Monthly Archives: July 2024

Grammy Award winner, Tony Bennett, died on July 21, 2023, at the age of 96. Bennett had a prolific career releasing more than 70 albums and winning over 19 Grammys. He enjoyed a resurgence in popularity late in his career when he partnered with Lady Gaga to release two albums. He devoted his life to music amassing an impressive music catalog, image rights, and memorabilia, along with paintings and artwork. Rolling Stone reported that Bennett earned more than $100 million from live performances in the last 15 years of his life and sources estimate the value of his estate over $200 million.

From the facts that we have available, it appears that Tony Bennett left more than enough money and assets to take care of all of his loved ones: his wife, Susan Crow, and his four children D’Andrea  Bennett (“Danny”), Daegal  Bennett (“Dae”), Johanna Bennett, and Antonia Bennett. Yet, that hasn’t stopped litigation from ensuing. Two of Bennett’s four children, Johanna and Antonia, filed a lawsuit against their brother, Danny, in New York Supreme Court earlier this summer. In that lawsuit, Johanna and Antonia allege that Danny failed to provide a full accounting for sales of Bennett’s music catalog and image rights proceeds, that he withheld information about their father’s assets, and that he personally benefitted from the estate and received a substantial commission from financial activities prior to Bennett’s death.

To the untrained observer, Tony Bennett did everything right. He created an Estate Plan, which included the Bennett Family Trust. A comprehensive Estate Plan consists of a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and a Health Insurance Portability and Accountability Act Authorization. During life, the plan acts as a set of instructions regarding who makes what decision, be it medical or financial, if the client is unable to make those decisions. At death, these documents dictate who controls distribution of the estate, to whom the estate will be distributed, and when and how it will be distributed to those individuals. While we cannot know which documents Bennett signed, we know that the Bennett Family Trust would have kept his plan private as Trusts are used to prevent the public probate process. Now that his daughters have filed a lawsuit, that changes.

Unfortunately for Tony Bennett, he didn’t do everything right. According to sources, he named Danny to serve as co-Trustee of the Bennett Family Trust along with him during the later years of his life. At Tony’s death, Danny became the sole Trustee. Additionally, it seems that Danny managed property and assets for the Bennett Family Trust and the family’s Delaware-based company, Benedetto Arts, LLC (“LLC”) in which Bennett’s children and the LLC all hold membership interests.

According to the lawsuit, Danny oversaw the sale and consignment of Bennett’s memorabilia, personal property, and an interest in Bennett’s name and likeness in July 2022. Danny founded an artist management and strategic marketing company, and the lawsuit alleges that in this capacity he received a “substantial commission” from the sale. Bennett’s Will contained a provision distributing all of his tangible personal property equally among his children after debts, expenses, and taxes. The daughters allege that they were not aware which of Bennett’s assets were sold in the deal. They further allege Danny prevented them from visiting their father’s apartment and that they were not allowed to view Bennett’s tangible personal property. The lawsuit alleges that these items had “significant sentimental value.” Finally, the lawsuit alleges Danny donated Bennett’s clothing to charity without notice to his sisters in contravention of the express terms of Bennett’s Will. Further, Danny auctioned off Bennett’s remaining tangible personal property without consulting his sisters even though none of Bennett’s Estate Planning documents directed a sale.

Danny’s actions or inaction caused his sisters to file their lawsuit, undoubtedly damaging their relationship permanently. The sisters’ lawsuit contains allegations regarding allegedly improper $1.2 million loan and gifts totaling $4.2 million, which is “more than double the value of gifts to each of Bennett’s other three children.” It’s possible that the loan and gifts were legitimate. It’s possible that they weren’t. We may never know. What we do know is that this family drama will play out in a public forum despite Bennett’s desire to keep his plan private.

This case highlights the importance of communicating your wishes to your beneficiaries. While many clients prefer to keep their plan private, letting your beneficiaries know the general scheme of the plan and any reasons for inequalities while you are alive will help prevent hurt feelings after your death. The case also serves as a reminder of the important role that a Trustee plays after your death. Whoever you name to serve as Trustee has a fiduciary duty to act for the benefit of the beneficiaries which includes providing them with information about the Trust, maintaining transparency in the actions that they take on behalf of the Trust, and communicating regularly about the Trust. Individuals serving as Trustee usually desire to abide by the decedent’s wishes, but often fail to realize the immense responsibility that comes along with the office. Finally, this case demonstrates the discord that arises when one child serves as Trustee. Naming any sibling to serve as Trustee for another sibling causes strife. If the children have different mothers that will only exacerbate that friction. Clients often want to name the eldest or most responsible child as the Trustee or co-Trustee to take over after their death, but that causes issues and may result in irreparable damage. If anything in this article sounds like something in your Estate Plan or if you have questions about your plan, reach out to me today. It could prevent litigation after your death.

What Is the Generation-Skipping Transfer Tax (GSTT)?

The generation-skipping transfer tax is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren. With the generation-skipping transfer tax, grandchildren receive the same amount as if the inheritance were coming from their parents.

Before the generation-skipping transfer tax was introduced in 1976, wealthy individuals were legally able to gift money and bequeath property to their grandchildren, without paying federal estate taxes. The legislation effectively closed the loophole where inheritances could skip a generation to avoid double estate taxation.

Understanding the Generation-Skipping Transfer Tax

The generation-skipping transfer tax (GSTT) is an additional tax on a transfer of property that skips a generation, known as a generation-skipping transfer (GST) for short. The GSTT was implemented to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren.

The parent’s generation is skipped to avoid an inheritance being subject to estate taxes twice. The GSTT ensures that grandchildren end up with the same value of assets that they would have had if the inheritance was transferred to them directly from their parents, rather than their grandparents.

The person giving the gift is referred to as the transferor and the recipient is known as the skip person. Many people use a grandchild as a skip person, but a skip person does not have to be a family member. Any individual is eligible to receive a generation-skipping transfer as long as they are at least 37½ years younger than the transferor. The generation-skipping transfer tax is imposed only if the transfer avoids incurring a gift or estate tax at each generation level. To make up for the taxes that may be avoided by skipping one generation, the Internal Revenue Service (IRS) imposes a second layer of tax on gifts and bequests above the estate and lifetime gift exclusion. It means that the GSTT is only due when a beneficiary receives amounts in excess of the GST estate tax credit.

Direct vs. Indirect Skips With the GSTT

The taxation of a GST depends on whether the transfer is a direct or an indirect skip. A direct skip is a property transfer that’s subject to an estate or gift tax. An example of a direct skip would be a grandmother gifting property to a grandchild. The transferor or their estate is responsible for paying the GST tax for direct skips.

An indirect skip involves a transfer that has intermediate steps before reaching a skip person. There are two types of indirect skips: the taxable termination and the taxable distribution.

A taxable termination involves a skip person and a non-skip person. A non-skip person is the primary beneficiary who will receive property before it is transferred to the skip person. The transfer to the skip person occurs upon the death of a non-skip person—typically the child of the transferor.

As an example of a taxable termination, consider a transferor who establishes an income-producing trust for his son. Upon the son’s death, the remaining property would be passed on to the transferor’s grandchild, at which time those assets would be subject to the GST tax.

A taxable distribution refers to any distribution of income or property, from a trust to a skip person that is not otherwise subject to estate or gift tax. If a grandmother established a trust that made payments to her grandson, those payments would be subject to GST taxes, which the recipient is responsible for paying.

How Much Is the Generation-Skipping Transfer Tax?

In the past, the GSTT has been hefty, ranging from 35% to 77%.9 The current rate, which has been in effect since 2014, is 40%; however, the Tax Cuts and Jobs Act dramatically lessened the estates that might be affected by it. For 2022, the federal estate, gift, and GSTT exemption is $12.06 million for each individual ($12.92 million in 2023) and $24.12 million for married couples ($25.84 million in 2023), more than doubling the pre-TCJA limit of $5.49 million (for individuals).

Only the value of a person’s estate that is in excess of the applicable exemption is subject to an estate tax at death or the GSTT, at that flat rate of 40%. So only aggregate gifts and bequests to a skip person in excess of $12.06 million in 2022 ($12.92 million in 2023) would be subject to the 40% flat generation-skipping transfer tax.

The GSTT is assessed when the gift or property transfer is made; GSTs can occur before or after the death of the transferor. While still alive, the transferor can give the gift directly to the skip person. But upon death, the transferor’s will may either stipulate that property is bequeathed to a skip person, or it may call for the establishment of a trust from which distributions will be made. Form 709 is used to report both GST taxes and transfers whereby federal gift taxes are due.

GSTT Strategies

Most beneficiaries will avoid the GST tax because the estates they inherit will be worth less than the government-provided estate tax credit. The GSTT exemption is very high (as noted above).

However, in cases where the tax could apply, transferors can create dynasty trusts, which are designed to avoid or minimize estate taxes with each generational transfer. By parking assets in the trust and making specified distributions to each generation, the corpus of the trust isn’t subject to estate taxes with the transfer.

What Triggers the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax is triggered when a person gifts another person an asset but skips a generation in doing so. For example, when a person gifts a home to their grandchild and skips their child.

Who Pays the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax is paid by either the grantor or the skipped beneficiary. The grantor pays the direct generation-skipping tax while an indirect generation-skipping tax is paid by the skipped beneficiary. The former is the most common scenario.

How Much Can a Parent Gift a Child Tax-Free in 2022?

A parent can gift a child tax-free $18,000 in 2024.

Anyone who has seen my house at Christmas knows that it tops the list as my favorite holiday. We deck the halls, make cookies, exchange presents, look at light displays, and revel in the Christmas spirit as long as possible. Christmas in July seems like a great idea except we can’t celebrate Christmas in July until Independence Day has passed! While Christmas is my favorite holiday, the 4^th of July ranks a very close second. Now you really may be wondering where I’m headed in this blog dedicated to all things Estate Planning and how it ties into Independence Day. Keep reading and I promise to make the connection.

Freedom, liberty, and the right to individual ownership serve as the reasons that this country declared its independence from England in 1776. The desire to have freedom from the worry about what will happen to our family and loved ones upon our death, to give liberty to those individuals by continuing to care for them after our death, and to protect our beneficiaries’ ownership of assets thereafter all influence the decisions that we make while undertaking Estate Planning. We create Estate Plans to protect some of the very same ideals that our nation sought to protect when it declared its independence.

To help us gain a better understanding of the need for and benefit of Estate Planning, let’s review the history of the federal estate tax. Congress passed the Stamp Act of 1797 to raise money for the Navy to defend the United States against a threat from France. The Stamp Act required a stamp on Wills and other probate-related documents. The stamp cost money to affix creating the first ever estate tax, a tax on the transfer of property from decedent to beneficiary. Congress repealed the Stamp Act in 1802.

Several decades later when the government needed to raise money for the Civil War in 1862, it passed the Revenue Act of 1862 (“1862 Act”). The 1862 Act included the nation’s first true inheritance tax but excluded bequests to surviving spouses, bequests of real estate, and small estates from the tax. Interestingly, both tax-free bequests to a surviving spouse and exclusions for small estates exist in today’s version of the federal estate tax. The government expanded the 1862 Act to impose a succession tax on real estate. Congress repealed both the legacy and succession taxes in the early 1870s. The repeal was short-lived because of the Spanish-American War and passage of the War Revenue Act of 1898 (“1898 Act”) which imposed a legacy tax, although the tax was on the estate, not the beneficiaries. Traditionally, beneficiaries, rather than the estate itself, bear the burden of legacy or inheritance taxes. The 1898 Act applied to personal property only and was repealed in 1902 when the war ended.

The Revenue Act of 1916 assessed taxes on estates (“Estate Tax”) based upon the value of an individual’s assets as of the date of death when President Woodrow Wilson signed legislation creating it. Originally, the government used the revenue generated from the Estate Tax to fund the United States’ involvement in the First World War; however, after that war ended, the Estate Tax stuck. The Revenue Act of 1924 added a gift tax on transfers during life (“Gift Tax”) when it became clear that wealthy individuals found a way around the Estate Tax by transferring wealth during their lifetimes. Legislation repealed and then reinstated several years later the Gift Tax that continues today.

The Tax Reform Act of 1976 unified the Estate Tax and Gift Tax giving us the precursor to the system that exists today. The Economic Recovery Act of 1981 codified the unlimited marital deduction for estate and gift tax providing the unlimited marital deduction that exists in today’s estate and gift tax system. The Economic Growth and Tax Relief Reconciliation Act of 2001 contained provisions that phased out and ultimately repealed the Estate Tax and Gift Tax in 2010. The American Taxpayer Relief Act of 2012 made the Estate Tax permanent, indexed the Applicable Exclusion Amount for inflation, and introduced the concept of portability which allows one spouse to “port” the unused Applicable Exclusion Amount from their deceased spouse. The Tax Cuts and Jobs Act of 2017 temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, which is the current law and which is set to sunset on January 1, 2026, if not sooner.

In 2024, the Applicable Exclusion Amount is $13.61 million, meaning that a person can pass that amount to anyone without worrying about Estate Tax consequences. In addition, an individual can pass an unlimited amount to their spouse both during life and at death; however, just because your estate doesn’t reach the threshold amount does not mean that you need not worry about an Estate Plan. As indicated above, an Estate Plan provides much more than a way to protect your assets from taxes.  It provides certainty and peace of mind for your family and loved ones long after your death.

I hope that this blog has given you a view of our country’s history through the lens of Estate Planning and helped you understand the long history behind the Estate Tax. For years, this country funded its freedom by taxes levied on its citizens. These days, the revenue raised from the Estate Tax represents a small portion of the nation’s budget but it’s interesting to understand the important role that the Estate Tax once played for our nation. As we celebrate the birth of independence for the United States, let’s give ourselves the gift of freedom as well. Create a comprehensive Estate Plan that will provide peace of mind today and every day. That’s something worth celebrating while you enjoy barbeque, eat a popsicle, and watch the night sky light up. Enjoy your 4^th of July – however you choose to spend it!