details on public forums without realizing that their privacy settings won’t protect the information from ne’er-do-wells. Some of the most common scenarios include receipt of an email or telephone call from the grandchild or someone pretending to be calling to advise the grandparent of the grandchild’s circumstances. Unfortunately, bad actors know how to use artificial intelligence technology to mimic voices and hold a conversation in that voice which makes recognizing the scam that much more difficult.

How can we help protect ourselves or the grandparents in our lives? First, be vigilant about calls from any number you don’t recognize. Understand that scam calls happen often and seem to happen more regularly during the holidays. Some swindlers manage to spoof numbers known to the target, thus it’s vital to use caution whenever someone asks for money, especially in what seems like “high-pressure” situations. Scammers impose pressure and bully targets into sending money quickly through money orders, gift cards, or cash apps, before the target has time to think and when adrenaline runs high because they are worried about their grandchild. Some may even insist upon receiving money in person. If you receive a call like this, hang up and report the call to local law enforcement, and then call your family members directly to confirm that they are safe. If the call came from someone claiming to be in law enforcement, call the agency to verify the person’s identity along with any information provided in the call. Resist the urge to keep the call a secret.

Next, review the privacy settings on your social media accounts and prevent strangers from accessing posts and photos. These sites have many benefits in allowing us to stay connected, but they provide fertile ground for scammers to obtain private information. Even on the telephone call, refrain from providing any information, such as your grandchild’s name. Force the scammer to say your grandchild’s name and remember to stay calm. Scammers rely upon causing panic and getting their targets to drop their guard and make quick decisions in the heat of the moment.

Finally, increase your awareness about the latest scams. The Federal Communications Commission (“FCC”) publishes consumer guides on spoofed caller IDs such as Caller ID SpoofingStop Unwanted Robocalls and Texts, and Call Blocking Tools and Resources. The FCC’s website has several links allowing a user to file a report about unwanted calls or spoofing or to find information on imposter scams.

The Better Business Bureau website contains consumer awareness articles about scams targeting older Americans, find these articles by reviewing BBB Scam Alert: Top trick used to scam older adults. The American Association of Retired Persons keeps track of scams by location and allows users to either submit a report or see local scams. To report or view scams in your area look at AARP Fraud Watch Network Scam-Tracking Map.

We can combat scams targeting our elders by learning to recognize the more common signs of a scam, educating our clients on scams aimed at the elderly, especially the grandparent scams, and alerting trusted individuals, such as family members and authorities when we suspect a scam, and understanding the resources designed to prevent, intervene, and investigate these scams. These scams will continue to gain popularity as artificial intelligence improves and makes it easier to replicate a loved one’s voice. It’s important that the community continues to evolve with technology and remember that we all have a duty to protect our elderly clients and loved ones.