Author Archives: Robert Mondo

Creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, as most understand, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, there are things that the grantor or testator does or fails to do that undermine an Estate Plan.

Some clients prefer to avoid hiring an attorney for estate planning and take matters into their hands by titling assets so that said assets pass outside of probate. Of course, clients have other ways to avoid using the services of an attorney. Numerous organizations such as Legal Zoom, RocketLawyer, and Will Maker all claim to permit an individual to create estate planning documents without hiring or consulting an attorney. Documents created using these services sometimes lack basic elements such as a residuary clause, fail to include lapse beneficiaries, or fail to meet the statutory requirements for validity. Any items not specifically devised by a Will or Trust, or things not owned at the creation of the documents pass pursuant to the terms of the residuary clause. If the documents do not contain the residuary clause, it’s not clear how those assets will pass. Likewise, if the Will or Trust fails to name lapse beneficiaries, that also causes problems. For example, if a specific devisee predeceases the testator or grantor and there’s no lapse beneficiary, then the assets pass to the residuary beneficiary which may or may not have been the grantor’s intent. If the residuary beneficiary predeceases the grantor and there’s no lapse beneficiary, or if the documents lack a residuary clause, that creates even more confusion. In situations in which the documents lack a residuary clause or lapse beneficiaries, the fiduciary likely would need to petition the court for an order directing the distribution of the assets. This causes a delay in the distribution of the assets along with increased expense for the estate ultimately reducing the amount passing to the beneficiaries.

Even if an individual retains the services of an attorney to create their Estate Plan, that’s not the end of the attorney’s role. The client should consult the attorney to update the plan whenever major life changes occur. The death of a spouse, being one of the most critical such life events. Upon the death of a spouse, the surviving spouse should contact me to ensure proper administration of the estate and trust. If a client fails to contact me upon the death of their spouse that can cause significant issues. For example, many estate plans utilize a “Family Trust” or “Credit Shelter Trust” to hold assets of the decedent spouse equal to their unused Applicable Exclusion Amount. Pursuant to Internal Revenue Code Section 2010, in 2022 an individual may transfer up to $12.06 million (the Applicable Exclusion Amount) upon their death without the imposition of transfer tax. Some Estate Plans with a Family Trust requires the establishment of that trust as soon as practical after the death of an individual. If a Trustee fails to do this, said Trustee has breached their fiduciary duties to the beneficiaries of the Trust. Further, imagine the difficulty in trying to fund that Family Trust several years later when assets may have changed in value, been sold, or have otherwise been depleted.

Even if the decedent’s plan did not mandate the creation of a separate Trust, other decisions impact the estate and trust. For example, perhaps an intended beneficiary recently won the lottery. That beneficiary could disclaim an inheritance and let it pass to the next beneficiary under the plan. A qualified disclaimer under Internal Revenue Code Section 2518 allows an individual to refuse a gift or bequest without transfer tax consequence and must be made within nine months of the creation of the interest. I always walk an individual through the process and he/she will know the requirements for a qualified disclaimer. Many plans that leave everything to a surviving spouse include disclaimer language that gives the surviving spouse the option to decide whether to disclaim assets and use the decedent spouse’s unused Applicable Exclusion Amount thereby saving estate taxes upon the surviving spouse’s later death.

Creating an Estate Plan without an attorney saves neither time nor expense, in fact, it’s likely to cost the family more in the long term.

Creating an Estate Plan that includes a Revocable Trust, Pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides numerous benefits during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, there are things that the grantor or testator does or fails to do that undermine an Estate Plan.

Creating an Estate Plan requires an individual to disclose sensitive information to create the plan. Many of us agonize over a discussion focusing on mortality, yet that’s exactly what a discussion about Estate Planning does. A comprehensive Estate Plan though implements a plan for that eventuality. People creating an Estate Plan often make the mistake of failing to inform their beneficiaries and fiduciaries of the plan. While the conversation may be awkward, having it not only lets your loved ones know of your plan and their role therein but also prevents hurt feelings and potential litigation if the plan deviates from a beneficiary’s expectation.

Clients may hesitate to discuss their plan because they worry that a beneficiary who knows that they will receive an inheritance will lose motivation to work hard. Others may worry that disclosing the information will cause current conflict or believe that the details of their plan should remain private until after their death. Still, others may have a hard time assessing family dynamics or the limitations of their intended beneficiaries. An experienced Estate Planning practitioner assists a client in working through these concerns and encourages an open dialogue with the beneficiaries and fiduciaries to reduce conflict after death. As Trust and Estate litigators know, a beneficiary whose inheritance failed to meet their expectations makes a great client. Plenty of contentious battles begin because the grantor treated one beneficiary differently than another or one person decided something of which another disapproved.

Having a conversation with the beneficiaries during and at the end of the process provides several benefits. First, it allows the client to provide the beneficiary with their underlying reasoning or motivation for creating the plan. That helps the client understand and manage the beneficiary’s expectations and address the beneficiary’s questions or concerns. Second, the conversation might help the grantor or testator better understand the beneficiary’s needs. That conversation may serve as motivation for the beneficiary to undertake their own Estate Planning. Third, the conversation helps prepare the beneficiary for experiencing the testator’s end-of-life. Imagine a healthcare agent faced with the decision to terminate life support, now imagine they never had a conversation with the individual hooked up to the machines. Imagine trying to make that decision without all the information. A conversation about your wishes with those who will make the decision reassures them that they know what to do when the time comes.

Having a tough conservation with your beneficiaries about the contents of your plan goes a long way toward preventing litigation. Unfortunately, it can’t prevent all litigation. The plan itself also plays a role. If the plan fails to address incapacity, that could cause significant issues. A comprehensive Estate Plan that includes all the documents noted above addresses incapacity if the Revocable Trust has been funded and contains provisions regarding who serves as Trustee if the original Trustee (who is typically the Trustor) cannot because of incapacity and how distributions from the Trust should be made during the period of incapacity. If there are assets outside the Trust, then the Attorney-in-Fact acting under the Property Power of Attorney can make decisions about those assets. Relying upon the Property Power of Attorney could cause issues if the Power of Attorney is outdated or otherwise insufficient. In any scenario, the individual acting pursuant to the Health Care Power of Attorney will control decisions regarding health care for the incapacitated individual. If an Estate Plan lacks these documents or the documents don’t properly address and plan for incapacity, then the family or loved ones will have to go through the time, effort, and expense of initiating incapacity proceedings.

As this article has demonstrated, while there are reasons that folks want to keep the details of their Estate Plan secret, that can backfire in big ways. Further, failure to include provisions in an Estate Plan can result in expensive litigation for the estate, ultimately reducing the benefit to the beneficiaries. I encourage clients to have tough conversations, includes provisions that address a range of circumstances that the client might experience in their life, and ultimately creates a plan that honors their legacy and protects their beneficiaries. Any plan that fails to address these matters ultimately fails the creator of the plan and their loved ones, at a time when they are least equipped to deal with it.

Creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides benefits both during life and at death. During life, the plan provides directions to your family regarding your medical care and finances if you become incapacitated or are otherwise unable to articulate your wishes. At death, the plan acts as a set of instructions to your fiduciaries regarding the distribution of your assets. Unfortunately, as many practitioners understand, signing the documents alone does not solve every problem or guarantee that everything will work as intended. Sometimes, even a properly executed Estate Plan contains mistakes.

Let’s start with what seems like an obvious mistake, leaving assets outright to a minor beneficiary. Any Estate Plan that gives assets outright to a minor beneficiary has disastrous consequences. Although most states have statutes that prevent a minor beneficiary from inheriting money or assets directly, some permit the minor to hold title to certain assets, such as real estate. Of course, even if the state allows minors to hold title to real estate, minors cannot contract and therefore cannot alone exercise the bundle of rights associated with property ownership. Other states have statutes that let a parent take the property on the minor’s behalf if the assets do not exceed a modest amount, but inheritances often exceed that amount. If the Estate Plan does not properly address minor beneficiaries, the fiduciary distributing the assets will need to ensure that he or she distributes the assets to the appropriate party, which could require petitioning the court for the appointment of a guardian or conservator to take title to the assets on the minor’s behalf. Guardianship proceedings involve significant time, trouble, and expense, and often mean continuing court oversight. If instead, the Estate Plan contains provisions for the establishment of a trust along with the appointment of a trustee or a custodian for the property going to the minor, that can save the fiduciary, the estate, and by extension, the beneficiaries, tremendous time, and effort while giving the minor immediate access to the assets.

Even if all the beneficiaries in a plan have attained the age of majority, other life factors may require the implementation of a plan that leaves assets in trust rather than outright to the beneficiaries. For example, beneficiaries known for spending money, battling addiction, facing legal woes, or dealing with creditors need the benefit of a trust holding their inheritance, rather than outright distribution. Implementation of a trust structure for beneficiaries with certain problems protects the inheritance and by extension, the beneficiaries from those problems. Savvy practitioners will encourage long-term thinking and planning for these issues while achieving the client’s goals and protecting their legacy.

Finally, if a beneficiary receives government benefits, then that, too, deserves special consideration. Failing to plan for a special needs beneficiary may cause a disaster in an Estate Plan, usually including loss of benefits for a beneficiary receiving public assistance. If a client wants to leave money or property to a special needs beneficiary, then it’s important that the assets pass through a Special Needs Trust to the beneficiary to preserve that beneficiary’s benefits. The trust needs to meet certain requirements to qualify as a Special Needs Trust and if it does, then the beneficiary will maintain his or her benefits. In addition to provisions for any beneficiaries currently receiving benefits, it’s important that the plan include provisions that authorize the creation of a Special Needs Trust for any beneficiary receiving government benefits at the time of distribution, not just upon the creation of the plan. Estate Plans need to have flexible provisions that allow evolution of the plan to meet changing needs and circumstances.

As this article has demonstrated, certain categories of beneficiaries require special provisions to protect them in an Estate Plan. Although folks undertaking Estate Planning think about which assets should go to whom, a qualified Trusts and Estates attorney understands that the intended beneficiaries impact the plan tremendously. I always include the proper provisions in the plan to address the age and situation of the beneficiaries and to account for the inevitable changes that will occur in the beneficiary’s circumstances over time. Any plan that fails to address these matters ultimately fails the creator of the plan and their loved ones, at a time when they are least equipped to deal with it.

As most individuals realize, creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides benefits both during life and at death. During life, the plan gives directions regarding your finances and medical care if you become incapacitated or are otherwise unable to articulate your preferences. At death, the plan provides instructions regarding who should distribute your assets, in what manner, and to whom. If only drafting and signing the documents were enough; however, as I can attest, there are numerous issues that cause the best-laid plans to go awry.

As a threshold matter, the worst mistake is failing to plan. Many people procrastinate when it comes to their Estate Planning for various reasons, such as lack of money or time, an unwillingness to face their own mortality, or indecision regarding their affairs. The excuses never end. Failing to prioritize your Estate Plan or failing to ensure its completion leaves your affairs and your family in limbo both during life and after your death. Without a proper Estate Plan, the state of your domicile controls distribution of your assets upon your death. When you die without an Estate Plan, that’s called dying intestate and the laws of intestacy in your state of domicile control what happens to your assets upon your death. Intestacy laws usually give at least half of your assets to your surviving spouse and distribute the remainder among your children, all outright. Outright distribution could have disastrous consequences for any special needs beneficiary by making them ineligible for the benefits that they were receiving. Outright distribution causes issues for a minor child by requiring a guardianship for such child to receive the assets. Finally, the distribution pattern may or may not match your intended plan of distribution. Creating a comprehensive estate plan that consists of the documents noted above avoids this result and solves the threshold issue of failure to plan.

Even with the documents noted above, an Estate Plan may not work as intended. For example, consider the couple that creates an Estate Plan when their children are young but then fails to update it as their children reach the age of majority, marry, and have children of their own. Each of those milestones represents a time that the couple should revisit their plan and update it accordingly. Even in the absence of major life events, it makes sense to review and update an Estate Plan every few years to ensure that it continues to accomplish your goals, especially as they change, and that it reflects any changes in the law.

Some individuals try to avoid creating an Estate Plan by using titling mechanisms to transfer their assets at death. Practitioners often cite avoiding probate as one of the reasons for creating a Revocable Trust to govern the distribution of your assets at death. As I know, probate avoidance comes in other forms. For example, taking title to an asset as joint tenants with rights of survivorship avoids probate as long as the other joint tenant(s) survive. However, using that form of joint ownership raises certain issues that using a Revocable Trust does not. Because joint tenants each have rights to the entire asset, a joint tenant could deplete a joint account without the permission or knowledge of the other joint tenants. In addition, joint tenants could share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Transferring assets to a Revocable Trust, however, avoids those problems. Owning assets in a Revocable Trust allows the owner to maintain the use of the assets during life and prevents the creditors of another individual from getting to those assets while the trustor is alive. The Revocable Trust also allows the trustor to include safeguards for the beneficiary that will continue after the death of that trustor.

Another tempting way for clients to avoid probate without creating a Revocable Trust involves holding title to real estate with a child or other beneficiary. This causes a myriad of issues. In addition to creating vulnerability to the creditors of both owners like that of joint tenancy ownership, adding a beneficiary to the deed raises issues of gifting. If the beneficiary failed to contribute to the purchase price of the property, then adding the beneficiary to the deed constitutes a gift if the beneficiary’s interest exceeds the annual per donee exclusion amount, currently $16,000. Further, if the original owner wants to refinance, lenders will require the beneficiary’s approval and signature on those documents. Finally, if the original owner desires to sell the real estate, every other owner listed on the deed needs to approve the sale.

As this article demonstrates, while it’s tempting to use shortcuts such as titling assets as joint tenants with rights of survivorship, or adding a beneficiary on a deed, that generally causes more problems than it solves when it comes to Estate Planning. A true Estate Plan entails creating a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization, but that’s just the beginning. YOUY MUST FUND THE TRUST! An unfunded Trust means nothing!! A comprehensive Estate Plan involves regular meetings to ensure the plan remains current both with the grantor’s goals and the ever-evolving estate tax laws. 

These days, in a rough economy, we hear a lot about adult children in their late 20s or early 30s moving back in with their parents because of unemployment or underemployment. However, what happens when older parents opt to move back in with their financially stable children?

A weakened economy altered the family dynamic in the early part of the century. At that time, we were used to a mom, dad, 2.5 children, a dog and a cat. But today, families take all shapes, and many times, that means moving Mom or Dad in with you. There could be benefits such as round-the-clock childcare, added income from chipping in for rent or household expenses, and helping prevent loneliness. However, for those thinking about moving back in with their adult children, there’s plenty to consider.

Before moving in, it is important to discuss the big things and commit to them in writing. If it seems silly or troublesome to ask a family member to sign a binding agreement, then type up your understanding of the arrangement and send it via email to time stamp it with your signature. This will offer evidence of the agreement, should any conflicts ever arise. Conflict often arises when other children wonder about the arrangement and the impact it may have on their inheritance.

When planning your arrangement, be sure to carefully consider homecare needs such as chores and repairs, social arrangements, and transportation. Otherwise, parents may learn quickly that they cannot adapt to their child’s busy schedule.

Additionally, if the parent will be taking care of a grandchild, and will be receiving payments for this task, it is important for the families to follow any applicable labor and tax laws.

If at all feasible, families may wish to try to build a separate living space for their live-in parent. This ensures that there are no conflicts with television programming, microwaving, showering and other minor items that may cause major stress over time. If building an add-on is impractical, then a parent should at least have some private space, as the parent likely had his or her own private space for years and may feel stifled without privacy.

While there may be some challenges associated with bringing a parent into their adult child’s home, it may be well worth it in the end. Adult children offer a great safety net for aging parents, and such an arrangement allows the adult children to return the favor of years of childcare, support, and unconditional love.

Shortly after signing the Inflation Reduction Act into law, President Biden announced his plan to use executive action to cancel up to $10,000 of student loan debt for borrowers under certain income thresholds and an additional $10,000 for borrowers who received Pell Grants. Some support this action, while others condemn it and threaten lawsuits. While nothing is certain until the ink is dry, let’s assume that forgiveness occurs and an estimated 43 million borrowers receive this relief. For the curious, that’s roughly 13% percent of the population of the United States as a whole. No matter how you slice it, that’s a staggering number of individuals affected. Many might wonder how this reduction will affect their taxes.

Internal Revenue Code (“Code”) Section 61(a)(12) specifically includes income from the discharge of indebtedness (cancellation of debt or “COD”) as gross income. Sounds simple enough, but those familiar with the Code know that for every rule, at least one exception exists. In fact, the Code contains several provisions that exclude COD from gross income. Code Section 108(a)(1) indicates that income does not include discharge of indebtedness income if the discharge occurs: (1) in a title 11 bankruptcy reorganization; (2) when the taxpayer is insolvent; (3) the discharged debt is farm indebtedness; (4) for a taxpayer other than a C Corporation, if the discharged indebtedness is qualified real property business debt; or (5) if the indebtedness discharged is qualified personal residence indebtedness discharged before January 1, 2026, or subject to an arrangement entered into and evidenced in writing before January 1, 2026. Excluding COD from gross income comes at a price and doing so usually reduces or eliminates other tax attributes such as basis in property, or loss of credit carryovers. See Code Section 108. Code Section 1017 includes details regarding reductions in basis. The foregoing Code provisions indicate that those taxpayers who receive a partial (or complete) loan reduction will have COD income in the amount forgiven and may lose other valuable tax attributes which arguably defeats the purpose of the forgiveness.

In certain cases, debtors with low income have additional repayment options designed to accommodate lower income. One such program, the income-driven repayment (IDR) plan works like it sounds. The borrower in an IDR plan makes monthly payments based upon their income. Usually, the amount of interest accrued each month on the loans exceeds the borrower’s income resulting in COD for the borrower which undercuts the purpose of lowered payments for lower income. Fortunately for those borrowers, the American Rescue Plan Act (ARPA) of 2021 exempted student loan forgiveness under IDR plans from inclusion in gross income through 2025. According to whitehouse.gov, ARPA eliminates the need for borrowers to include forgiveness of student loan debt under Biden’s plan in their gross income as well, even if they are not paying under an IDR plan.

As of the writing of this article, student loan borrowers benefitting from President Biden’s loan forgiveness should not have to include the income from such discharge in their gross income. However, that could change so it’s important to keep updated on this plan as it develops. It’s possible that some clients, or more likely their children or grandchildren, may benefit on some level from this program. It seems that the Department of Education plans to make additional changes in the future, so this story will continue to develop.

Paul Newman, famous actor turned entrepreneur, died in 2008. Prior to his death, Newman created Newman’s Own, a company that began by making and selling salad dressing and expanded into other food products. Newman wanted to give away all profits generated from Newman’s Own to charitable causes by creating Newman’s Own Foundation (the “Foundation”), the parent company of Newman’s Own. Several years before his death, Newman’s attorney drafted a letter of intent memorializing Newman’s intention to give his children the major voice in distributing funds for charity which Newman later reiterated at least twice in the years just prior to his passing. In a surprising move, however, a mere two months before his death, Newman updated his estate plan and named two associates, rather than his children, to control the Foundation. In response to multiple purported misdeeds by the associates, as members and directors of the Foundation, his daughters, Susan Kendall Newman, and Nell Newman, just filed a lawsuit seeking $1.6 million in damages in a Connecticut state court.

Charitable causes were important to Newman during his life. He pledged $1 million to open a recovery center in his predeceased son’s name after his son died from a drug and alcohol overdose in 1978. Interestingly, in 2011, the Foundation stopped funding to the center, and it closed shortly thereafter. In 1982 Newman famously said “let’s give it all away” with respect to the profits generated by Newman’s Own. The company’s website indicates that it gives 100% of the profits away each year and has donated more than $570 million worldwide since 1982. Charitable giving was so important to Newman that during his life, he charged his daughters with making charitable donations to organizations that supported education, health, the environment, arts and culture, international affairs, emergency relief, animal welfare, and scientific and human services. Newman planned for those distributions to continue after his death. While it’s clear that contributions have continued, it’s unclear whether they have occurred as Newman envisioned.

Susan and Nell’s lawsuit declares that by eliminating awards to organizations focusing on arts, climate change, and the environment in favor of other sectors, the Foundation has abandoned its founder’s recommendations. The lawsuit further alleges that the Foundation improperly reduced the mandated contributions to charitable entities designated by the daughters. Newman’s Estate Planning documents granted the Foundation publicity and intellectual property rights if it continued a $400,000 annual disbursement to each of his five daughters. Reportedly, each daughter was to take a “reasonable salary” from those funds and distribute the remainder to charities they chose. After several years of these payments, the Foundation decided unilaterally to cut that payment in half. The lawsuit maintains that the reduction in allocations fails to comport with Newman’s stated intent. The complaint asserts improper behavior by one of the directors, including enjoying prohibited perks. Finally, the daughters claim that Newman set up his estate while incapacitated and subject to undue influence. In support of these allegations, they contend that Newman intended to give them control of the Foundation by making them successor members or giving them seats on the board of directors and cite the letter of intent and its verbal confirmations. As indicated above, though, Newman’s plan failed to do that. Instead, Newman appointed long-time advisors as members and directors of the Foundation and vested them with ultimate decision-making authority.

Newman’s daughters face an uphill battle. First, undue influence and lack of capacity claims rarely succeed. Plaintiffs in these cases often have trouble meeting the high burden of proof. Second, while Newman’s comprehensive pour-over Will contained provisions about what was to happen to his tangible assets, corporate interests, and intellectual property rights, it failed to reveal any details about his intangible assets or the provisions of his trust. It’s clear, however, that he engaged an attorney’s services to complete the plan. Third, while the daughters claim that their father intended them to have more control over distributions to charities and he signed a letter of intent to that effect during his life, his final plan failed to name either daughter as a member or director of the Foundation, thereby depriving the daughters of the power they seek. Had Newman intended for the daughters to control distributions, he could have and should have made it clear in the documents he signed just prior to his death.

The daughters intend to donate the funds sought to their foundations for charitable giving. It’ll be interesting to see whether the court imposes the constructive trust that Newman’s daughters seek. Incapacity and undue influence are among the hardest cases to prove. Unfortunately, disputes often arise over family foundations and Estate Plans in general. With my services, I can help avoid those disputes for clients by guiding them to create a clear plan and communicating that plan to their family. In any context in which the clients want to involve future generations, it’s better to set that up earlier rather than later. That gives the clients time to work together toward the common stated goals. Finally, the biggest lesson for all is that it’s better to let loved ones know of your Estate Plan prior to death. While it’s certainly not required, it helps everyone understand your reasons and goes a long way in preventing hurt feelings and unnecessary litigation after death.

Talk of interest rates seems inescapable as inflation hovers at a forty-year high and we feel that impact every time we open our wallets. Many sophisticated Financial and Estate Planning techniques derive their value from the prevailing interest rate. Certain techniques work better in low-interest rate environments, while others produce better results in high-interest rate environments. This second part will detail the use of techniques that work better in a high-interest rate environment, including the Charitable Remainder Trust (“CRT”) and a Qualified Personal Residence Trust (“QPRT”).

As the opening paragraph indicated, the techniques that I recommend should be influenced by the prevailing interest rate. As a reminder, to grasp the impact of interest rates on Estate Planning, you need to understand interest rates in general. Each month, the Internal Revenue Service (“IRS”) publishes the Applicable Federal Rate (“AFR”) under Internal Revenue Code (“Code”) §1274 for short-term loans (0-3 years), mid-term loans (3-9 years), and long-term loans (more than 9 years) along with the §7520 rate which is 120% of the mid-term AFR rounded to the nearest 2/10ths. Practitioners use the §7520 rate to calculate annual payments for certain estate planning techniques. Use of the appropriate AFR on a loan between related parties prevents imputed income or gift taxes. Note that if the IRS considers the loan a gift, the lender/donor still may apply their annual per donee exclusion (currently $16,000) to the gift as well as using any portion of their applicable exclusion amount (currently $12.06 million) to cover the gift. Use of the appropriate AFR prevents use of the annual per donee exclusion or applicable exclusion amount.

As noted above, certain estate planning techniques, such as CRTs and QPRTs, work better with higher interest rates. A CRT has two beneficiaries, the non-charitable beneficiary who takes the lead or income interest, and the charitable beneficiary which takes the remainder interest. A CRT may be set up as either an annuity trust or a unitrust. An annuity trust pays out a fixed dollar amount each year to the lead beneficiary. A unitrust pays out a fixed percentage of the trust each year to the lead beneficiary. With a unitrust, if the trust corpus grows, the amount going to the lead beneficiary grows right along with it. With an annuity trust, the lead beneficiary’s payment doesn’t change if the trust corpus increases or decreases.

Charitable trusts provide numerous benefits. For example, although the Code considers the CRT a tax-exempt entity, the CRT may distribute the annuity or unitrust interest to a non-charitable beneficiary without jeopardizing that status. In addition, the grantor receives an income tax deduction, subject to limitations under Code §170, upon funding the CRT for the present value of the charity’s right to receive the remainder. A CRT removes the assets from the estate for estate tax purposes. Finally, the CRT provides the most benefit for highly appreciated assets. By transferring the appreciated assets to the CRT well in advance of the sale, the later sale by the CRT produces an income stream (in the form of the annuity or unitrust payment) for the grantor or other designated individual. Only as the grantor or other designated individual receives the annuity or unitrust payment will he or she recognize the capital gain which occurred when the CRT sold the assets. The tax attributes of the income earned over the life of the CRT flavor the distributions to the lead beneficiary.

To achieve the desired tax consequences, a practitioner needs to follow specific rules when creating a CRT. Failure to follow them precisely will cause the CRT to fail. For example, split-interest trusts that distribute all income to the lead beneficiary do NOT qualify for a charitable deduction, even if the entire remainder goes to charity. The greater the stream of payments going to the non-charitable lead beneficiary, the smaller the actuarial value of the interest going to the charitable remainder beneficiary. Thus, a higher rate of return will provide more income to pay the retained annuity or unitrust amount, thereby increasing the value of the assets remaining for the charitable remainder interest. The remainder value determines the charitable income, estate, and gift tax deduction available to the grantor.

The other estate planning technique that works better in a high-interest rate environment is the QPRT. The grantor contributes their residence to the QPRT. The terms of the QPRT allow the grantor to use the residence as their own during the initial term of the trust, while the remainder goes either outright or in further trust for named beneficiaries. Upon the expiration of the QPRT, the grantor must pay fair market value rent to the new owners of the home (i.e., the trust or the beneficiaries) for continued use of the home. If the grantor dies during the term of the QPRT, then the date-of-death value of the QPRT will be included in the grantor’s estate and subject to estate taxes. However, the grantor’s estate will receive credit for any tax consequences of the initial gift to the QPRT, putting the grantor in no worse a position than if he or she had never created the QPRT.

QPRTs provide several benefits to the grantor of the trust. Creating a QPRT results in a gift to the remainder beneficiaries of the discounted present value of the remainder interest of the QPRT using the rate under §7520. Any appreciation in the value of the home passes without additional estate or gift tax consequences. Use of the QPRT removes the home from the grantor’s estate as long as the client survives the term of the QPRT. In addition, QPRTs provide an asset protection component because the grantor only has a right to use the residence for a term of years, instead of the full bundle of property rights in the home. Not only does this reduce the value of the property rights for attachment by creditors, but it increases the inconvenience to the creditor because the grantor (or the creditor standing in their shoes) cannot force a sale of the home. Finally, using multiple QPRTs allows for discounting when determining the value of the gift.

As noted above, a QPRT works well if the home appreciates faster than the §7520 rate. A grantor can increase the estate tax savings by splitting the house into two or more fractions and establishing separate QPRTs for each piece. Splitting the house allows the grantor to discount the value of the house. If the grantor has a spouse, then it’s common to have each spouse put one-half of the home into separate QPRTs. This allows the clients to minimize the risk against one of them dying during the term of the QPRT. If the couple desires additional discounting or protection, then each could set up multiple QPRTs with differing terms thereby decreasing the likelihood of death during the term of the QPRTs.

The above techniques work better in high-interest rate environments. Remember that certain strategies like Tenancy in Common Fractionalization and Family Limited Partnerships or Family Limited Liability Companies do not depend upon interest rates at all. Finally, although the techniques discussed in Part 1 of this article work better in low-interest rate environments, it may make sense to utilize them in certain situations even when rates are higher.

After more than a year of debate over the provisions of the “Build Back Better Act,” President Biden signed the newly titled “Inflation Reduction Act” (the “Act”) into law on Tuesday, August 16, 2022. While the Act represents a scaled back version of the Build Back Better Act, it embodies the goal of reshaping the U.S. economy after the pandemic. Fortunately for Estate Planning purposes, the Act did not make any changes to the estate and gift tax. Instead, the Act focused on climate, healthcare, and income tax issues by lowering prescription drug costs, health care costs, and energy costs. For the first time, its legislation aimed directly at the climate crisis. According to whitehouse.gov “no one making under $400,000 per year will pay a penny more in taxes.” The package is expected to raise over $700 billion in revenue over the next decade with the vast majority of that coming from reductions in drug prices for Medicare recipients and tax hikes on corporations. Allegedly, significant revenue should also come from expanded Internal Revenue Service (“IRS”) enforcement funding over the next ten years. The Act allocates approximately $80 billion to the IRS which has suffered from underfunding in recent years.

Although the Act makes no changes to estate and gift taxes, it makes two significant changes to individual income taxes. First, it lengthens the limitation on pass-through business losses enacted by the 2017 Tax Cuts and Jobs Acts for two additional years, through 2028. Second, the Act extends the expanded health insurance Premium Tax Credits from the American Rescue Plan through 2025 for both high-income and low-income households by allowing higher-income households to qualify for the credit and boosting the credit for lower-income households. In addition to individual income taxes, the Act imposes a fifteen percent (15%) minimum tax on corporate book income for those corporations with profits over $1 billion for tax years beginning after December 31, 2022. Estimates indicate that this alone will bring in over $300 billion in revenue. The Act also creates a one percent (1%) excise tax on the value of stock repurchases during the taxable year with exceptions for stock contributed to retirement accounts, pensions, and employee stock ownership plans.

In addition to the above tax changes, the Act caps the amount that individuals on Medicare pay for prescription drugs bought at a pharmacy at $2,000 per year effective in 2025. It also limits the amount that those on Medicare will pay for insulin to $35 per month. The Act provides access to numerous free vaccines for Medicare beneficiaries. The Act lowers the cost of prescription drugs by allowing Medicare to negotiate the price of high-cost drugs and requiring drug manufacturers to provide a rebate when they raise prices faster than inflation. The Act extends subsidies in the Affordable Care Act for those purchasing insurance through the Marketplace.

Finally, the Act takes the most aggressive action on climate and clean energy in American history by including tax credits for the installation of efficient heating and cooling equipment. The Act also provides credits for home construction projects involving windows, doors, insulation, and other weatherization measures that prevent energy from escaping. The Act provides tax credits for the purchase of electric vehicles and gives direct rebates to individuals buying energy-efficient appliances.

It remains unclear whether additional bills will make changes to the tax code that may require action. Representatives Cohen and Beyer recently introduced proposed legislation titled the “Billionaire Minimum Tax Act” in the House of Representatives. Stay tuned to see if the Billionaire Minimum Tax Act or any other legislation becomes law.

It’s hard to look anywhere these days without seeing something about interest rates or inflation. All of us know that inflation hovers at a forty-year high and we feel that impact every time we go to the grocery store or gas pump. While these represent direct ways that interest rates impact us, interest rates have an indirect impact on Estate Planning as well. Many advanced Estate Planning techniques derive their value from the prevailing interest rate. Certain techniques work best in a low-interest rate environment, while others produce better results in a high-interest rate environment.

As the opening paragraph indicated, the techniques that we recommend need to change based on the prevailing interest rate. To fully understand the impact that interest rates have on Estate Planning, it’s important to understand a bit about interest rates. Each month, the Internal Revenue Service publishes the Applicable Federal Rate (“AFR”) under Internal Revenue Code §1274 for short-term loans (0-3 years), mid-term loans (3-9 years), and long-term loans (more than 9 years) along with the §7520 rate which is 120% of the mid-term AFR rounded to the nearest 2/10ths. Practitioners use the §7520 rate to calculate annual payments for certain estate planning techniques. Use of the appropriate AFR on a loan between related parties prevents imputed income or gift taxes. Note that if the IRS considers the loan a gift, the lender/donor still may apply their annual per donee exclusion (currently $16,000) to the gift as well as using any portion of their applicable exclusion amount (currently $12.06 million) to cover the gift. Use of the appropriate AFR prevents use of the annual per donee exclusion or applicable exclusion amount.

Planning during periods of low-interest rates often involves a lending strategy used to leverage the interest rates and transfer wealth with little or no gift tax. Parents or grandparents may make loans to children, grandchildren, or any other related party at the appropriate AFR for the desired loan term. This allows the younger generation to invest the loan proceeds and if the investment produces returns that exceed the AFR, the borrower keeps that excess value free of gift tax consequences. The borrower may use the funds for anything, such as purchasing a home or starting a business. If the lender feels generous, or simply wanted to gift the funds, but lacked sufficient applicable exclusion amount, the lender could forgive up to the annual per donee exclusion amount each year, reducing or eliminating entirely, the amount returned to the lender. Of course, if the lender had sufficient applicable exclusion amount, then they could forgive the loan at any time. In the right situation, the intra-family loan benefits both the lender and the borrower.

Similar to the intra-family loan, a sale to an Intentionally Defective Grantor Trust (“IDGT”) presents another great technique for use in a low-interest rate environment. Here, the grantor sells a highly appreciating asset to the IDGT. The grantor creates the IDGT and funds it with “seed money,” usually at least 10% of the value of the asset which the grantor intends to sell to the IDGT. The IDGT purchases the asset with a note. The IDGT then uses income received from the appreciating asset to make the interest payments on the note. The IDGT qualifies as a “grantor trust,” which means the lender/grantor reports the income and capital gains incurred by the trust on his or her individual tax return. This allows the assets to grow inside the IDGT on a tax-free basis. In addition, any appreciation of the assets above the AFR accrues to the beneficiaries free of gift tax.

A Grantor Retained Annuity Trust (“GRAT”), much like the sale to IDGT, allows for the transfer of significant assets to beneficiaries with little or no gift or estate tax consequences. The grantor establishes the trust and funds it with assets expected to appreciate. The grantor receives annuity payments for the GRAT term. The total value of all annuity payments will equal (or exceed) the initial value of the asset plus interest based on the §7520 rate. A lower §7520 rate means a lower bar for success. If the GRAT was structured as a zeroed-out GRAT, then any assets or appreciation remaining in the trust at the end of the GRAT term passes to the beneficiaries free of gift tax. Even if the assets in the GRAT fail to outperform the §7520 rate, the grantor suffers no adverse tax consequences.

The final technique that works well in a low-interest rate environment, the Charitable Lead Annuity Trust (“CLAT”) resembles the GRAT, except the Trust makes the annuity payments to a charity rather than the grantor. This entitles the grantor to a charitable deduction for the projected actuarial percentage passing to charity. The grantor makes a gift of the assets projected to pass to the non-charitable beneficiaries at the end of the CLAT term. Like the GRAT, I may structure both the CLAT to “zero-out” meaning that the grantor will incur no gift tax upon creation of the entity. Like a GRAT, a CLAT works best in a low-interest rate environment because any investment performance above the §7520 rate passes tax free to the beneficiary or beneficiaries at the end of the trust’s term. The lower the rate, the larger the potential tax-free transfer.

Many of the above techniques worked great in recent years while the interest rates were historically low. Some strategies like Tenancy in Common Fractionalization and Family Limited Partnerships or Family Limited Liability Companies do not depend upon rates at all. This makes these techniques important regardless of interest rates.