The Neophyte

Today, I had the pleasure of meeting a new client.  Wonderful man, smart, educated, refined and a true gentleman.  His live-in girlfriend was there also.  She made her feelings immediately known about her opinions of estate planning.  She was wholeheartedly against the use of a Trust as an estate planning tool.  Why? I asked.  She proceeded to state that ‘everyone’ has told her, including accomplished attorneys, that a Will is all you need and that having a Trust is a mistake.  No other reasoning, just her opinion, based upon other’s opinions.  She obviously believes herself to be an expert in the field of estate planning.  A neophyte?  Maybe.  An authority has spoken!  Every run into these types of people?  We all have.

Continuing, she was belligerent to the point of interrupting the discussions with my new client and made remarks that made little to no sense as to the estate planning process.  She stated that ‘everyone’ had great and impactful experiences with Wills and the probate process.  There was no negativity in their experiences.  I asked her a question.  “Would you rather be in control or leave it to a court to determine the happenings of your estate.  Her response was something to the fact that it doesn’t matter to her.

Her very apparent misunderstanding of estate planning is probably not that uncommon.  Often times, those that do not understand and/or do not have the capability of understanding, take other people’s word as Gospel when it comes to a matter of which that person has no experience.  Case in point, today.  She may have looked on the internet and saw an opinion of someone about Wills and probate.  Thus, since it is on the internet, it has to be true.  Don’t get me wrong, the internet is a great source of knowledge, but it fails in two respects, ’Dr. Google and Attorney Google.’  According to Dr. Google, I have every symptom of leprosy!  As to legal concepts, there are so many competing theories that no one can decipher what is up or down.

In each of my meetings, whether it be an estate planning or tax client, my main focus is to educate the client to the greatest extent without having them die of boredom.  This way, we have educated clients that truly understand, not only the concepts, but also how it directly affects them.  But, no matter what you explain to certain people, they have pre-conceived notions that they will not falter from.  Regardless of reason or true fact, certain people believe that they know better than someone who is experienced and seasoned in their chosen field.  The women I was with today, is the type that if her car is not running correctly and she brings it to an expert mechanic who tells her she needs a new timing chain will argue with the mechanic that the car just needs an oil change.

I have come to the conclusion that closed minded people will always be closed minded.  Also, people that have an inherent distrust of everyone is a strong indicator of a lack of intelligence.  So, trying to influence any of these types of people by using reason and facts are a waste of time.  So, my advice is to stop trying to teach neophytes/authorities on everything (masters of none) and allow them wallow in their own ignorance.

Tax Planning for 2024

As 2023 draws to a close and the New Year dawns, we need to think of…tax planning for 2024 and beyond! Some years Congress tweaks the laws more than other years. While 2023 held plenty of surprises, it was a relatively quiet year for legislative changes impacting tax planning. Still, even in a quiet year, some things change due to inflation adjustments, etc.

Estate Tax Planning

Applicable Exclusion rises from $12.92 million in 2023 to $13.61 million in 2024.

GST Exemption rises from $12.92 million in 2023 to $13.61 million in 2024.

Annual Exclusion for present interest gifts rises to $18,000 in 2024.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $185,000 in 2024.

In a couple years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over those amounts, you may want to consider removing those amounts from your estate while you still have the temporarily-doubled Exclusion and Exemption to cover the transfers. The law will change on January 1, 2026, unless Congress changes things dramatically before then, which appears unlikely at least for the next year given the closely divided Congress and Senate.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $27,700 in 2023 to $29,200 in 2024.

Single, increases from $13,850 in 2023 to $14,600 in 2024.

Head of household, increases from $20,800 in 2023 to $21,900 in 2024.

State and Local Tax (SALT) deduction cap remains at $10,000 in 2024.

The income tax brackets creep slightly higher, as well.

As you plan for 2024, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. According to the Tax Foundation, less than 14% of taxpayers itemize each year after the TCJA. Before then, more than twice that percentage, over 31% of taxpayers, itemized. If you give to charity, you may want to group your charitable contributions into one year, itemize them in that one year, and take the standard deduction in other years. You can do this by consolidating giving to a Donor Advised Fund (“DAF”) in one year. Then you can make grant recommendations from your DAF each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary have high incomes and make $17,700 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $27,700 of deductions and they’d be better off taking the standard deduction ($27,700 in 2023). Rather than giving $17,700 for each of three years to charity, they could give 3 x $17,700 ($53,100) in one year and they’d get a much better tax result. If they gave $53,100 in year 1 to a DAF, combined with their SALT deduction of $10,000, they’d have $63,100 of deductions instead of the standard deduction of $27,700. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($29,200 in 2024). The charities would get their funds each year just as usual when John and Mary make the grant recommendations from their DAF. John and Mary would get a much better tax result. In year 1, they’d have $63,100 of deductions instead of $27,700, an increase of $35,400. Their deductions in years 2 and 3 would not change, because either way they’d be taking the standard deduction in those years. Depending upon John and Mary’s income tax bracket, this increased deduction could save them over $12,000 in federal income taxes alone.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2024!

Estate Planning with Entities

I have long recommended the use of closely held entities such as family limited partnerships (“FLPs”) and limited liability companies (“LLCs”) to provide flexibility in allocating rights to profits and capital, to shift income and property appreciation from one generation to the next, and to provide asset protection.  Individuals transfer assets to the entity in exchange for membership or partnership interests, which provide management control and income distribution rights, but which may be subject to certain restrictions set forth in the governing documents.  These restrictions limit new owners to a class of individuals, usually the descendants of the original members or partners, although some documents allow for the interest to pass to a spouse.  Limitations like this insulate owners from liability, provide concentrated management in one individual, and allow the owners to carry out their business and tax objectives.  The manager of an entity owes fiduciary duties to the other members which protects the business from claims of ex-spouses, creditors, outsiders, or even adversarial family members.  Family entities provide great opportunities to leverage discounts for minority interests or freeze values by allowing appreciation to escape taxation at death when used in conjunction with other Estate Planning techniques.

Many states use partnerships as the default for two or more individuals in business together.  Sometimes the partners have a formal agreement called a partnership agreement, and sometimes it’s just a handshake.  LLCs and limited partnerships, on the other hand, require a more formal intent.  For example, with an LLC, the members file Articles of Organization to establish the LLC and use an operating agreement to govern the day-to-day operation.  The operating agreement generally contains provisions regarding distribution of profits, management of the company, restrictions on ownership, duration of the entity, and what happens upon dissolution.  Often, the operating agreement will include provisions that dictate what happens upon the death of an owner.  These provisions may override the provisions of an individual member’s Estate Plan, although they should work in conjunction with one another.  Questions can arise though, when the provisions of Estate Planning documents conflict with provisions in the entity agreements.  Let’s review an example based on facts from a real case.

Assume that Shirley and Warren created an LLC for their family business.  The operating agreement (“Agreement”) gave each sibling a 50% membership interest (“Interest”) in the company which consisted of the right to distributions, allocations, information, and the right to vote on matters before the Members.  Shirley and Warren included language in the Agreement that a member could transfer all or any portion of his or her Interest by obtaining the prior written consent of all the other Members unless certain limited exceptions applied.  The exceptions included a transfer of Interest outright or in trust for the benefit of another Member and/or any person or persons who are members of the “Immediate Family.”  The Agreement defined Immediate Family as living children and the issue of any deceased child of a Member.  If the Member failed to transfer the Interest during life in accordance with the provisions of the Agreement and failed to dispose of the Interest through the Will, then the Agreement provided that upon the death of such Member, the Interest would pass to and immediately vest in the Immediate Family of the deceased Member.  Shirley and Warren ran the business together for two years until Warren’s untimely death.  Warren left behind four adult children, and his estranged wife, Annette.

Upon Warren’s death, his Will was admitted to probate and Letters of Administration were issued to his son, Benjamin.  The Will did not dispose of Warren’s LLC interest but instead directed that his assets be poured over to his trust which distributed everything equally to his four adult children and named Benjamin as successor Trustee.  Shortly before his death, however, Warren amended his trust to include a distribution of his home to his friend, Faye.  The amendment also gave Faye his Interest.  Benjamin, as Personal Representative and Trustee, refused to transfer the Interest to Faye citing the provisions of the Operating Agreement.  Faye sued Benjamin and won in trial court but lost when Benjamin appealed.

The appeals court focused first on determining whether it was the terms of Warren’s Estate Planning documents, or the terms of the Agreement that would control disposition of his Interest.  That court determined that the laws of the state where the contract was made permitted the Agreement to dictate how the Interest would pass at death.  As such, the Agreement vested title to Warren’s Interest in his adult children immediately upon his death thereby overriding the provisions of his Estate Plan and his true intent.

The example above greatly oversimplifies the case; however, it provides universal lessons.  First, if you have an interest in a family entity, ensure that you transfer that interest in accordance with the terms of the governing instrument.  In the facts above, Warren needed to obtain Shirley’s consent to transfer his Interest to Faye.  Second, make sure that your Estate Plan works with the governing instrument for your entity.  Here, Warren would have needed to transfer his Interest to Faye during life and obtain Shirley’s consent in accordance with the terms of the Agreement, rather than relying upon his Estate Planning documents at his death.  Finally, if you are unaware of any governing instrument, understand the impact of local law on your interest in the entity and your overall Estate Plan.  The opinion for the case did not indicate whether Warren’s Estate Planning attorney reviewed the Agreement, but it’s best to start with a review of the entity documents when dealing with any closely held entity.  Remember that even if you set up the business without the services of an attorney, the business is a legal entity, as is the transfer of your interest in it.

Of note for everyone with a business that files documents with the Secretary of State is the Corporate Transparency Act (“Act”) that requires such entities that qualify as a “Reporting Company” to provide certain information about its “Beneficial Owners” and “Company Applicants.” Failure to report this information may result in civil and criminal penalties. The Act imposes the duty to report the required information to the Financial Crimes Enforcement Network (“FinCEN”) on any Reporting Company beginning on January 1, 2024. 

Family entities serve a vital role in accomplishing numerous estate planning goals like asset protection, shifting appreciation and income to the next generation, centralized management, stability, and continuation of business upon death.  Family entities also provide the opportunity to leverage the benefits of other techniques to achieve more significant results during life by excluding assets from the gross estate and increasing valuation discounts.  To achieve these benefits, it’s vital to operate the entity in accordance with its governing documents.  If you have a business, now is a great time to talk to me to ensure that your estate plan and business plan work together to accomplish your goals and to explore any options that you have.

Estate Planning Lessons from the Movies – Part II

Recently, a headline titled “Eight Lessons from Killers of the Flower Moon” caught my eye, and the idea for this two-part blog took hold. The article talked about the movie titled “Killers of the Flower Moon” that received critical acclaim for its depiction of the plight of the Osage Indian Tribe. The article focused on the many real-life Estate Planning lessons that we can learn from watching the movie. The first part, Estate Planning Lessons from the Movies – Part I, of this two-part series, gave a brief overview of the movie’s plot along with beginning to introduce the lessons from the movie. This second part will finish exploring those lessons and their real-world application.

As a reminder, “Killers of the Flower Moon” 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 (learn more about that here: The Osage Nation). 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 by requiring 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.

I find the story itself intriguing, yet it becomes even more fascinating when viewed through an Estate Planning lens and with an eye toward learning from mistakes of the past. The first part of this series gave us lessons regarding the importance of fiduciary duties, understanding your intended beneficiaries, how sudden wealth destabilizes, and that addiction knows no income bracket or socioeconomic status. The next lesson focuses on the importance of flexibility in family legacy. A good Trusts and Estates Attorney inquires about the legacy that you want to leave for your family and helps you accomplish that goal. A great Trusts and Estates Attorney helps you create a legacy that will evolve with your family over time. Family expectations may motivate one member while crushing another. This underscores the importance of building flexibility into a legacy. The movie highlights how the Osage people struggled to integrate their well-established traditions into their increasingly modern world as it grew with their sudden wealth and interaction with non-indigenous people. The ones who found ways to adapt their traditions to their changing reality seemed happiest. The same holds true for our modern-day families and the legacies they want to pass along – those who can change with the times experience greater satisfaction.

The next lesson focuses on the importance of the proper valuation of assets. While we often boil down the value of an estate to a single figure, it’s rare that an estate consists of only easy-to-value assets. Usually, an estate contains cash, securities, and many other assets such as real estate, tangible personal property, and even intangible rights. While most of these assets have monetary value, sometimes assets have sentimental value or a different intrinsic value and it’s vital to understand that. The Osage understood the importance of land and the rights attached both above and below it. Upon their forcible removal to the Osage reservation in Oklahoma, they negotiated a deal allowing them to keep any subsoil rights. Because the Osage kept those rights, when they discovered oil under their reservation, it was theirs. This resulted in the headrights at the heart of the controversy in “Killers of the Flower Moon.” While the tragic Osage tale demonstrates the ugly side of greed, among many other things, it also highlights the importance of understanding the value of what you have. For those of us who regularly deal with the valuation of assets in either estates or trusts, we understand the importance of assigning correct value both in terms of assessing taxes and maintaining family harmony.

Third, blended families bring complex issues. For most Estate Planning attorneys, this goes without saying. Anytime a potential client arrives and indicates that they have been married previously, or have children from another relationship, that information changes the advice the attorney gives. Apparently, the perpetrators of the Reign of Terror managed to integrate themselves fully into the society they sought to destroy, and the movie tells the tale of non-indigenous husbands and grandfathers murdering their wives, children, and grandchildren to ensure that they inherited the headrights. While most families agree that’s going too far, families, especially blended ones, have different goals. Estate Planning attorneys need to understand those goals and develop a plan that addresses and honors those differences.

Finally, “Killers of the Flower Moon” reminds us of the danger of undue influence. As our clients age, often their world shrinks, and they depend upon others for help and support. It’s that same help and support that create the opportunity for the caregiver to unduly influence the aging client. Apparently, that’s how the self-proclaimed “King of the Osage Hills” gained his wealth, by insinuating himself with the Osage people and exerting his influence both on his family and on members of the tribe. Ultimately, William Hale’s wealth came from his nefarious deeds and dealings with the Osage tribe. We, as Estate Planning professionals, have the duty to ask the tough questions and determine whether the plan that the client wants to create represents their true intent or that of someone else. It’s not always easy.

I’m excited to catch this movie and look for the lessons explored in these articles. If you have concerns regarding your Estate Plan or any of its provisions, make it a point to talk to me and I can guide you through the maze of Estate Planning and ensure that your plan addresses the lessons raised in this two-part series.