Use It or Lose It…Examining the Efficacy of the Spouse And Family Exclusion Trust or Spousal Lifetime Access Trust

On January 1, 2024, the Applicable Exclusion Amount (“AEA”) reached a record high amount of $13.61 million. The AEA is the amount that any person can pass to a non-spouse without incurring an estate tax. An individual can pass an unlimited amount to the U.S. citizen spouse without worry about incurring a gift or estate tax. In 2011, legislation set the “permanent” exclusion amount at $5 million, as adjusted for inflation. The Tax Cuts and Jobs Act of 2017 (“TCJA”) temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation. Provisions of the TCJA cause the doubled amount to sunset on December 31, 2025. Thus, on January 1, 2026, the exclusion will return to $5 million, and with inflation adjustment it’s expected to be around $7 million at that time. Any transfer exceeding the AEA will be taxed at a rate of 40% on the overage. Given the nearly $7 million difference between the current AEA and the reduced AEA in the future, individuals whose estates exceed $6.5 million need to think about how to take advantage of today’s AEA. Using the AEA now ensures that individuals get to utilize the higher amount before it sunsets.

Let’s look at a quick example. Assume that an unmarried client has $15 million. They could give away $13.61 million this year and retain $1.39 million. At the client’s death in 2026, they’d only owe tax on the $1.39 million in their estate. If the client were married, that client could use a Spouse And Family Exclusion (SAFE) Trust, (sometimes called a Spousal Lifetime Access Trust (SLAT)) to hold the gift. Such a trust is set up by one spouse for the benefit of the other spouse and their children. The SAFE Trust appeals to many married individuals because even though the donor spouse gifts assets to the SAFE Trust, because the gift benefits their spouse, the donor spouse has indirect access to the assets.

For persons with wealth that exceeds twice the AEA, it may make sense for each spouse to consider establishing a SAFE Trust for the benefit of the other. This allows each spouse to utilize their AEA while having direct access to the assets in the trust of which they are the named beneficiary and indirect access (through their spouse) to the assets of the trust for the benefit of their spouse. Of course, this structure carries some risk. The spouses need to ensure that sufficient differences exist between the two trusts to avoid the “reciprocal trust doctrine.” Under the reciprocal trust doctrine, if the trusts are mirror images of one another, or relatively mirror images, the IRS will recharacterize two trusts and treat the trusts as if each spouse created a trust for himself or herself which will cause inclusion of the assets in the trust in the donor/decedent spouse’s estate.

Let’s assume that Amy and Sheldon have $30 million, $15 million each, and wanted to take advantage of the temporarily increased AEA. Sheldon gifts $13.61 million to a trust for the benefit of Amy and their children. Likewise, Amy gifts $13.61 million into a trust for the benefit of Sheldon and their children. Each spouse now only has $1.39 million left in their respective estates. The attorney drafting the trusts needs to design them in a manner that avoids the reciprocal trust doctrine. Generally, that means creating as much difference between the trusts as possible. For example, one trust might name one of the spouses as Trustee, but the other trust might name a third party as Trustee. Perhaps the trusts have different standards for distribution of income and principal. One trust might give the spouse a 5 and 5 power and the other might give the spouse a limited power of appointment. The more differences that that the trusts have, the less likely that they run afoul of the reciprocal trust doctrine.

If the trusts have been structured properly, then neither estate will include the assets of the trust. Unfortunately, without estate tax inclusion, the assets in the trusts do not receive a step-up in basis at death. For this reason, it’s important to consider what assets to use for funding the SAFE Trust. Given that the estate tax rate exceeds the long-term capital gains tax rate, the benefit of removing the assets from the estate likely outweighs the potential for capital gains taxes in the future.

The SAFE Trust has certain risks. First, there’s the risk that one spouse fails to create a SAFE Trust for the other. There’s always the risk of the spouses divorcing. Finally, there’s the risk that one spouse dies prematurely thereby causing the surviving spouse to lose indirect access to assets in the SAFE Trust for the benefit of that decedent spouse. Everyone has unique circumstances, including different levels of risk tolerance, which means that the SAFE Trust is not a one-size-fits-all solution. Regardless, given the sunset of the doubled AEA on January 1, 2026, it’s a great time to open the discussion about ways to take advantage of the AEA before the sunset.

What You Need to Know about the Corporate Transparency Act

Congress enacted the Corporate Transparency Act (the “Act”) for Fiscal Year 2021 as part of the National Defense Authorization Act with an effective date of January 1, 2024, which this blog first reviewed herein The Not-So Transparent Corporate Transparency Act. The Act requires any “Reporting Company” to file “Beneficial Ownership Information” (“BOI”) reports with the Financial Crimes Enforcement Network (“FinCEN”) for its “Beneficial Owners” and if created after January 1, 2024, its “Company Applicants.” Failure to report the required information may result in civil penalties of up to $500/day until corrected or criminal penalties of 2 years imprisonment or a $10,000 fine.

The Act originally imposed a 30-day deadline to report for any entity created on or after January 1, 2024. Thankfully, FinCEN published proposed and final regulations on November 30, 2023, extending that deadline to 90 days after confirmation of creation of the entity. Reporting Companies in existence prior to January 1, 2024, have until January 1, 2025, to file their BOI report. Reporting Companies created on or after January 1, 2025, have 30 days to file their initial BOI report. Note that pending legislation may extend the deadline for companies in existence prior to January 1, 2024, to file their BOI an additional year, until January 1, 2026; however, unless and until passed, all Reporting Companies existing on December 31, 2023, should follow the January 1, 2025, deadline. FinCEN has published “Beneficial Ownership Information Reporting Frequently Asked Questions” and guidance on how to complete the report ( to help explain the Act and the reporting requirements.

The Act defines a Reporting Company as any entity formed by a filing with a secretary of state or any foreign entity that’s registered to do business in the United States by filing with a secretary of state. This intentionally broad definition means that most privately owned businesses such as any corporation, limited liability company, limited partnership, or limited liability limited partnership, along with any other entity formed by filing a document with a secretary of state, will be subject to the duty to report. General partnerships, sole proprietorships, and trusts do not file documents with a secretary of state upon creation and thus are exempt from reporting. The Act exempts twenty-three categories of organizations such as banks, credit unions, depositories, securities brokers and dealers, tax-exempt entities, and large operating companies, all of which are already highly regulated.

Every Reporting Company needs to report its legal name, any names under which it does business, a principal business address, the jurisdiction of formation, its taxpayer identification number, and its Beneficial Owners. The Act looks at two separate “tests” to determine Beneficial Owners: the substantial control test and the 25% ownership test. Beneficial Owners are individuals who own or control 25% or more of ownership interest or any non-owner that exercises substantial control over the company. While those categories seem clear, a deeper investigation reveals they aren’t.

The “substantial control test” means any individual exercising substantial control over the company fits the Act’s definition of Beneficial Owner and therefore the Reporting Company needs to report the individual as a Beneficial Owner. A President, CEO, CFO, COO, general counsel, or any other individual performing similar functions exercises substantial control. Additionally, under the Act, anyone with the authority to appoint or remove certain officers, a majority of directors, or similar group of the Reporting Company exercises substantial control. Finally, any individual with the authority to make loans, undertake debt, modify governing documents, or otherwise make or influence important decisions for the entity exercises substantial control. If the definition seems broad, it is and that’s intentional. If it’s unclear whether an individual’s duties meet substantial control, prudent advice dictates disclosing the individual as a Beneficial Owner to avoid any potential penalties.

The “ownership test” requires a Reporting Company to identify all individuals who own or control at least 25% of the ownership interests of the company. Ownership interests include equity, stock, voting rights, capital or profits interest, convertible instruments, options, non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or mechanism used to establish ownership. The Act does not require family attribution although it does require attribution for direct and indirect interests of an individual.

The Act requires any Reporting Company to disclose the name, date of birth, street address, a unique identifying number from a passport, driver’s license, or another such document, and a copy of that document for each of its Beneficial Owners determined under both the substantial control test and the ownership test. Additionally, any Reporting Company created on or after January 1, 2024, needs to report the individual who filed the formation or registration document for the Reporting Company, called the Company Applicant, and if different, the individual “primarily responsible for directing or controlling such filing,” limited to two individuals. This requirement has numerous implications for attorneys; a partner may direct an associate or paralegal to make the filing, thus both individuals would meet the definition of Company Applicant. The Act permits individuals who anticipate being Company Applicants to register for a FinCEN number that such individuals will provide to the Reporting Company instead of their personal information.

Also the Act considers a trustee who can dispose of trust assets that include at least 25% of a Reporting Company as a Beneficial Owner of that Reporting Company. Similarly, the Act includes the sole income and principal beneficiary of a trust owning at least a 25% interest in a Reporting Company as a Beneficial Owner of such Reporting Company. Any beneficiary with the ability to withdraw substantially all of the assets of a trust containing at least 25% of an interest in a Reporting Company will also be a Beneficial Owner of such Reporting Company.

As this article demonstrates, the Act has some complex provisions that have broad applicability. This article provides only a brief synopsis of the most relevant provisions. All company owners need to familiarize themselves with the provisions of the Act as it will affect any person with a privately-owned business (S-Corp, LLC, C-Corp, etc.).

There’s No Better Way to Say “I’ll Be There for You” than with an Estate Plan

Matthew Perry was probably best known for his role as the sarcastic, neurotic, and always witty, Chandler Bing on the hit-tv show, Friends. He died suddenly at the age of 54. He was unmarried, had no children, and was survived by his parents, five half-siblings, and legions of fans. His Estate Plan differs from many of the cases that this blog examines because there likely won’t be a huge fight in court over his substantial fortune at least in part because he created a Revocable Trust and, as of this writing, no other documents exist. This lack of public fighting doesn’t mean that we can’t draw important lessons from this situation.

At the time of Matthew’s death, it’s estimated that his estate exceeded $120 million. He earned most of that from his time on Friends and the continued royalties from the show. While tragic, Matthew’s death and an examination of what we know about his Estate Plan remind us, regardless of the size of your Estate, it’s vital to have a comprehensive Estate Plan suited to your particular needs. While Matthew had a Revocable Trust, he didn’t have a Will. In many celebrity cases, the celebrity dies with no estate plan, or an insufficient Will, or a document that purports to be a Will which causes the fighting and gives the public insight into the decedent’s affairs. That likely won’t happen here because Matthew chose to create a Revocable Trust.

The Revocable Trust avoids many of the problems typically associated with celebrity estates. First, a Revocable Trust serves as a Will substitute thereby avoiding probate that a Will requires. Additionally, the Revocable Trust provides centralized management of assets, allows for disability planning during life, and protects the privacy of the decedent, the plan, and the beneficiaries. In creating the Revocable Trust, Matthew ensured the privacy of his plan and beneficiaries and avoided the probate process altogether. He did that right; but that alone is not a comprehensive Estate Plan. Any good Trust and Estate practitioner would advise their clients to create both a Will and a Revocable Trust to direct what happens at death because each document serves different functions. In addition to being the only instrument that does certain things (for example nominate guardians for minor children), the Will acts as a backstop to the Trust. If the decedent failed to retitle any assets in the name of the Revocable Trust prior to death, then the Will contains provisions directing distribution of those assets to the Trust, but first, those assets need to go through probate which can be a long and expensive process depending upon the state of residence. Except rarely, probate is a public process.

While it’s unclear how Matthew’s assets will pass because of the privacy a Revocable Trust affords the family, it’s clear that unless certain provisions were included in the Revocable Trust, they will bear significant taxes. When Matthew died, the Applicable Exclusion Amount was $12.92 million, about 10% of his net worth. In other words, the other 90%, or approximately $107 million will be subject to estate tax at a rate of 40%. That means there will be a federal estate tax bill of approximately $42.8 million ($107 million * .40). While it’s possible that the trust included provisions that would have decreased the tax liability, for example, by naming a charity as a beneficiary, we likely won’t know that because the terms of the Revocable Trust remain private. Interestingly, shortly after the actor’s death, the National Philanthropic Trust created the Matthew Perry Foundation. Had Matthew established that Foundation either through the terms of his Trust or as a stand-alone entity, assets given to the Foundation would have provided a charitable deduction for his estate saving substantial taxes.

Celebrity estates make great blogs. They demonstrate the myriad of issues that arise when an individual fails to undertake appropriate Estate Planning. No one is immune from having an Estate Plan regardless of the size of their Estate. It’s important to speak with me regarding your Estate Plan and your unique circumstances. I recommend the use of Revocable Living Trusts as Will substitutes to avoid probate and to provide certain other protections during life, including simplified asset management during periods of disability or incapacity. But, as this article demonstrates, Revocable Trusts alone do not cover every circumstance. Had Matthew created a proper Estate Plan, he could have ensured that his legacy would live on in the way that he desired, quite possibly through the Matthew Perry Foundation or any other charitable organization he created. Allow me to guide you through the creation of your Estate Plan. Your family will consider you a true “Friend” if you do.

Dynasty Trusts

January 1, 2024, marked exactly two years until the planned reduction by half of the current Applicable Exclusion Amount (“AEA”). The AEA is the amount that an individual can pass to anyone either during their life or at death before imposition of a transfer tax. For those needing a refresher, the Tax Relief Act of 2010 set the AEA at $5 million (adjusted for inflation) and the Tax Cuts and Jobs Act of 2017 temporarily doubled that amount to $10 million per person ($20 million per couple), as adjusted for inflation. The inflation-adjusted number in 2024 is $13.61 million per person ($27.22 million per couple). Thus, in 2024 each United States resident or citizen may pass an unlimited amount to their spouse and $13.61 million to whomever they want without worrying about gift or estate taxes. The provisions of the Tax Cuts and Jobs Act of 2017 sunset on January 1, 2026, which means that individuals who may have an estate tax issue when the AEA returns to $5 million per person need to consider more sophisticated Estate Planning techniques. A “Dynasty Trust” presents a good opportunity for wealthy individuals to leverage the doubled AEA for future generations and prevent taxation of those same assets for several generations.

While many folks think Dynasty Trusts are complex, they don’t have to be. In simple terms, a Dynasty Trust continues for the longest possible time allowed by state law. Some states have a “Rule Against Perpetuities” (“RAP”) that limits the amount of time that a trust can exist. Under common law, the RAP provides that the asset must vest, if at all, no later than 21 years after the death of a “life in being” determined when the trust became irrevocable, typically the death of the grantor of the trust. In practical terms, this means that upon the death of the grantor, the Trustee needs to distribute the assets in the trust no later than 21 years after the death of the last of the beneficiaries alive at the grantor’s death. For example, let’s assume that the grantor establishes a trust for his children and grandchildren, the youngest of whom is 4 years old upon the grantor’s death. If that grandchild lives until their 104th birthday (100 years after the grantor’s death), the trust can continue for another 21 years or 121 years after the grantor’s death.

Many states have adopted the Uniform Statutory Rule Against Perpetuities, which allows a trust to last either the traditional RAP period (a “life in being” plus 21 years) or 90 years, if longer. Some states have modified the RAP so that a trust might last 150, 365, or even 1,000 years. Other states have repealed the RAP completely thereby allowing the trust to last forever! You may be wondering why anyone would want to leave their assets in trust that long. First, the grantor could name a professional Trustee to manage the assets to prevent the beneficiaries from squandering them. Second, leaving assets in trust this long ensures that the Trustee distributes the assets in the manner decided by the grantor for future generations. Finally, a Dynasty Trust helps save on taxes for those with a taxable estate thereby allowing the assets to grow for multiple generations without diminution by estate taxes.

Let’s look at a quick example. For the sake of simplicity, we will ignore the impact of the AEA on each estate, assume a tax rate of 40%, and assume that the inheritance grows at a rate of 7.2% annually. John (age 80)(1st generation) dies and leaves $5 million to his daughter, Sally (age 50)(2nd generation), outright. The $5 million turns into $40 million by Sally’s death. Sally’s estate will pay a tax of $16 ($40 million * .40). Sally leaves the $24 million ($40 million inheritance less $16 million tax) inheritance to her child, Beth (3rd generation). Beth lives another 30 years and the $24 million she inherited from Sally grows to $192 million. Beth’s estate will pay a tax of $76.8 ($192 million * .40). Beth leaves the $115.2 million ($192 million inheritance less $76.8 million tax) inheritance to her child, Josh (4th generation), who invests similarly. Thus, the $115.2 million he inherits grows to $921.6 million. At Josh’s death, his estate owes tax of $368.64 million ($921.6 million *.40), leaving $522.96 million for future generations. So, by the end of the 4th generation, the $5 million inheritance from John has grown, after transfer taxes, to $522.96 million in 90 years. That’s an impressive return however, each generation has paid taxes on the assets.

There is a better way, a way that avoids taxation at successive generations. If at his death John (1st generation) left the $5 million to a Dynasty Trust for the benefit of Sally (2nd generation) and her descendants and allocated his Generation-Skipping Transfer Tax exemption, the assets would have been excluded from Sally’s estate. At Sally’s death, the $40 million in the Dynasty Trust would have escaped the 40% reduction due to the estate tax. Instead, the full $40 million could have continued to grow for the benefit of Beth (3rd generation) and her descendants. After 30 more years it would have increased to $320 million and at Beth’s death, again, it would have escaped taxation and would have passed to Josh without further estate taxes. After another 30 years of prudent investing by the 4th generation, the inheritance would have grown to $2.56 billion, or approximately 5 times the amount that it was without using the Dynasty Trust.

Without a Dynasty Trust, the assets increased significantly; however, with a Dynasty Trust, the assets ended up 5x more over the same period and with the same investment assumptions. A Dynasty Trust offers several benefits. It keeps the money in the family and may prove a better option than a nuptial agreement because the Dynasty Trust existed well before the couple and avoids the awkward situation of asking a fiancé to agree to a nuptial agreement prior to or just after the marriage. It allows the grantor to control distributions many years into the future. It provides the assets an opportunity to grow without imposition of estate taxes. Finally, it offers significant asset protection. While a Dynasty Trust may not work for everyone, it provides some great advantages if properly structured.

Starting 2024 the Right Way…with an Estate Plan!

Welcome to 2024! The year 2023 left many feeling unsettled. Chat GPT burst onto the scene, and it seemed AI was destined to take over everything. War continued in Ukraine and broke out in the Gaza Strip. Finally, COVID-19 seems to be the new norm. Calendar year 2023 taught us some tough lessons, most of which focus on preparing for the unexpected and unthinkable. Creating an Estate Plan helps give us a feeling of control and peace of mind, knowing that your loved ones will endure when you leave this earth.

Simply put, an Estate Plan serves as a set of instructions regarding how you want your affairs handled if something happens to you. The plan sends a message to your loved ones that you care enough to tell them what to do in your absence. A basic Estate Plan consists of documents that provide instructions for what happens both during your life and at death. Those documents consist of a Living Trust, also known as a Revocable Trust (a “Trust”), a Will, a Property Power of Attorney, a Healthcare Power of Attorney, a Living Will, and a Health Insurance Portability and Accountability (“HIPAA”) Authorization.

Although we list Trust first, let’s start with a discussion of the Will. A Will determines distribution of your assets upon your death and allows you to select an individual or company to make the disbursements of those assets. The Will allows you to nominate guardians to care for any minor children that you have at your death. Finally, some states allow their residents to pass tangible personal property through a separate writing without the formalities required of a Will. These documents must follow state statutes concerning requirements for validity, but generally, these documents need only reference the tangible personal property sought to be distributed, the desired recipient of the property, and have the testator’s signature along with the date signed. Usually, states that allow a separate writing require that the Will contain a direction regarding passing the tangible personal property according to such document. These states typically do not have companion statutes that allow a Revocable Trust to reference the memorandum. If you do not have a Will, then your state’s intestacy laws will govern dispensation of your assets at your death. Often, the state’s distribution pattern does not match your own. Even if state laws match your desired disposition, state laws contain no provisions to account for a beneficiary’s specific circumstances, for example, a beneficiary with special needs. Finally, state intestacy laws may appoint a stranger to handle these important tasks.

Regardless of whether you have a Will or your state’s intestacy laws determine property division and distribution of your assets upon your death, the individual in charge must petition the court for permission to transact the business of your estate through a probate proceeding. Depending upon the laws of your state, probate can be a lengthy, costly, and public process. If you want to avoid probate and maintain your privacy, a Trust serves as a Will substitute and provides the opportunity for you to do that. With a Trust, you transfer the assets to the Trust during your lifetime and manage them as the Trustee. You avoid probate altogether by using a Trust because the Trust contains provisions regarding what happens upon your death and vests a successor Trustee with the power to make distributions from the Trust without court oversight. The Trust also protects against incapacity by giving a successor Trustee the power to make distributions from the Trust for your benefit should you become incapacitated. Due to cases of fraud, institutions more readily recognize a successor Trustee acting on your behalf than an agent under your Property Power of Attorney.

The Property Power of Attorney allows you to appoint someone as your “Agent” to act on your behalf concerning your financial affairs. If that Agent is unwilling or unable to act, you can appoint one or more successor Agents. Through the Property Power of Attorney, you give someone else (the Agent) powers you inherently already have yourself. Property Powers of Attorney come in several flavors. Some vest immediately meaning that the Agent has the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, they also may vest upon incapacity meaning that the Agent’s powers “spring” into action only upon your incapacity. Practitioners refer to these types of Property Powers of Attorney as “springing” Powers of Attorney. You may hear the term “durable” in conjunction with the Property Power of Attorney. This means that the Property Power of Attorney continues to be effective notwithstanding your incapacity. A Property Power of Attorney that is not durable does not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney allows you to appoint an agent to make medical decisions for you if you are unable to do so for yourself. If you can make these decisions, then your agent cannot veto any medical decision you make. A Living Will, sometimes called an “Advance Directive” expresses your wishes regarding end-of-life decisions. Without this document memorializing your wishes, doctors and medical professionals must keep you alive even if you have no reasonable chance of recovery notwithstanding that doing so only prolongs your suffering. Often the Living Will and Healthcare Power of Attorney are combined into one document. The Health Insurance Portability and Accountability Act of 1996 mandates that healthcare providers keep your protected healthcare information confidential. While most of us would agree that generally makes sense, sometimes you want others to have access to that information, especially the fiduciaries that you have nominated to act upon your incapacity. A HIPAA Authorization allows you to appoint one or more individuals to access or receive protected health information.

It’s important to keep your Estate Plan updated. Reviewing these documents often ensures that you always have trusted and capable individuals serving in these important roles and that you do not leave your loved ones wondering what to do upon your incapacity or death. While we hope 2024 will be better than the last several years, it’s important to begin the year by creating an estate plan, if you do not yet have one, or reviewing the plan that you already have in place to ensure that it accomplishes your goals. This will provide you and your loved ones with peace of mind for anything that 2024 brings. If the last few years have taught us anything, it’s to expect the unexpected. Even a basic Estate Plan provides peace of mind. Resolve now to get your estate planning done this year, sooner rather than later.

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.

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.