Estates and Trusts

Estates and Trusts

Building Adaptive Trusts: Ensuring Tax Efficiency in an Evolving Tax Landscape

The lifetime estate tax exemption amount is as high as ever. The estate tax exemption amount rose from $1,000,000 in 2002 to $5,000,000 in 2011. Then, Congress doubled the amount of the estate tax exemption in 2018. As of this writing, the current lifetime exemption amount is nearly $14,000,000 per individual. With such high exemption amounts, there are few estates subject to federal estate tax. The focus of estate planning has, therefore, shifted from removing assets from a decedent’s estate to minimize or eliminate estate taxes, to ensuring that assets remain in the estate for estate tax purposes so that the assets receive a step-up in capital tax basis at the time of death. The “step-up” in the capital tax basis of assets means that for capital gains tax purposes, assets in a decedent’s estate will reset to the fair market value of these assets at the time of their death. By way of illustration, if a stock were bought for $100 and appreciated to $1,000 at the time of the account holder’s death, the beneficiary would only pay capital taxes on any further appreciation above $1,000. If the beneficiary sold the stock for exactly $1,000, no taxes would be owed. On the other hand, assets gifted during lifetime or held in an irrevocable trust do not receive a step up in capital tax basis. With the ever-shifting tax landscape, the estate planner must carefully balance the likelihood that their client will have a taxable estate at the time of their death with the desire to include appreciated assets (especially assets with a low capital tax basis) in the Decedent’s estate so that they will enjoy the step-up. But what happens if that calculation seems imprudent or unwise based on facts and circumstances in the future? For example, suppose Peter wishes to provide all his assets to his wife, Mary. Peter’s assets, when combined with Mary’s assets, will be close to or exceed the lifetime estate tax exclusion amount. When Peter passes away, assets received by Mary will not generate any estate tax liability because spouses enjoy an unlimited marital tax deduction. However, it is possible that Mary may now have a taxable estate upon her death, especially if her assets continue to appreciate over her lifetime. Thus, the beneficiaries of Mary’s estate will pay estate taxes on the assets they receive in excess of the lifetime exemption amount in effect at the time of Mary’s death. There are several ways to address these concerns and minimize or eliminate any estate taxes that may be owed in the future. Peter could remove some of his assets from his estate by establishing an irrevocable trust. This trust could be established either during his lifetime or via the use of testamentary trusts (i.e., a trust established at the time of Peter’s death). However, Peter may want to avoid the costs and inconvenience of trust administration if it is possible that he and Mary will never have estate tax issues. Another option is the “wait and see” approach using a “disclaimer trust” that may or may not be funded after Peter’s death.  Peter could direct in his will or revocable trust that his assets will pass outright to Mary. Mary may then make a qualified disclaimer, effectively refusing to accept some or all of Peter’s assets. Any disclaimed assets will bypass Mary’s estate and go into the disclaimer trust, which can be used to support Mary for the remainder of her lifetime. The assets that pass to the disclaimer trust, and any subsequent appreciation in these assets, will remain outside of Mary’s estate and will pass estate tax-free to her future beneficiaries. Suppose after funding the disclaimer trust that Mary’s assets are significantly spent down and exhausted during her lifetime. Perhaps a future Congress will increase the estate tax exclusion amount further or completely eliminate the estate tax. In any of these scenarios, the disclaimer trust will serve no tax purpose for Mary. Worse, the assets in the disclaimer trust will not receive the “step-up” in the capital tax basis at the time of Mary’s death. Is there a way to unwind the disclaimer trust and ensure that these assets are includable in Mary’s estate at the time of her death? With careful planning, the answer is “yes”. One powerful technique to resolve this issue is by appointing a trust protector for the disclaimer trust. A “trust protector” is a disinterested party with specific enumerated powers. The trust protector could be given the power to confer upon Mary a general power of appointment to choose any beneficiary she wishes to receive her estate assets, even her own estate. Pursuant to IRC § 2041, assets subject to a general power of appointment are includable in the power holder’s estate for estate tax purposes. Now, whether Mary exercises her general power of appointment or not, the assets will be included in her taxable estate and receive a step-up in capital tax basis. While this planning technique can provide significant tax benefits, it is not always the right choice in every situation. For instance, if Mary were to face creditor issues, granting her a general power of appointment would subject the entire disclaimer trust’s assets to creditor claims. However, when implemented thoughtfully, incorporating a trust protector with the ability to grant a general power of appointment adds valuable flexibility, allowing the estate plan to adapt to the ever-evolving tax laws and optimize tax outcomes. 

April 3, 2025

Estates and Trusts

Trustee's Standing in Estate Distribution: A Legal Analysis of Estate of Barry Tarlow

In a groundbreaking decision that could reshape the landscape of California estate law, the Court of Appeal in the Second District Division Four has ruled in favor of trustee David Henry Simon, affirming his right to seek a judicial determination of trust assets under Probate Code section 11700. The court's ruling clarifies the legal framework under which trustees can seek judicial determination of their rights to trust assets, emphasizing the application of Probate Code section 11700. This pivotal ruling is a must-read for estate law practitioners, trustees, and beneficiaries as it navigates the complexities of estate administration with unprecedented clarity and precision. Factual Background Barry Tarlow, a prominent criminal law attorney, executed a will in 2005, with minor modifications in 2006, which held terms for a testamentary trust. The will divided his estate between his siblings, Barbara and Gerald. Gerald was to receive his share outright, while Barbara's share was to be placed in the "Barbara Tarlow Trust," with David Henry Simon named as trustee. Following Barry's death in April 2021, Barbara and Gerald became executors of the estate, and Simon retained his role as trustee. The Barbara Tarlow Trust was a spendthrift trust, which provided that upon Barbara’s passing, the residue would go entirely to Gerald, if living, or otherwise, to a donor-advised fund at Fidelity Charitable Gift Fund. The estate administration process revealed that Barbara's share, intended for the trust, was valued at over $20 million. Barbara disagreed with the use of the spendthrift trust and purchased from the contingent remaining beneficiary, donor-advised fund at Fidelity Charitable Gift Fund, the interest that might go to them to have a power of appointment. Further, to gain control over the trust assets, Barbara and Gerald filed an ex parte petition to replace Simon as trustee and modify the trust terms. After a denial of the ex parte petition, Barbara then disclaimed her entire interest in testamentary trust and Gerlad disclaimed his interest in the estate's personal property. As the joint executors, Barbara and Gerald filed a petition for final distribution, which would remove any distribution to the testamentary trust based on the disclaimers. This led to a series of legal disputes over the final distribution of the estate, including Simon filing a petition to determine beneficiaries of the estate under Probate Code section 11700. Legal Issues and Court's Analysis The central legal issue was whether Simon, as the named trustee, had standing to file a petition under Probate Code section 11700. This section allows any person claiming to be entitled to a share of the estate to seek a court determination of their rights. Simon argued that his role as trustee entitled him to such standing, while Barbara held that her disclaimer prevented such an interest to Simon as there was, therefore, no testamentary trust for him to administer. The court first analyzed the language of the code section as far as standing, providing that "any person claiming to be a beneficiary or otherwise entitled to distribution." In rendering their ruling, the court stated that this phrase, as included by the legislature, was broad and inclusive, allowing a wide range of individuals to file a petition for court determination. As such, it encompasses not only direct beneficiaries but also trustees and others who may have a claim to the estate assets. The Court of Appeals held that trustees are indeed "persons claiming to be entitled to distribution of a share of the estate" under Probate Code section 11700, reasoning that trustees are "persons entitled to distribution" because they are responsible for managing and distributing trust assets according to the terms of the will. This decision underscores the trustee's legal title to trust property, which vests as of the decedent's death, giving them a legitimate claim to the estate's distribution. The court's interpretation of section 11700 provides a clear precedent for future cases involving trustee standing in probate matters. Although Barbara argued that her disclaimer presumptive prevented Simon’s standing, the court highlighted that the presumption of the validity of disclaimers is not conclusive and can be challenged, which was contrary to the trial court’s assumption in these proceedings. This aspect of the ruling emphasized the need for a thorough judicial review of disclaimers and other estate-related documents. Ultimately, the Court of Appeals remanded the case for further proceedings to determine the validity of Simon's claims and Barbara's disclaimer, indicating that factual disputes should be resolved through evidentiary hearings. Conclusion and Implications The Estate of Barry Tarlow marks a pivotal moment in estate law, reinforcing the vital role of trustees and the necessity of procedural rigor in probate proceedings. By affirming the trustee's standing and emphasizing the importance of judicial review, this ruling ensures that the administration of estates is conducted with fairness and transparency. Legal practitioners, trustees, and beneficiaries can look to this case as a guiding beacon, illuminating the path to equitable and just estate distribution. This ruling has significant implications for drafting attorneys, trustees and beneficiaries alike. For drafting attorneys, the decision underscores the need for precise and detailed trust provisions to account for potential court involvement, which could complicate the estate planning process and necessitate more extensive legal advice. Trustees gain enhanced authority to manage and distribute trust assets, but they must be vigilant against potential misuse of their standing and be prepared for increased litigation risks. Beneficiaries benefit from greater protection, as trustees can now more confidently seek court intervention to safeguard their interests. However, this ruling may also lead to more frequent challenges to trustee actions, potentially straining relationships and increasing disputes. Overall, while the ruling strengthens the legal framework for trustees, it introduces complexities that all parties must navigate carefully. As the legal community absorbs the implications of this landmark decision, it is clear that the principles established here will resonate through future probate and trust law cases, shaping the landscape of estate administration for years to come.

April 2, 2025

Estates and Trusts

Cultural Perspectives on End-of-Life Planning: Traditions, Taboos, and Practical Considerations

The United States is an ever-changing cultural landscape. As a nation of immigrants, we are a complex patchwork of individuals from diverse backgrounds, each bringing distinct ethnic, cultural and religious beliefs. Estate planning attorneys must recognize and respect these differences, as they are deeply embedded in our social structure. To be culturally competent attorneys, we must view each client as a unique individual whose background may influence decisions regarding estate distribution, end-of-life planning and burial arrangements. Cultural Influences on End-of-Life Planning End-of-life planning involves some of the most intimate decisions a person may make, often shaped by religious and cultural beliefs. Attorneys cannot assume a client’s preferences regarding burial, cremation or body donation. Additionally, alternative burial practices such as green burials or organic reduction are gaining popularity, though they may be restricted in certain states or prohibited by specific cultural or religious traditions. Despite the discomfort these discussions may bring, engaging in frank and honest conversations with clients is essential to ensure their final wishes are honored. Religious and Cultural Funeral Practices Islam Islamic law emphasizes minimizing harm. When making end-of-life medical decisions, Muslims are encouraged to pursue treatments that preserve life while avoiding those that may cause unnecessary suffering. As death approaches, a Muslim may lie on their right side, facing Mecca. Upon passing, the deceased’s eyes and mouth are closed, and family members recite a final prayer. Islamic funeral customs require that the body be washed, shrouded, and buried as soon as possible. Embalming is generally prohibited, and cremation is strictly forbidden. The deceased is placed on their right side in the grave, facing Mecca, often with a layer of rocks covering the gravesite to prevent direct contact with the soil. Judaism Judaism also emphasizes the sanctity of life and minimizing suffering. Aggressive medical intervention is encouraged only when it does not prolong suffering. After death, mourners traditionally tear their clothing as a sign of grief. The body is cleansed, groomed, and wrapped in a simple white shroud. A designated “shomer” (guardian) remains with the body until burial, which should occur within 24 hours. Traditional Jewish burials use plain wooden caskets with no metal fastenings. Embalming and cremation are discouraged, and mourners may take part in filling the grave with soil as a final act of respect. Buddhism Buddhist traditions focus on facilitating a peaceful transition to the next life. Burning incense during a person’s final moments may be customary. After death, the body is often left undisturbed for a period, typically up to a week, to allow the soul to transition peacefully. Buddhist funeral customs vary by region, but cremation is the preferred method of disposition, as it is believed to free the soul. In Tibetan Buddhist tradition, a high-altitude burial, where the body is offered to vultures, is customary, though this practice is not permitted in the United States. Catholicism Catholics receive three sacraments at the end of life: anointing of the sick, confession, and Holy Communion. These sacraments provide spiritual comfort, forgiveness, and preparation for the afterlife. The anointing of the sick involves a priest blessing the individual with sacred oil, confession allows for absolution, and Holy Communion serves as spiritual nourishment. A Catholic funeral typically includes a vigil, a Funeral Mass and a Rite of Committal. While cremation is allowed, traditional burial is preferred, and cremated remains must be buried rather than scattered or kept at home. Eastern Orthodox Christianity Eastern Orthodox Christians emphasize sacraments at the end of life. A priest administers the final confession and Holy Communion, and individuals are encouraged to avoid medications that may cloud their consciousness during these sacred moments. After death, the family washes and clothes the body in the presence of a priest. Embalming is optional. A wake is held before the funeral, and hymns, such as the Trisagion, are sung during the procession from the funeral home to the church and then to the cemetery. Cremation is not permitted, as the body is considered sacred even after the soul has departed. Chinese Funeral Customs Chinese funerals are deeply rooted in tradition, with customs varying based on geography and religious beliefs. However, certain elements remain consistent across different communities. Before the funeral, families often consult a feng shui master to determine an auspicious date and time for the funeral and burial. In some cases, the master may also select the grave’s location, which is traditionally on a hillside but never beneath a tree. The deceased is typically dressed in white, though individuals who lived to be 80 or older may be clothed in colorful garments to celebrate the long life. Family members customarily hold a three-day visitation period, during which they spend time with their loved ones before the funeral. When the casket is sealed, all family members turn their backs to avoid the belief that their souls could be trapped inside. Similarly, they avert their gaze when the casket is lowered into the grave. Incense is often burned throughout the funeral service and at the gravesite as a sign of respect.  Families may also burn spirit money, known as “joss paper,” to ensure their loved one’s comfort in the afterlife. While cremation is permitted, it is customary for family members to witness their loved one being placed in the cremation chamber. Hindu Funeral Customs Hindu funeral rites are deeply intertwined with the belief in reincarnation. Since the physical body is no longer needed after death, cremation is considered the most effective way to release the soul and facilitate its journey toward rebirth. Before cremation, the body undergoes a sacred cleansing ritual, during which it is washed with ghee, honey, milk, and yogurt. The head is anointed with oil, the hands are placed in a prayer position, and the big toes are tied together. The deceased is traditionally wrapped in a white sheet, adorned with a garland of flowers and rice balls. A lamp is placed near the head as part of the ritual. Hindu tradition emphasizes a swift cremation, usually within 24 hours of death. Until then, the body remains at home, allowing family members to pay their respects and participate in final rites. Unique Cultural Funeral Practices South Korea: Burial Beads In 2000, South Korea enacted a law requiring the removal of remains from burial sites after 60 years due to limited space. As an alternative, many South Koreans now transform their loved ones cremated remains into colorful beads, which are displayed in homes. This practice has also gained popularity among South Koreans who live in the United States. Ghana: Fantasy Coffins In Ghana, elaborate, custom-made coffins celebrate the deceased’s personality, profession or passions. These artistic coffins, crafted in shapes such as animals, airplanes, or everyday objects, serve as tributes and works of art, ensuring a vibrant and meaningful send-off for loved ones. Conclusion These are only a short list of the different cultural and religious traditions influencing end-of-life planning. Estate planning professionals must be sensitive to these diverse perspectives to ensure that the clients’ wishes are properly honored. By fostering open discussions and respecting cultural practices, attorneys can provide thoughtful, personalized guidance that aligns with their clients’ values, beliefs and traditions.

March 21, 2025

Estates and Trusts

How to Have "The Talk" About Estate Planning with Your Parents

Estate planning is one of the most important conversations you’ll ever have with your parents. Discussing wills, trusts, and end-of-life wishes can feel uncomfortable, but having a clear plan in place can save your family from confusion, conflict, and stress down the road. If you’ve been putting off the conversation, you’re not alone. Many adult children hesitate to bring up estate planning for fear of upsetting their parents or appearing greedy. But the truth is, approaching the topic with care and respect can actually strengthen family bonds and ensure that everyone’s wishes are honored. Moreover, learning about your parents’ plan may lead to additional productive conversations—if you are independently wealthy or have creditor concerns, you may not want your parents to leave you assets outright—you can encourage your parents to optimize their planning through the use of trusts or other alternatives. Here’s a step-by-step guide to having "the talk" about estate planning with your parents — without awkwardness or tension. Find the Right Time and Setting Timing and environment matter when discussing sensitive topics. Choose a time when everyone is relaxed and not rushed. A calm and private setting will help everyone feel more comfortable and open. Tip: If you’ve done your own estate plan, then an easy way to start the conversation naturally could be: “I’ve been working on my own estate plan and realized how important it is. Have you thought about yours?” Approach It with Care and Empathy This isn’t about money — it’s about protecting your parents’ wishes and avoiding family disputes later. Make it clear that your goal is to understand and respect their choices, not to control or influence them. Instead of saying, “We need to talk about your will,” try: “I want to make sure we’re prepared as a family if anything happens.” “It’s important to me that your wishes are honored — can we talk about how you’d like things handled?” By framing it as a conversation about their legacy and peace of mind, you’ll help them feel more at ease. Ask Open-Ended Questions Rather than diving straight into the details of their will or assets, ease into the conversation by asking thoughtful, open-ended questions like: “Have you thought about how you’d like your estate handled?” “What matters most to you when it comes to your legacy?” “If something were to happen, how would you want us to handle things?” Give them time to process and respond without pressure. If they hesitate or seem uncomfortable, reassure them that you’re there to listen, not to push. If they don’t feel comfortable discussing the details with you, offer to help them find an experienced estate planning attorney. Discuss the Essentials Once the conversation is flowing, gently introduce key estate planning elements. If they permit you to do so, include an estate planning attorney in the dialogue: Will: Do they have a will? Is it up-to-date and legally sound? A will ensures that their assets are distributed according to their wishes and can prevent costly legal battles. Trusts: Trusts can offer more control over how and when assets are distributed while helping avoid probate and potentially reducing estate taxes. Ask questions like: “Have you considered setting up a trust to protect certain assets?” “Would you want to make sure certain funds are distributed over time rather than all at once?” “Would a revocable or irrevocable trust make sense for you?” Many people don’t realize how flexible and powerful trusts can be for protecting assets and reducing tax burdens. Estate Taxes: Depending on your parents' estate size, estate taxes could significantly reduce the amount passed on to heirs. Questions to consider: “Have you spoken with an advisor about strategies to minimize estate taxes?” “Would you like to explore options like gifting or charitable donations to reduce tax liability?” “Should we look at how setting up a trust could reduce taxes?” Understanding how estate taxes work can help you and your parents make more informed decisions about structuring their estate. Power of Attorney: Have they appointed someone to make financial or healthcare decisions if they’re unable to? A durable power of attorney can give someone authority to manage their financial affairs, while a healthcare power of attorney ensures their medical wishes are respected. Healthcare Directives: Do they have a living will or healthcare proxy to outline their medical wishes? These documents help guide medical decisions if they’re unable to communicate. Beneficiaries: Are their assets (e.g., life insurance, retirement accounts) designated correctly? Beneficiary designations can override what’s written in a will, so they need to be up to date. Executor/Trustee: Have they named someone to carry out their wishes? This person will handle closing accounts, distributing assets, and working with the courts if needed. This isn’t about getting into the nitty-gritty details; it’s about ensuring the basics are covered, and that someone knows where to find important documents. Offer to Help (But Respect Their Decisions) Your parents might not have all the answers. Offer to help them get organized by suggesting they meet with an estate planning attorney. You could say: “Would you like me to help you find an attorney?” “If you want to put together a list of accounts and documents, I’m happy to help.” Of course, their estate plan is ultimately their decision. Your role is to support, not control. Keep the Conversation Going Estate planning isn’t a one-and-done conversation. Circumstances change — marriages, divorces, births, deaths, and financial shifts all impact an estate plan. Check-in periodically with your parents to see if they need to make updates or have questions. Keeping an open line of communication will help avoid misunderstandings later. Thank Them for Their Trust Talking about estate planning requires vulnerability — from both sides. Thank your parents for opening up and trusting you with such personal matters. Let them know how much it means to you that they’re taking steps to protect their legacy and make things easier for the family. Follow Up with Next Steps Once the conversation is underway, help your parents take action: Encourage them to meet with an estate planning attorney. Suggest setting up a trust if it makes sense for their situation. Help them gather financial records, account details, and important documents. Work with them to create a list of assets and liabilities. Following up shows that you’re invested in helping them protect their legacy — without pushing them to make uncomfortable decisions. Final Thoughts Discussing estate planning with your parents isn’t easy — but it’s one of the most loving things you can do as a family. By approaching the conversation with empathy, patience, and respect, you’ll help ensure that your parents’ wishes are honored and that your family is prepared for whatever the future holds.

March 20, 2025

Estates and Trusts

Not Considering the Importance of Charitable Giving

This is Part 10 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. When a client’s family does not wish to inherit a collection or if its inclusion in the estate would create a significant tax burden, it is crucial to explore charitable giving options. Proper planning can help maximize the benefits of a donation while avoiding unintended legal and tax complications. Ensuring the Charity Will Accept the Gift While many clients may assume that institutions will welcome their generous donation, not every organization is willing or able to accept a collection. Before naming a charity as a beneficiary in estate planning documents or making a present gift, it is essential to confirm the charity’s willingness to accept the donation and any conditions the client wishes to impose on its use. Establishing this agreement in advance can prevent post-mortem disputes and ensure the estate qualifies for the intended tax deductions. Tax Benefits of Lifetime Charitable Giving Beyond philanthropy, charitable gifting can provide substantial tax benefits. Clients should be advised on the income tax advantages of donating all or part of their collection during their lifetime. A charitable income tax deduction is available for contributions of art and collectibles to a public charity, provided the property qualifies as capital gain property and meets the related-use rule (discussed below). If these conditions are met, the donor can deduct the full fair market value of the collection in the year of transfer, subject to a limit of 30% of their adjusted gross income (AGI). Any excess deduction may be carried forward for five years. Since the property must qualify as capital gain property, a lifetime charitable deduction for the donation of art or collectibles is only available to clients who qualify as collectors. As noted in Mistake #1 of this series, creators and dealers recognize ordinary income upon the sale of art and collectibles. Moreover, creators have little incentive to donate their work during their lifetime, as any charitable deduction would be limited to the cost of materials rather than the item’s fair market value. Under the related-use rule, the donee charity must use the donated property in a manner that aligns with its exempt purpose under Internal Revenue Code Section 501. If the charity’s use is unrelated to its mission, the donor’s deduction is limited to the property’s cost basis rather than its appreciated value. Additional limitations apply under the Pension Protection Act of 2006 if the charity sells the donated property within three years of receipt unless the organization certifies that the donation was used for its exempt purpose. For the creator and dealer, it usually makes more sense to consider selling the item and donating the proceeds to charity.  Doing so avoids the related-use rule and the requirement that the item be capital gain property. In such a case, the charitable deduction may offset, most if not all of, the ordinary income realized on the sale. Public Charities vs. Private Foundations Clients should also understand the key differences between donating to a public charity versus a private foundation. Donations to public charities allow a deduction based on the collection's fair market value, provided the collection is capital gain property and the related-use rule is met. Donations to private foundations, however, only permit a deduction based on the donor’s cost basis, and the deduction is limited to 20% of AGI. Excess amounts may still be carried forward for five years. Fractional Gifts and Changes Under the Pension Protection Act One of the biggest challenges in lifetime charitable gifting is persuading clients to part with their collection while they are still alive to enjoy it. Before August 17, 2006, clients could donate a fractional interest in tangible personal property, allowing them to share ownership with a charity while retaining partial possession. However, the Pension Protection Act introduced stricter valuation, time, and use limitations that impact the deductibility of fractional gifts. Under IRC Section 170(o), the deduction for a fractional gift is now limited to the lesser of: The value used to determine the deduction for the initial fractional donation, or The fair market value at the time of subsequent contributions. Additionally, the donor must fully transfer their interest in the property within 10 years of the initial fractional gift or before their death—whichever comes first. The recipient charity must also take substantial physical possession of the item within one year of the initial gift (and within one year of any additional gifts) and satisfy the related-use rule. Failure to meet these conditions may result in the recapture of previous deductions, plus interest and an additional 10% penalty. Charitable Bequests and Estate Tax Benefits An outright donation of a collection upon death—whether to a public charity or a private foundation—qualifies for an estate tax charitable deduction based on the fair market value at the time of death. Importantly, bequests of tangible personal property generally do not trigger the related-use rule, making this a valuable option for clients seeking to preserve their collection’s full value for charitable purposes.  However, clients planning to donate a collection upon their death should always consult with the intended recipient during life to confirm the organization’s willingness to accept the gift. A public charity’s acceptance of art and collectibles typically depends on whether the donation aligns with its mission and whether it has the necessary facilities and financial resources to store or display the collection.

March 12, 2025

Estates and Trusts

Not Discussing Collections with Heirs

This is Part 9 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. A collection may hold deep personal significance for a client but may not carry the same sentimental or financial value for their heirs. It is essential to encourage clients to have open conversations with their heirs, as appropriate, to understand their intentions and expectations. In many cases, heirs may see a collection primarily as a financial asset rather than a legacy to preserve.  Clients should consider alternative disposition strategies beyond an outright bequest if they intend to sell the collection.  For instance, donating the collection to a museum, establishing a trust, or selling select pieces during their lifetime may better align with their goals. Even if heirs wish to keep the collection, clients should clarify whether they intend to retain it in its entirety or only select pieces. This distinction is crucial, as valuation discrepancies can arise when certain items are allocated to specific individuals, potentially impacting the overall fairness of asset distribution. Many clients express a desire to donate their collections to museums. However, before proceeding with such a gift, it is essential to confirm that the museum is willing to accept the items. Many museums already have extensive collections in storage and may not be interested in acquiring additional pieces. Additionally, if a museum does agree to accept a collection, it often requires a financial contribution to cover ongoing maintenance and preservation costs. Contacting the museum or other recipient organization before making the gift – especially if the donation is planned through a will or other testamentary document – is essential to ensure its acceptance. Most importantly, clients should consult with an expert in art succession planning. A knowledgeable advisor can help structure a well-organized, tax-efficient plan during life or at death and ensures a smooth transfer of the collection while honoring the client’s wishes.

March 7, 2025

Estates and Trusts

Essential Legal Documents Transpeople Must Update for Protection

Navigating life as a transgender individual involves critical steps toward ensuring that your identity is recognized legally and accurately, particularly in the current political climate. Updating your legal documents is an essential part of the process, especially in a world where current systems are not designed with gender diversity in mind. Updating these documents not only reflects your true identity but can also help you avoid potential challenges, whether it is at the doctor's office, in the workplace or when traveling. Below is a comprehensive list of essential legal documents that every trans person should consider immediately to ensure their identity is represented accurately: Legal Name Change One of the most important steps in affirming your gender identity is ensuring your government-issued identification reflects your gender and name. The process of a name change is different in every state. In New York, your local county Supreme Court provides an administrative form to request a name and gender marker change, which is the first step to ensure that all other government IDs can then be changed to align with your true identity. Once approved in New York, you will receive a court order to reflect your name and gender marker. A court order is not required in all states; many states have an administrative process to effectuate the change. Name Change: In New York, unless you are changing your name via marriage, adoption, divorce or citizenship, a court order is required. Once your name and gender marker are legally changed via court order, you may then update your driver’s license and begin the process of updating all other government IDs, including the reissuance of your birth certificate as discussed below. Gender Marker: In some states like New York, you can update the gender marker on your identification to reflect your gender identity. While the process and requirements vary by state, as discussed below, some states require proof of medical transition or a letter from your healthcare provider. Birth Certificate The birth certificate is a foundational legal document. The process of changing a birth certificate varies from state to state and will involve an administrative process or filing a court petition to obtain a court order or directive reflecting the change in name and gender marker. Name Change: Some states allow you to amend your name on the birth certificate without any additional steps or documentation, while others may require a court order. Gender Marker: New York allows you to amend the gender marker on your birth certificate. As of February 2025, Florida, Kansas, Montana, Oklahoma, Tennessee, and Texas are the only states that prohibit the changing of gender marker. Alabama, Arizona, Arkansas, Georgia, Guam, Kentucky, Louisiana, Michigan, Missouri, Nebraska, North Carolina, and Wisconsin all require medical proof of gender change. Certainly, many states make it challenging to amend the gender marker, but it is absolutely worth pursuing to ensure that your birth record aligns with your gender identity. Social Security Upon your legal name change you should update your records with the Social Security Administration (“SSA”). Updating your Social Security records ensures that your name aligns with your legal identity, especially for the purposes of employment, Social Security Disability or Retirement benefits, and taxes. In some states, failing to update your identity with the SSA could even result in the suspension or revocation of your state driver’s license. Name Change: You may update your name by submitting a legal name change document to the Social Security Administration, which is available online at www.ssa.gov. Gender Marker: As of the date of this publication, the Trump Administration has issued a directive to exclude the use of gender marker “X” and prevent the update of gender markers to reflect a transition. Passport Updating your United States Passport information is important for those who wish to travel outside of the country. Your passport must reflect your name and should reflect your gender to ensure ease of travel. A passport reflecting your true identity is necessary not only to leave the US but also to deal with border officials, obtain visas, and participate in immigration processes in other countries. It should be noted that an inconsistent gender marker does not automatically prohibit your travel, but it may cause complications within the United States when leaving or upon arrival in a different country. Name Change: To update your United States Passport, you will need to provide the court order or administrative ruling from your state reflecting your name and a copy of your newly issued birth certificate. Gender Change: The Trump administration has suspended issuing passports with X markers and passport renewals with differing gender markers. This directive is currently pending litigation and there has been no final determination of its legality. As of the date of the publication of this article, it is being widely recommended by trans-rights groups that until there is a legal determination and the policy is released, trans people who have a current, valid passport should refrain from attempting to renew or change it. Health Insurance and Medical Records Your health insurance and medical records should reflect your correct name and gender to prevent confusion and ensure that you are receiving the appropriate medical care. It goes without saying that doctors entrusted to provide medical care and treatment for their patients should be informed of your proper name and gender in the furtherance of health care. HIPAA requires that healthcare providers update a person’s gender identity or transition care and are prevented from sharing this information without your express consent. However, there are several legal battles brewing in states regarding the release of this information for minors and gender-affirming care. Health Insurance: You should contact your insurance provider to update your name and gender on all of your insurance records. In general, proof of a name change and gender markers are requested. Medical Records: Update your doctor, therapist, and other healthcare providers on your name and gender marker so that your medical records accurately reflect your identity. This will also help you avoid issues when seeking medical care, such as incorrect gender-specific treatments or tests. Employment Records Updating your name and gender with your employer ensures that your employer recognizes your identity at your company. Providing this updated information to your employer will avoid unnecessary confusion in official communication from your company, payroll, retirement benefits and health care benefit administration. Name Change: Once you have legally changed your name in your state, you must notify your employer so that your employer may update their records, including the name on your paychecks, your tax documents and your benefits enrollment. Gender Marker: Some employers offer the ability to update gender markers in their records, which can be important for workplace respect and to avoid misgendering. Many employers provide the opportunity for its employees to indicate their gender within office systems, such as email and signature blocks, to promote a culture of respect and affirmation. Estate Planning Transgender individuals should make sure their estate planning documents reflect their identity and desires. They should also ensure that their loved one’s estate planning documents naming them also reflect their name and gender marker changes. These documents may include: Executor, Trustee and Beneficiary Updates: Ensure that your name is properly reflected in your own estate planning documents such as your Last Will and Testament and Trust instruments. For others, ensure that the names of your chosen executors and beneficiaries in your documents are accurate and that their gender is respected in all related documents so that they can be easily identified in the probate or estate administration process. While many states, such as New York, have done away with gender terminology within official legal documents, it is important to note that others’ estate planning documents must also be changed if you were referred to in your parents’ documents as a daughter or a son and said identification no longer applies to you. Health Care Proxies and Powers of Attorney: Make sure that your health care proxies and health care appointment documentation have been updated with both your proper name and gender markers, as well as your agents’ proper names and gender markers. The same is true for Powers of Attorney, which are presented to financial institutions to gain access to your financial accounts. If an identity cannot be verified, often financial institutions will restrict access to prevent fraud and financial misdealing. Bank Accounts and Financial Documents Financial institutions require legal documentation to update your name on accounts, checks, and credit cards affiliated with the institutions. Name Change: You should provide your legal name change court order or administrative determination to your bank and financial institution to update the name on your accounts, credit cards, and other financial documents. You should also ensure that named beneficiaries on your financial accounts are updated when your loved ones have name changes. Gender Marker: While gender markers do not always need to be updated for financial documents, you may request that your gender be reflected accurately in your account details to avoid confusion. Academic Records Educational records held with universities and educational institutions must properly reflect one’s identity. Diplomas and other credentials should be updated to reflect your name and gender marker. Most private educational institutions allow you to change your records to match your name and gender identity; however state institutions will likely follow state law as it relates to name and gender markers. Name Change: You should contact the registrar at your educational institution or university to request that your name be updated on your academic records and diploma to reflect your identity. Gender Marker: Depending on the institution’s policies, you may be able to update your gender marker in school records. Updating official legal documents is a process that requires legal and administrative processes and often patience. However, it is an important step toward living authentically and without continued administrative hassle. Whether you are transitioning or you simply wish to align your documents with your identity, updating your legal records ensures that you are recognized for who you are.

February 26, 2025

Estates and Trusts

Death Tax Repeal Act

On February 13, 2025, Republican lawmakers in Congress introduced the Death Tax Repeal Act, which aims to permanently eliminate the federal estate tax. Since 2015, various legislative efforts to repeal the estate, gift, and generation-skipping transfer (GST) taxes have been introduced in Congress but have failed to pass. Current Federal Transfer Tax Framework The Internal Revenue Code imposes a tax on an individual’s right to transfer property during life and at death. The federal gift tax applies to lifetime transfers at a rate of 40%, though individuals benefit from a "unified credit" that allows a certain value of transfers to be made tax-free during life and at death. In 2025, the unified credit stands at $13,990,000. Any combined transfers exceeding this amount are subject to the 40% tax rate. Additionally, the GST tax applies to transfers made to individuals who are two or more generations below the transferor or to certain trusts benefiting such individuals. The GST tax is also levied at 40%, with an exemption matching the unified credit amount of $13,990,000. Impact of the 2017 Tax Cuts and Jobs Act (TCJA) Under the 2017 Tax Cuts and Jobs Act (TCJA), enacted during the first Trump administration, the unified credit and GST exemption were temporarily doubled. However, since the TCJA was passed as a reconciliation measure, it is set to expire on December 31, 2025. Unless Congress takes further action, the unified credit and GST exemption will revert to their 2016 levels, adjusted for inflation, or approximately $7,000,000 each. Key Provisions of the Death Tax Repeal Act The Death Tax Repeal Act seeks to go beyond simply extending the TCJA provisions beyond December 31, 2025. If enacted, it would: Permanently repeal the federal estate and GST taxes, allowing individuals to transfer unlimited amounts of property at death free of transfer tax. Establish a permanent $10,000,000 lifetime exemption against the gift tax (indexed for inflation to $13,990,000 in 2025). Transfers exceeding this exemption would be subject to a 35% tax rate. Retain the current "step-up" in basis for capital assets at death, minimizing capital gains taxes for beneficiaries upon the sale of inherited assets. Implications for Estate Planning The passage of the Death Tax Repeal Act would significantly impact estate and wealth transfer planning. Estate planning documents that currently reference the federal unified credit or GST exemption amount would need to be reviewed to ensure they align with the proposed law and the client's intentions. Additionally, several states impose a separate estate or inheritance tax — Connecticut, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska (County inheritance tax only), New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and Wisconsin — or have decoupled from federal estate tax provisions. If the Death Tax Repeal Act becomes law, many of these states will continue to impose their own estate and/or inheritance taxes. Clients residing in or owning property within these states may require substantial revisions to their estate planning documents to optimize state transfer tax savings. Next Steps Our team of estate and trust attorneys is closely monitoring the progression of the Death Tax Repeal Act in Congress. We are available to answer any questions and review your estate planning documents to ensure they accurately reflect your wishes under the proposed law.

February 25, 2025

Estates and Trusts

Not Properly Insuring a Collection

This is Part 8 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. Accidents happen—whether a piece of artwork or a collectible is damaged in shipping, affected by fire or water or even knocked over by Steve Wynn’s elbow. Having the right insurance in place can help mitigate financial losses and protect a client’s investment. Without proper coverage, even a minor incident could result in significant economic consequences. When insuring a collection, there are three primary options: Including it as part of a homeowner’s policy, Scheduling individual items separately, or Obtaining blanket coverage. For clients with valuable or extensive collections, we often recommend the additional effort and cost of scheduling items separately. This approach typically requires obtaining a qualified appraisal to establish fair market value at the time of coverage. To ensure continued protection, these appraisals should be updated regularly so that coverage reflects the collection’s current worth, rather than its purchase value. Total loss claims are rare. More often, insurers assess the damage to determine if an item is salvageable and provide funds for repairs or restoration. Unfortunately, this can lead to a loss in value that remains unquantifiable until the item is sold. To best protect collectible assets, clients should seek insurance from companies specializing in the relevant categories of items, even if it comes at a higher upfront cost. Additionally, different policies may be necessary if parts of a collection are housed in multiple locations. Are the items in a private residence, a storage facility or on loan to an institution? Are they owned directly by the collector or held within an entity or trust? Understanding these nuances ensures that each piece remains properly protected.

February 25, 2025

Estates and Trusts

Not Keeping Records of Your Purchases and Sales, Location, and Authentication Documents – Implications of Restrictions and Patrimony

This is Part 7 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. The provenance of any item is essential to determining its value. Proper documentation of an item’s history and proof of chain of title help establish authenticity, ensuring the highest fair market value at the time of sale. It also prevents clients from wasting money on items later found to be inauthentic. A complete record of an item’s history and chain of title should include the item’s current location and any restrictions on selling or moving the item. This is particularly important when the asset holds historical significance, and the client plans to transfer items between jurisdictions with high taxes on the sale or use of art and collectibles. Understanding the limitations of an item’s sale or transfer can be crucial. Limitations on the use of artwork, as well as patrimony claims often affect the value of an item. For example, in the Estate of Ileana Sonnabend case, Ms. Sonnabend, an art dealer, owned Robert Rauschenberg’s Canyon, a collage featuring a stuffed bald eagle. Federal laws prohibit the possession or trafficking of bald eagles, dead or alive, making the artwork unsellable – although Ms. Sonnabend’s gallery had received a permit allowing the work to be loaned and exhibited during her lifetime. On the federal estate tax return filed for the estate, Canyon’s value was reported as zero. The IRS Art Advisory Panel challenged the valuation, asserting a $65 million fair market value under the assumption that it could be sold on the illicit market to "a recluse billionaire in China." After litigation, the estate resolved the issue by making a long-term loan of Canyon to MoMA in New York City, receiving a full charitable deduction for its full value. Many nations and communities advocate for the return of artworks that hold historical, spiritual, or national significance, arguing that these pieces were taken under coercive or unethical conditions. Patrimony claims often center on the rightful ownership and cultural heritage of works that have been displaced, looted, or unlawfully acquired. Museums and private collectors frequently face both legal and ethical dilemmas when addressing repatriation demands. The most high-profile case involves the Elgin Marbles—renowned Greek sculptures removed from the Parthenon in Athens and currently housed in the British Museum. A UK parliamentary inquiry in 1816 concluded that Britain had legally acquired the Marbles. However, in 2000, the Greek government, in anticipation of the opening of the new Acropolis Museum in Athens, formally requested their return. In 2013, Greece sought UNESCO’s mediation between the Greek and UK authorities regarding the Marbles’ return, but both the UK government and the British Museum rejected UNESCO's offer to intervene. In 2021, UNESCO asserted that the UK had an obligation to return the Marbles and called on the UK government to begin negotiations with Greece. Despite these developments, the controversy remains unresolved. At the Parthenon Museum in Athens, a portion of the original Marbles are on display with white casts held in place of the Marbles, which are still currently on display at the British Museum. While not every client owns artwork as unique as Canyon or the Elgin Marbles, understanding the nuances of a client’s collection is essential for proper representation and estate planning.  Every client should keep clear and accurate records that include the acquisition date of each item, its location, and any restrictions on its use.

February 18, 2025

Estates and Trusts

Protecting Your Family and Future: Essential Estate Planning for the LGBTQ+ Family

Estate planning is a critical part of securing the future for any family, and for LGBTQ+ individuals, it is particularly important given the legal complexities and challenges that may arise in the current political climate. There have been several legal shifts that affect LGBTQ+ families’ rights and protections, which makes it even more essential for LGBTQ+ families to ensure their estates are properly considered, planned, and protected. Below is a simple checklist of estate planning documents that LGBTQ+ families must consider to safeguard their interests, particularly during a time of legal uncertainty and inequitable policies: Last Will and Testament When one thinks of an estate plan, a will is what likely comes to mind: it is considered a fundamental estate planning document. A will directs how a person's property, whether real or personal, should be distributed after death. For LGBTQ+ individuals, a will is especially important because, without one, state laws dictate who inherits your estate and in what proportion. With only limited exceptions, state laws do not recognize non-biological family members, such as a partner or even a registered domestic partner: close friends who are more like family are not recognized in any state. A will provides clarity to ensure that your relationships and wishes are honored, regardless of your family makeup. Why a will matters for LGBTQ+ individuals: If you have a partner but are not legally married, or if you want to leave property or assets to a close friend or chosen family member, a will ensures that these individuals are recognized as your beneficiaries. It also allows you to name the person you choose to oversee the distribution of your assets. While many states require that your biological family is informed of your death and provided a copy of your will, most courts are fiercely protective of directives in a will. As a result, documenting those wishes is imperative to ensure your wishes are carried out in the way that you desire. Without a properly executed will, most states simply distribute assets to your biological family members. Healthcare Directives Advanced healthcare directives such as a healthcare proxy and living will specify both the person you wish to speak for you in a healthcare setting and the type of care you would want (or refuse) in the event you cannot articulate those wishes. The health care proxy appoints an agent who knows you, understands your wishes, will communicate those wishes, and advocate for your rights in a health care setting. The living will outlines the type of care you want including memorializing your preferences for medical treatment or discontinuance of treatment. A living will sets forth whether you want life-sustaining treatment and how you would like to be treated in end-of-life scenarios. Why healthcare directives matter for LGBTQ+ families and individuals: In the event of incapacitation, biological family members may not always know or respect your wishes, particularly if your biological family does not support your identity, lifestyle, or relationships. Naming a healthcare proxy and having a living will in place ensures that your healthcare decisions are in line with your desires, even if your family disagrees or is uninvolved in your life. Without a healthcare proxy, a family member (who may not understand or accept your relationships) may gain control over your medical decisions. Without documentation, most states allow your next of kin to make these decisions, potentially preventing your partner from being involved in your care. Nominating your partner or chosen friend provides them with the legal authority to make decisions consistent with your wishes. Durable Power of Attorney   A durable power of attorney (POA) allows you to designate someone, referred to as an agent, to manage your financial matters upon your incapacity. A POA can be tailored to the specific powers you wish to bestow upon your agent. For example, your agent can access your bank accounts, pay your bills, apply for public benefits, and manage investments on your behalf. Why a durable power of attorney matters for LGBTQ+ individuals: LGBTQ+ couples are not recognized as legal next of kin unless they are legally married and, therefore, will face complications if their relationship is not legally formalized, as most financial institutions are unable to speak with others without authority. This is especially essential if partners financially depend on one another but have separate financial accounts; without a POA in place, your partner cannot access your finances in the event of your incapacity. Having a POA ensures that your partner, rather than a biological family member who may not be involved in your life or support your relationship, has the authority to handle your finances, if necessary. Trust A trust is a key estate planning tool that allows you to manage your assets efficiently during your life and distribute your assets after your death without the necessity of probate (which is required with a Last Will and Testament). A trust also allows you to appoint a successor trustee, a person in charge of your trust assets if you can no longer manage your own trust assets. There are different types of trusts that can accomplish many goals within an estate plan, but the common theme is that assets funded in a trust avoid probate, a lengthy and expensive court process. In addition to avoiding probate, trusts do not have to be authenticated by a court or shared with your biological family members, as is the case with a Last Will and Testament. Why a trust matters for LGBTQ+ individuals: A trust can ensure that assets are passed on according to your wishes, even in cases where state inheritance laws might not recognize your partner or chosen family. Trusts can also be structured to provide for specific needs, such as the care of a dependent partner or a loved one, long after you die. Importantly, trusts are much more difficult to contest than wills, thus ensuring that estranged biological family members will not be able to easily upend your carefully constructed estate plan if they do not agree with your choices or your relationships. A trust is also a private document that others cannot access in the same way as a Last Will and Testament, which is a public document that is published in court. Beneficiary Designations Beneficiary designations ensure that your assets pass directly to your loved ones without going through probate. A beneficiary designation can be made on bank accounts, brokerage accounts, insurance policies, and retirement accounts. Relationships can change over time, and therefore, beneficiary designations should be reviewed and updated regularly to reflect your current wishes. Why beneficiary designations matter for LGBTQ+ individuals: If you have a domestic partner or chosen family members, it is crucial to ensure that your beneficiary designations align with your intentions. In most cases, financial institutions will not recognize a domestic partner or non-biological family members unless you have explicitly named them as beneficiaries on your financial accounts and policies. Beneficiary designations are also private and financial institutions are not at liberty to disclose those named as beneficiaries on your accounts after your death. Letter of Intent While not legally binding, a letter of intent can provide your loved ones with important details and intentions regarding why you constructed your estate plan the way that you did. For example, if you decide to disinherit a biological family member from an estate distribution, the reason for the exclusion can be articulated in the letter in a way that cannot be explained in the estate planning document itself.      Why a letter of intent matters for LGBTQ+ individuals: If your estate plan is one that leaves out next of kin or biological family members, a letter of intent can provide further proof of your wishes related to your estate distribution. Letters of intent can also ensure that your funeral or memorial service reflects the way you wish to be remembered, celebrating your identity and your values. Letters of intent can also be entered into a court proceeding as evidence in an estate contest to further outline your rationale for the disinheritance of estranged family members. Guardianship Documents for Children It is vital for any parent to document guardianship of their minor child in the event of the parent’s death. Documenting a guardianship designation ensures that upon your passing, your children will be cared for by the person or the people you designate, not the person that a court may choose. Why guardianship documents for children matter for LGBTQ+ individuals:  If you are an LGBTQ+ parent, establishing guardianship is incredibly important, especially if you are not biologically related to your child. In some cases, your biological family members may challenge your partner's ability to care for your children upon your death, particularly if you are in a non-married partnership. Establishing guardianship and memorializing your choice of guardian for your minor children provides clarity, protects your partner’s rights to care for your children, and safeguards the sanctity of your family structure. Estate planning is a crucial step for every individual, but it takes on an added level of importance for LGBTQ+ individuals, especially during times of legal uncertainty and political turmoil. With the right documents in place, you can be confident that your wishes will be respected and that your loved ones are protected, regardless of legal challenges or changes in administration. Estate planning empowers you to take control and secure the rights of your partner, your children, and your chosen family.

February 11, 2025

Estates and Trusts

Not Realizing the True Value of “Stuff”

This is Part 6 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. For federal estate and gift tax purposes, transfers are valued at the “fair market value” of the asset on the date of transfer. One of the more common estate tax audit issues is the failure to properly report the value of items of tangible personal property on a decedent’s Form 706. Similarly, failing to properly account for the value of tangible personal property transferred by inter vivos gift may result in the audit of a client’s Form 709. Despite their upfront cost, in order to identify the true value of art and collectible assets, clients should obtain professional periodic appraisals. Appraisals serve many functions, including estate and gift tax reporting, such as establishing value for insurance purposes, establishing bidding parameters for assets at auction, obtaining loans with tangible personal property serving as collateral, and planning for future gifts.  For tax purposes, fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.” Although the most persuasive indication of fair market value is an actual contemporaneous sale of the property in question, in the absence of such a sale, an appraisal is typically required to establish the taxable value of the asset subject to transfer. Under current regulations, a reported gift of tangible personal property that exceeds $5000 in value must be substantiated by a qualified appraisal conducted by a qualified appraiser.  The Pension Protection Act of 2006 (the “Pension Act”) established new requirements for what it means to have a “qualified appraisal” for tax reporting purposes. A qualified appraisal must contain a declaration that the appraiser (i) understands that a substantial or gross valuation misstatement resulting from an appraisal of the value of the property that the appraiser knows, or reasonably should have known, would be used in connection with a return or claim for refund, may subject the appraiser to a civil penalty, and (ii) understands that an intentionally false or fraudulent overstatement of the value of the appraised property may subject the appraiser to civil penalty for aiding and abetting an understatement of tax liability.  A qualified appraisal of tangible personal property must contain the following:  a detailed description of the property;  the physical condition of the property;  the date or expected date of the contribution;  the terms of any agreement or understanding entered into or expected to be , entered into by or on behalf of the client that relates to the use, sale or other disposition of the property, including any restrictions on the use or disposition or reservations of rights conferred on anyone other than the donee and any earmarks for particular use;  the name, address and taxpayer id number of the appraiser;  a detailed description of the appraiser’s educational background and qualifications;  the date on which the property was valued;  the appraised fair market value of the property;  the method of valuation used to determine the fair market value;  the specific basis for the valuation; and  a description of the fee arrangement between the client and the appraiser.   A qualified appraisal is prepared by a qualified appraiser defined as an individual who:  has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in the regulations;  regularly performs appraisals for pay; and  meets other requirements that the IRS has prescribed in the regulations.  An individual cannot be a qualified appraiser with respect to any specific appraisal unless she:  demonstrates verifiable and passing professional or college level education and experience or earned a recognized appraiser designation from a generally recognized professional trade or appraiser organization or as part of an employee apprenticeship program or educational program; and  the education and experience is in valuing the property type being appraised.   In addition, the appraiser must make the following declaration: “I understand that my appraisal will be used in connection with a return or claim for a refund.  I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties.  I affirm that I have not been at any time in the three-year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. 330(c).” If the appraisal or the appraiser does not meet all of the above requirements, the resulting valuation report will not be considered as any evidence of value, and the IRS will conduct its own appraisal to determine the fair market value of the asset subject to transfer.  In certain instances, providing the IRS with an appraisal that adheres to all of the requirements of the Pension Act may not help with avoiding an estate or gift tax audit, but provides a powerful bargaining tool. For example, regardless of the asset composition of the remainder of the estate, if a decedent dies owning artwork that has a claimed value of $50,000 or more, the appraisal will be subjected to consideration by the IRS Art Advisory Panel, comprised of a body of art industry experts who review and evaluate the acceptability of artwork appraisals submitted by taxpayers in support of claimed fair market value. When a qualified appraisal is submitted, you and your client may find that the IRS is more willing to compromise on valuation issues.

February 11, 2025

Estates and Trusts

Not Hiring a Qualified Appraiser and Realizing the True Value of Art and Collectibles

This is Part 5 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. For federal estate and gift tax purposes, transfers are valued at the “fair market value” of the asset on the date of transfer. One of the more common estate tax audit issues is the failure to properly report the value of items of tangible personal property on a decedent’s federal estate tax return. Similarly, failing to properly account for the value of tangible personal property transferred by inter vivos gift may result in the audit of a federal gift tax return. Despite the upfront cost, professional periodic appraisals should be obtained to identify the true value of art and collectible assets. Appraisals serve many functions, in addition to those relating to estate and gift tax reporting, such as establishing value for insurance purposes, establishing bidding parameters for assets at auction, obtaining loans with tangible personal property serving as collateral, and planning for future gifts. For tax purposes, fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.” Although the most persuasive indication of fair market value is an actual contemporaneous sale of the property in question, in the absence of such a sale, an appraisal is typically required to establish the taxable value of the asset subject to transfer. Under current regulations, a reported gift of tangible personal property that exceeds $5000 in value must be substantiated by a qualified appraisal conducted by a qualified appraiser. The Pension Protection Act of 2006 (the “Pension Act”) established new requirements for what it means to have a “qualified appraisal” for tax reporting purposes. A qualified appraisal must contain a declaration that the appraiser understands that a substantial or gross valuation misstatement resulting from an appraisal of the value of the property that the appraiser knows, or reasonably should have known, would be used in connection with a return or claim for refund, may subject the appraiser to a civil penalty, and understands that an intentionally false or fraudulent overstatement of the value of the appraised property may subject the appraiser to civil penalty for aiding and abetting an understatement of tax liability. A qualified appraisal of tangible personal property must contain the following: A detailed description of the property. The physical condition of the property; The date or expected date of the contribution. The terms of any agreement or understanding entered into or expected to be, entered into by or on behalf of the client that relates to the use, sale or other disposition of the property, including any restrictions on the use or disposition or reservations of rights conferred on anyone other than the donee and any earmarks for particular use. The name, address and taxpayer identification number of the appraiser. A detailed description of the appraiser’s educational background and qualifications The date on which the property was valued. The appraised fair market value of the property.  The method of valuation used to determine the fair market value. The specific basis for the valuation.  A description of the fee arrangement between the client and the appraiser.   A qualified appraisal is prepared by a qualified appraiser defined as an individual who: Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in the regulations Regularly performs appraisals for pay. Meets other requirements that the IRS has prescribed in the regulations. An individual cannot be a qualified appraiser with respect to any specific appraisal unless she demonstrates verifiable and passing professional or college-level education and experience or earned a recognized appraiser designation from a generally recognized professional trade or appraiser organization as part of an employee apprenticeship program or educational program as well as the education and experience in valuing the property type being appraised.  If the appraisal or the appraiser does not meet all the above requirements, the resulting valuation report will not be considered as any evidence of value, and the IRS will conduct its own appraisal to determine the fair market value of the asset subject to transfer. In certain instances, providing the IRS with an appraisal that adheres to all the requirements of the Pension Protection Act may not help with avoiding an estate or gift tax audit, but provides a powerful bargaining tool. For example, regardless of the asset composition of the remainder of the estate, if a decedent dies owning artwork that has a claimed value of $50,000 or more, the appraisal will be subjected to consideration by the IRS Art Advisory Panel, comprised of a body of art industry experts who review and evaluate the acceptability of artwork appraisals submitted by taxpayers in support of claimed fair market value. When a qualified appraisal is submitted, you and your client may find that the IRS is more willing to compromise on valuation issues.

February 4, 2025

Estates and Trusts

The Impact of Transgender Executive Order on New York Residents

On January 20th, President Trump issued an executive order entitled “Defending Women from Gender Ideology Extremism and Restoring Biological Trust to the Federal Government.”  The executive order included provisions for the limitation of two gender markers – male and female -- on United States passports. The passport gender marker limitation is not retroactive but will only apply to issuing new passports and renewing existing passports. The order would force changes to federal documents, including new and renewed passports, visas, and Global Entry cards, and would require trans inmates to be removed from areas in federal prisons that align with their gender identity. It also rescinds the Biden-era executive order that allowed trans individuals to serve in the military. Almost immediately after the announcement, transgender advocacy organizations began receiving frantic calls from members of the transgender community, fearing that the executive order could lead to the inability to change identification documents to conform to one’s gender identity, as well as fears of physical harm. New York is one of several states that have enshrined the protection of gender identity in its constitution. Substantial pushback on the executive order is anticipated at the federal and state levels. If you are a member of the trans community and were born in New York City and/or the State of New York, you should still be able to change your name and state-issued identity documents to properly align with your gender identity. If you have not already done so, you should start the process of changing your legal name and state-issued identification documents. Various organizations, including A4TE and Lambda Legal, offer assistance with these processes.  Along with your state-issued identification documents, you should make sure that your estate planning documents, including wills, trusts, powers of attorney, health care proxies, and designations of agents for the disposition of your remains, are in order and properly reflect your gender identification. Selecting the proper agents who will fulfill your wishes with respect to your health care and bodily remains is equally important. 

January 30, 2025

Estates and Trusts

Not Maintaining an Up-to-Date Inventory of Art and Collectibles for Estate Planning

This is Part 4 in a Series of the Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients. A well-organized inventory is essential for effectively managing and planning the distribution of collectibles, including art. Clients may struggle to track their assets without an inventory, making future distribution and estate planning significantly more challenging. Maintaining an inventory can be as simple as using a basic spreadsheet or, for larger collections, leveraging specialized inventory management software. Regardless of the method, a comprehensive inventory should include: Size, materials, and description of items, as well as photographs of each individual item. A system for recording purchases and sales, including transaction dates and parties involved. Documentation of loans and gifts, specifying recipients and terms, as well as the location of items. Records of appraisals and insurance coverage. Logs of damages and losses. Keeping an up-to-date inventory also helps track each item's provenance, which is critical for authentication and valuation, particularly in the event of a sale. Maintaining an inventory of copyrights is just as important for clients who are also artists or creators. These intellectual property rights may have been licensed for specific periods or may require a distinct distribution plan separate from the original works upon the artist’s passing. Ensuring these details are well-documented can prevent legal complications and preserve the creator’s legacy.

January 28, 2025

Estates and Trusts

Equal Shares, Unequal Outcomes: Estate Planning Strategies for Parents and their Qualified Retirement Accounts

Typically, a parent wishes to treat their children equally in their estate plan and presumes they will achieve this goal by dividing all their assets into equal shares upon their death. Accordingly, they will designate their children as equal beneficiaries of their qualified retirement accounts, such as traditional IRAs and Roth IRAs. However, doing so without considering the individual circumstances of their children may be less tax efficient and may ultimately result in one child receiving more assets after the payment of taxes than their siblings. Traditional IRAs vs. Roth IRAs: Key Differences A traditional IRA is funded on a pre-tax basis, with the income taxes on any appreciation deferred until assets are withdrawn from the account. Traditional IRAs are subject to requirement minimum distributions (RMDs) when the account holder attains the age of 73. A RMD is the minimum amount that must be withdrawn from the IRA each year. Contributions to a Roth IRA, on the other hand, are made with after-tax dollars, and the distributions are withdrawn tax-free. In addition, there is no RMD requirement for a Roth IRA during the lifetime of the account holder. The Ten-Year Rule When the account holder dies, most beneficiaries must take distributions pursuant to the “ten-year rule,” which requires that the beneficiary withdraw the account assets in full within ten years from the date of death of the original account holder. During this withdrawal period, the beneficiary must take RMDs in each year that the inherited account is open. As these withdrawals are made, the beneficiary must pay the deferred taxes based on their individual income tax bracket. Notably, withdrawals from a Roth IRA account remain income-tax free to the beneficiary, and are not subject to the RMD requirement. Tax Benefits for Eligible Designated Beneficiaries (EDBs)  A beneficiary that is deemed an “eligible designated beneficiary” (“EDB”) is not subject to the ten-year rule and may take distributions from the inherited account over their lifetime. Thus, the account assets may continue to appreciate tax deferred over a significantly longer period of time. EDBs include beneficiaries that are not more than ten years younger than the original account holder, surviving spouses, beneficiaries that are deemed disabled or chronically ill, and minor beneficiaries.[1]. It will be inherently more tax efficient for a parent to name an EDB as a beneficiary of their qualified account because of the extended withdrawal period the beneficiary will have to take distributions from the account. Therefore, if a parent has two or more children, one of whom is deemed an EDB, and names each of them as an equal beneficiary of their IRA account, the child who is an EDB will ultimately receive significantly more assets than their siblings because the assets in the account will have significantly more time to appreciate tax-deferred. In addition, because of the extended withdrawal period, the beneficiary has more flexibility in choosing when to take distributions from the account to avoid getting bumped into a higher marginal income tax bracket. Accordingly, if the parent wishes that each of their children receive as nearly equal shares of their assets as possible, and one or more of their children are deemed EDBs, it may be better to provide a greater share of their qualified accounts to the EDB beneficiaries, and the non-EDB beneficiaries with a greater share of their other estate assets. Case Study: Tax Efficiency and Equalizing Shares What if the account holder does not have any beneficiaries who will be deemed an EDB? Even then, the account holder should still consider their children's individual income tax circumstances. Suppose the account holder is single with a Roth IRA with $1,000,000 in assets and a traditional IRA with $2,000,000 in assets. The account holder has two children: Alex, who is a stockbroker, and Jamie, who is a public school teacher. We can presume that Alex has more taxable income than Jamie and that Alex has a higher earning potential in their career. If Alex and Jamie were named equal beneficiaries of the traditional IRA, it is likely that the distributions from the account would bump Jamie into a higher income tax bracket in the years that they are received, thus generating more income tax liability. Alex’s distributions are almost certain to be taxed at a higher marginal rate than Jamie's. If Alex and Jamie are named equal designated beneficiaries of the Roth IRA, the distributions would be tax-free in the year that they are received, leaving their respective income tax brackets unaffected. Therefore, naming Jamie as a primary beneficiary of the traditional IRA, where distributions will be taxed at a lower tax bracket, and designating Alex as the primary beneficiary of the Roth IRA is likely more tax efficient and most likely to ultimately result in each child receiving equal shares of the assets after payment of income taxes. As this example illustrates, naming each child as an equal beneficiary of a qualified account may not result in equal distributions after the payment of taxes, frustrating the intentions of a well-meaning parent. Therefore, careful consideration must always be given to the individual circumstances of an account holder’s intended beneficiaries. [1] Minor beneficiaries become subject to the ten-year rule once they attain the age of 18.

January 23, 2025

Estates and Trusts

Ethical Wills: The Heart of Your Estate Plan

When most people think of estate planning, Trusts and Last Wills and Testaments usually come to mind. I have spent my career espousing the essential tools for ensuring an efficient transfer of assets from one generation to the next, planning for taxes and incapacity, and outlining health care desires. However, the standard estate plan does not capture something equally valuable: the values, lessons, and hopes that many wish to document for their loved ones. That is where an ethical will comes in. Ethical wills, also known as “Letters of Intent, or “Legacy Letters” are non-legal documents that convey the intangibles like morals, beliefs, and reflections on your life - both the highs and the lows.    What is an Ethical Will? A traditional Last Will and Testament or a trust directs how your tangible assets will be distributed upon your death. An ethical will instead can serve as heartfelt advice and guidance to your loved ones and future generations. While it is not legally binding, an ethical will can be deeply personal and meaningful. Ethical wills are not new. In fact, there is mention of an ethical will in the Book of Genesis in the Bible and they were traditionally recited orally to family members. It was not until the Middle Ages when they were recorded in writing with the hope that the message would be preserved and shared with future generations. Do you need an Ethical Will? The short answer is no. But considering the fact that in creating a traditional estate plan, most put significant time, thought, and energy into who should inherit and in what proportion, it likely would be appreciated and helpful to share your reasoning behind how you came to those decisions, or what you hope the beneficiary might consider when living their lives and using what you left to them. Content of an Ethical Will: Values:  Leaving your worldly goods, your home, and other financial assets to the next generation is certainly important, but your ethical will might explain to your beneficiaries the values that you lived by that enabled you to acquire those assets. It can provide a platform for you to share with your beneficiaries your principles, your beliefs, and the lessons learned in doing so. Strengthening Family Connections: The event or ceremony of sharing your ethical will together can be a truly powerful experience for a family. A document containing stories, anecdotes, and your successes and failures can help family members feel connected to your story and to each other during your life or long after your death. Clarifying Intentions: Sadly, the decisions and bequests made in a traditional will or trust can be misunderstood and lead to conflict within a family – having the opposite effect that you intended. An ethical will provides you with the opportunity to explain your reasoning behind the content of your legal estate planning documents, reducing the likelihood of misunderstandings or hurt feelings. Providing Comfort and Guidance: An ethical will should be a sort of love letter to your family in which you provide words of encouragement, share the joy you felt with your loved ones, and impart wisdom and advice for their future reference.  For those with religious beliefs, many choose to share how faith served as a touchstone if a parent or loved one is no longer here. Ethical wills can also provide a great source of comfort and strength during times of grief.   Get started: The best part of an ethical will is that you don’t need to hire a lawyer to start. Reflect on Your Life.  Consider the experiences that shaped you over the course of your life. What life lessons do you think are worth sharing with your loved ones for years to come?  Tell them to “take that risk” because it served you well. Do you have hopes for your loved ones for their lives? Now is the time to share those hopes for their higher education, or creating a family in the future. Is there something specific that you want to be remembered for? If so, convey what that is and why it’s important to you. Be Honest and Authentic.  This is not a formal legal document; you should write in your own voice. The whole point of an ethical will is to be heartfelt and a reflection of you. Get personal and write it as though you are having the most heartfelt conversation with your loved ones. Do not be concerned with form, grammar, or the legality of it all. It’s ok to be vulnerable and share your failures and your regrets. Nothing is Forever.  Let’s face it, things change and because of that, you can always revise and update your ethical will. Just as I tell clients that legal wills and estate plans should be updated, your ethical will should also be updated. Relationships, net worth, health, values, and perspective are not permanent. Do not be afraid to reconsider and revise.  Sharing is Caring.  In most cases the ‘reading of a will’ is only something made for TV. With an ethical will, the choice is yours: you may decide that you want your ethical will read prior to revealing the contents of your legal will to set the stage for how your assets are to be distributed, or choose to share your ethical will during your life. Whether it is something left behind to be read after your death, or if you prefer gathering your family together to foster a discussion about legacy and lessons, there are no rules how you share.  Combining an Ethical Will with Traditional Estate Planning.  While an ethical will is not a substitute for a legal will or trust, it certainly can complement your estate plan by adding an emotional, encouraging, loving, and sometimes spiritual dimension. Work with your estate planning attorney to ensure your proper legal documents are updated and in place and consider crafting an ethical will to share with your lawyer so that they can better understand what is important to you and how to help you accomplish your goals. Creating an estate planning does not just have to be about the legality of moving assets from one generation to the next, it can be much more. Including an ethical will in your plan may ensure that your lessons, love, and legacy are preserved for future generations.

January 21, 2025

Estates and Trusts

The Hidden Cost of Failing to Plan

The Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients Mistake #3:  The Hidden Cost of Failing to Plan Art and collectibles, while beautiful and culturally significant, can pose significant estate planning challenges. At the time of death, these assets are subject to estate taxes based on their fair market value. Without proper planning, federal and state estate taxes—combined with the costs of selling the assets—could erode over 50% of a collection’s value. Art, as an alternative investment, began emerging in the 1970’s and has only boomed as a result of digitalization. Art as a profitable investment now consistently outperforms other asset classes such as the FTSE 100 and S&P 100.  According to 12 Wall Street Journal article, "The Art of Passing Along Art," highlights an unexpected problem faced by many collectors, particularly those who acquired their art in the 1950s and 1960s. These octogenarian collectors are discovering that their art collections have appreciated significantly more than their liquid assets. As a result, their estates often lack sufficient liquidity to cover estate tax obligations. For example, consider a New York estate with $40 million in liquid assets and $100 million in art. That New York estate will potentially incur a $63.5 million tax bill, forcing the executor to sell some or all of the art within nine months to satisfy the obligation. Such rushed sales often lead to undervalued transactions, significantly reducing the collection's realized value. In extreme cases, the entire collection might be sold for a fraction of its worth simply to meet the estate's federal and state tax liabilities. Strategic Solutions for Collectors Fortunately, there are various strategies to reduce the estate tax burden on art and collectibles. These include: Charitable Contributions: Using art to fulfill philanthropic goals can provide both estate tax relief and personal fulfillment. Lifetime Gifting: Strategic gifting of art during the collector's lifetime can shift value outside the taxable estate. Estate-Freezing Techniques: These methods help move highly appreciated (or soon-to-appreciate) assets out of the taxable estate. Moving the Collection out of state: Using limited liability companies and other entities can eliminate the potential for state estate taxes by changing the location of the assets. When considering these options, it’s essential to evaluate whether the collection holds more value as a cohesive whole or as individual pieces. Each strategy should be tailored to the collector's goals, ensuring that both financial and sentimental value are preserved for future generations.  Make sure you speak with a trusted estate planner who specializes in planning for large collections of art and other intangible assets.

January 21, 2025

Estates and Trusts

Maryland’s 2025 Budget Proposal: Changes to Estate Taxes and What They Mean for Estate Planning

Recent Maryland proposed budget cause for close estate planning review before the sunset of the federal Tax Cuts and Jobs Act. This week, Maryland Governor Wes Moore released his proposed 2025 budget to the public and submitted House Bill 352 to the Maryland Assembly for review and approval. The proposed changes in the budget have a significant impact on estate planning, especially as it relates to Maryland’s death taxes. Maryland is the sole state in the union that assesses both an estate and inheritance tax against the estates of resident decedents. The governor’s budget proposed abolishing Maryland’s Collateral Inheritance Tax on probate and non-probate transfers and inter vivos gifts made within two years of the date of death. The proposed budget does not abolish Maryland’s Estate Tax, but significantly reduces the exemption amount.  Maryland’s current estate tax exemption is $5,000,000 per individual and $10,000,000 per married couple. The newly proposed budget would reduce the estate tax exemption by more than half to $2,000,000 per individual and $4,000,000 per married couple. Under the terms of the budget, the changes to Maryland’s Estate Tax exemption will go into effect in July 2025. Should the proposed budget and changes go into effect, many Marylanders will need to take a renewed look at their estate planning to mitigate the impacts of the changes to the new state estate tax threshold.

January 17, 2025

Adopting the Moving Van Approach

The Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients Mistake #2: Adopting the Moving Van Approach When it comes to estate taxes, the Internal Revenue Service (IRS) expects all tangible personal property to be properly reported on Schedule F of Form 706. This includes any valuable assets such as art collections, antiques, or other collectibles owned by the decedent. Failing to report or undervaluing these items is a common audit trigger and can turn what might have been a clean estate tax return into a costly investigation. But what happens when a client suggests they intend to "make their valuable art collection disappear" to avoid estate tax inclusion? A Word of Caution No Statute of Limitations on Tax Fraud Tax fraud—including estate tax fraud—is not bound by a statute of limitations. If an art collection or other personal property goes unreported on Form 706, the IRS retains the authority to pursue unpaid taxes, interest, and penalties indefinitely. Moreover, these liabilities can extend to the decedent’s heirs, potentially creating financial and legal challenges for the next generation. Impact on Provenance and Marketability Beyond tax considerations, failing to accurately value and report an art collection can undermine its provenance. Provenance—the documented history of ownership—is critical for determining an item's authenticity and value in the marketplace. Without proper documentation, including accurate estate tax filings, selling items at their fair market value can become difficult, if not impossible. Practical Advice It's essential to educate clients on the long-term consequences of attempting to sidestep estate tax obligations. Transparency and compliance not only minimize audit risks but also preserve the integrity and marketability of valuable collections for future transactions. By taking a proactive and informed approach, you can guide clients toward strategies that align with both their financial goals and legal responsibilities.

January 15, 2025

Estates and Trusts

Prudent Investing in Uncertain Economic Conditions

The Prudent Investor Rule is a legal principal that requires fiduciaries to act in the best interests of a beneficiary and exercise reasonable care, skill, and caution when making investment decisions, which was codified in Maryland in 1994 by Md. Estates & Trusts §15-114.  The Rule applies to fiduciaries, including trust companies, investment managers or advisors, and individual trustees who make a valid §15-114(g) election to be governed by the statutory standards for investing and includes fiduciary assets under management, including trusts, guardianships, and custodians.  Under the Rule, a fiduciary must consider the best interests of the beneficiary in diversifying investments and investing and managing assets as part of an overall investment strategy.  In doing so, the fiduciary may take into consideration the general economic conditions at the time. Any regime change in government brings a degree of economic uncertainty to market conditions.  Currently, the market is experiencing uncertainty due to the US presidential election, a number of rising geopolitical tensions, natural disasters, and uncertainty surrounding economic policy and regulatory framework that could impact investment and spending decisions. Under the Prudent Investor Rule, a fiduciary is authorized to invest and manage assets to incorporate both risk and return objectives and to pursue an investment strategy that considers both the production of income and the safety of capital, utilizing a portfolio theory of investing.   The directive to fiduciaries to diversify investments is intended to mitigate risk to the beneficiary of investment decisions made by the fiduciary.   For Trustees and other fiduciaries, reliance on the advice and guidance of knowledgeable, experienced, and informed advisors is never more important than in the face of uncertain economic conditions. 

January 13, 2025

Estates and Trusts

Not Knowing the Tax Implications of How Your Client is Classified

The Top 10 Mistakes Made When Planning for Art and Other Collectibles: A Guide for Professionals and Their Clients Mistake #1: Not knowing the tax implications of how your client is classified Navigating the tax landscape for art dealers, investors, and collectors can be a complex endeavor, but proper classification is key to maximizing tax savings and avoiding pitfalls. Professionals working with clients in the art world must understand how classifications affect income tax treatment, as well as practical steps to ensure clients benefit from the most favorable outcomes. This guide outlines the critical distinctions, tax implications, and actionable strategies to support clients. Understanding the Classifications The IRS recognizes three primary classifications for individuals engaged in art-related activities: dealers, investors, and collectors. Each carries distinct tax implications: Dealers: These individuals are in the trade or business of buying and selling art for profit. To be classified as a dealer under Internal Revenue Code Section 1221(a)(1), a client must demonstrate continuity and regularity in their activities and a primary purpose of generating income or profit. For example, an artist selling their own creations may qualify as a dealer. Investors: Clients who buy and sell art primarily for investment purposes fall under this category. Unlike dealers, investors do not actively market art as part of a trade or business but instead hold it as a capital asset Collectors: This classification applies to those who acquire art for personal enjoyment or aesthetic purposes. Collectors are not considered engaged in a business or investment activity and face the most restrictive tax treatment. Tax Implications The tax treatment of gains, losses, and deductions varies significantly depending on classification: Dealers: Gains are treated as ordinary income, taxed at rates up to 37%. Losses are ordinary losses, fully deductible against other income. Expenses incurred in the trade or business, such as storage or marketing, are deductible as ordinary and necessary business expenses on Form 1040. Note: For artists classified as dealers, the basis of their artwork is typically limited to the costs of their materials, often resulting in significant gains upon sale. Investors:Gains on the sale of collectibles are taxed as capital gains, subject to a maximum rate of 28%. Losses are capital losses, deductible against capital gains, with a $3,000 annual limit for net losses against ordinary income. Ordinary and necessary expenses for holding the art for income production are deductible. Collectors:Gains are taxed at the same 28% capital gains rate as investors. Losses are considered personal and cannot offset other income. Expenses related to collecting activities are generally nondeductible unless the client can demonstrate an investment intent. Practical Steps for Professionals Helping clients achieve the most advantageous classification involves careful analysis and documentation. Here are actionable strategies: Identify the Appropriate Classification: Evaluate the client’s level of activity, intent, and historical practices. Consider whether the client’s actions align with IRS criteria for a trade or business (e.g., continuity, regularity, and profit motive). Document Investment Intent:For collectors seeking reclassification as investors, gather evidence such as:Businesslike records of transactions. Consultation with art experts or advisors. Efforts to publicly display the collection. A history of profitable investments in similar areas. Educate Clients on Tax Treatment:Explain the impact of classification on their tax liabilities, including applicable rates and deduction limits. Highlight the importance of meeting the profit presumption test (three profitable years out of five) for activities presumed to be for profit. Leverage Deductible Expenses:For dealers and investors, ensure all ordinary and necessary expenses, such as insurance, storage, and advisory fees, are properly documented and claimed. For collectors, explore opportunities to demonstrate investment intent for potential reclassification. Monitor Changes in Activity:Reassess clients’ classifications periodically as their circumstances and activities evolve. A client who begins as a collector may transition to an investor or dealer over time with proper adjustments to their approach. Conclusion Proper classification of collectible and art-related activities can have a significant impact on a client’s tax liabilities, deductions, and overall financial outcomes. Professionals who understand these distinctions and proactively guide clients can unlock substantial tax savings and help avoid costly errors. By identifying the appropriate classification, documenting intent, and leveraging allowable deductions, you can ensure your clients are well-positioned to navigate the complex intersection of art and taxation. For tailored advice and support, consult a tax professional experienced in the unique considerations of art-related activities.

January 7, 2025

Estates and Trusts

The Impact of California Assembly Bill 2016 (AB2016) on the Probate Process

In April 2025, California bill AB2016 will take effect, significantly impacting the state’s probate process. Currently, probate is required if a decedent’s property exceeds a certain value, and AB2016 will raise this threshold considerably. AB2016 amends six sections of California’s Probate Code and repeals one. Starting on April 1, 2025, and lasting through March 31, 2028, the threshold for a real property to qualify for disposition without a full probate administration will increase to $750,000. As a result, more estates will be subject to probate, and the obligation to notify all heirs and devisees could lead to a rise in estate disputes. In the wake of AB 2016, it's crucial to understand the California probate process and consider planning strategies to avoid it. All too often the reasons provided to clients are probate avoidance or circumventing the Medi-CAL recovery. With the imposition of the new law set to take effect on April 1, 2025, the value for probate avoidance for real properties per Probate Code section 13151 will rise to $750,000 for a primary residence and then the additional small estate of personal property at $166,250. Of note, the law provides that the “primary residence” is not limited to the decedent’s residence at the time of their death. This provides a total exclusion anticipated for April 1, 2025, to be $916,250. However, Probate Code section 13100 is set to be adjusted for inflation every three years and based on the date of the enactment of this law, it is likely that the value will need to be adjusted upward with planners estimating a value of one million ($1,000,000.00) can be excluded aside from jointly held assets or payable on death accounts. This is a significant change in the basis previously required court involvement. Now, if not otherwise designated in an estate planning instrument, the assets below the threshold in the Probate Code can go through a shorter form procedure with the Probate Court in the determination of a real property of small value.  Although this will still expose family assets to the public, it prevents many of the expensive aspects of probate. For starters, the statutory fees associated with probate will no longer apply. This means that neither a personal representative nor any counsel would receive compensation based on the values of the statutory estate. Instead, the work performed could be calculated at an hourly rate or other agreed upon compensation.  While the law is meant to extend the notice to all potential heirs and beneficiaries, it does not address the notice requirements to governmental agencies such as the Department of Victims Compensation Board, the Franchise Tax Board, and the Department of Healthcare Services. or instance, under the Welfare and Institutions Code section 14009.5, the Department of Healthcare Services is only notified for a Medi-CAL recovery claim when there is a decedent’s estate as set forth in Title 42 of the United States Code. Pursuant to Section 1396p(b)(4)(A) of Title 42 of the United States Code, estate “shall include all real and personal property and other assets included within the individual’s estate, as defined for purposes of State probate law[.]” These techniques, as set forth in the Probate Code, provide an exclusion for the formal Probate Estate Administration procedures in California. This will eliminate a large sector from the reporting requirements for Medi-CAL recovery claims.  While AB 2016 brings about significant changes to estate planning and probate law that could affect how estates are managed in California, the fundamental reasons for estate planning remain unchanged. Instead, it is a stark reminder of why practitioners advise in planning early. While AB 2016 provides a partial fix for transference of wealth after passing, it does not eliminate the concerns during a client’s lifetime.  A properly executed estate plan can mitigate the need for court involvement during any period of incapacity. Further, it can provide for a mitigation of risk for abuse by others taking advantage of you as an elder with a truster contact named as a successor representative.

December 13, 2024

Estates and Trusts

The Ultimate Gift: Estate Planning for Your Loved Ones

When we think of holiday gift-giving, we are dazzled with images of homes adorned with holiday decor, beautifully wrapped packages tied with ribbons under an equally beautiful tree, and even cars draped with giant bows waiting in the driveway for the most appreciative recipients. Yet one of the most profound gifts you can give your loved ones is not parked in your driveway nor does it fit under a tree; it is the gift of estate planning. Ensuring your estate planning is complete, I would argue, is the most thoughtful, intentional, and responsible act that provides clarity, security, and peace of mind for those you care about most.  Why Estate Planning is a True Gift:  1. Eases Emotional Burdens    Losing a loved one is one of the most difficult experiences of one of life. Without a clear plan in place, grieving family members are left to navigate complicated legal and financial decisions while coping with their heartache. Estate planning removes the undue stress of figuring out your wishes, allowing your beloveds to focus on healing and celebrating your life.  2. Prevents Family Conflict  Unclear or contested estates are among the leading causes of family disputes. Clearly outlining your wishes in a carefully constructed estate plan, minimizes the potential for misunderstandings, disagreements, and legal battles. This proactive step can preserve family harmony during an emotionally challenging time.  3. Protects Your Legacy  You have worked hard to build your life and accumulate assets. Estate planning ensures that your legacy reflects your values—whether that means leaving an inheritance, supporting a favorite charity, or safeguarding family traditions, your wishes must be documented. More importantly, the documents must comply with your state’s requirements that govern last wills and testaments, and trusts.  4. Provides Financial Security  For families with young children, estate planning provides financial stability by appointing guardians and setting up trusts for those minor children. If you do not properly document who should step in to care for your minor children in the event of a tragedy, a court proceeding is sure to follow. Additionally, it is essential you decide who the best person is to manage your minor children’s inheritance until they are old enough to handle it themselves. For adult children, a properly constructed plan ensures that your assets are distributed according to your wishes. You should also consider how, exactly, those funds should be left to your adult child to ensure that such an inheritance matches the ability of the recipient to manage those funds.  5. Empowers Your Voice  Through advance healthcare directives and powers of attorney, you maintain control over medical and financial decisions, even if you are unable to articulate your wishes. Having proper documentation in place that nominates a person to speak for you and outlines the type of care you want spares your loved ones from guessing or making agonizing medical decisions on your behalf.  The Five Easy Steps to Provide Your Estate Planning Gift   1. Take Stock of Your Assets  Make a comprehensive list of your assets, including property, investments, savings, insurance policies, and sentimental items.  2. Choose Trusted Representatives  Identify the people in your life who will carry out your wishes. It is imperative that you choose those in your life whom you trust most to make informed financial decisions in your best interest and health care decisions that are reflective of your wishes.   3. Consult Professionals  An estate planning attorney can you help draft documents and navigate complex legal requirements. Financial advisors can assist you with maximizing the value of your estate to assist you in planning for your legacy. Accountants can assist you in determining the most tax efficient strategies that should be employed.    4. Communicate with Your Loved Ones  Discuss your plans with family members or those closest to you to ensure they understand your wishes. Opening a dialogue about such important issues can often bring clarity to your wishes and communication is an integral part of ensuring your plan is effectuated. A carefully drawn plan that is communicated in advance can reduce confusion and set expectations for those around you.  5. Revisit Your Estate Plan  Estate plans should be reviewed annually, especially when there are law changes, new presidential administrations, and updated tax policies. As I have shared before, in addition to those issues, the 5Ds apply, as well so in the event of Death (of a loved one or beneficiary),  Distance when a loved one or trusted person moves away, the Divorce of a loved one (or your own divorce,) the Disability of a loved one (or your own disability), and upon the arrival of new Descendants such as the birth of a child or grandchild. The 5Ds can really impact your estate plan.   A Lasting Gift for Generations   Estate planning is not just about the practicalities of distributing assets; it’s a profound act of love. By taking the time to plan, you give your family and loved ones the ultimate gift: peace of mind, financial security, and a clear roadmap for navigating a difficult time.  This holiday season, or any time of year, consider sitting down to create or update your estate plan. It’s a gift that will resonate far beyond the moment, ensuring that your love and care continue to guide your family and loved ones for generations to come. 

December 11, 2024

Estates and Trusts

Race to the Sunset: Critical Insights for Clients on Estate Tax Exemptions ending in 2025

As we approach 2025, it is important to stay informed about the upcoming changes to federal estate and gift tax exemptions. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the estate and gift tax exemptions were temporarily increased and are currently $13.61 million per individual in 2024 (adjusted annually for inflation) and will go up to $13.9 million in 2025. However, this law will expire at the end of 2025, potentially reverting the exemption to pre-TCJA levels. Understanding the impact of these changes and seeking guidance on tax mitigation and estate planning is crucial. What is the Sunset Provision? The TCJA's temporary increase in the federal estate tax exemption allows individuals to pass on up to $13.61 million (adjusted for inflation) at death without incurring federal estate taxes and make up to $13.61 million in lifetime gifts. Without further intervention from Congress, after December 31, 2025, this exemption is expected to revert to approximately $5.49 million per individual, adjusted for inflation. Projections adjusted for inflation indicate this will amount to around $6.5 million at the beginning of 2026. This will be a significant decrease from the $13.9 million exemption amount allowed in 2025. Implications for Estate Tax Liability The reduced estate tax exemption could significantly impact estates valued above the lowered threshold. Estates exceeding the new exemption will be subject to higher federal estate taxes at a rate of up to 40%, reducing the inheritance that beneficiaries receive. This underscores the need for proactive estate planning to minimize future tax liabilities. Strategic Estate Planning Ahead of 2025 With the sunset provision approaching, it's crucial for individuals to review and adjust their estate planning strategies. Key steps to consider include: Gifting Strategies: Clients may want to take advantage of the higher exemption by making significant gifts to heirs or charitable organizations before 2025. This can reduce the size of their taxable estate and help avoid higher taxes later.   Utilizing Irrevocable Trusts: Establishing trusts is a powerful way to manage and protect assets while reducing estate taxes. Trusts offer flexibility in ensuring that assets are passed on in accordance with the wishes of a client and can help mitigate estate taxes. Updating Estate Plans: Regularly reviewing and updating wills, trusts, and other estate planning documents is essential as tax laws evolve. Ensuring your estate plan is up to date with current laws and well-positioned to address the upcoming changes in 2025 is critical. Consulting Professionals: Working with estate planning professionals, including attorneys and financial advisors, provides valuable guidance on navigating these complex changes and strategies. Their expertise in tailoring estate plans to individual circumstances is key to successful tax and planning management. Action Steps for Estate Planning in 2025 To prepare for the upcoming changes, consider taking these steps: Schedule a Consultation: Meet with your estate planning attorney, financial advisor, and accountants to discuss how the 2025 changes could impact your estate plan and assets. Review and Update Estate Documents: Ensure your will, trusts, and other documents align with current goals, and consult with your trusted advisors to ensure that your plan is compliant and efficient. Explore Gifting Options: Consider making substantial gifts before the estate and gift tax exemptions decrease to maximize tax benefits and minimize future liabilities. As the 2025 sunset of estate and gift tax exemptions approaches, understanding the potential impact on your estate plan is crucial. By taking proactive steps to review your plan, explore gifting opportunities, and consult professionals, you can better navigate the complexities of estate tax planning and safeguard your assets for future generations. The sooner you consult with your estate planning attorney and financial advisors, the sooner you will be able to determine whether the sunset will impact you and get guidance on how to navigate the correct planning necessary for you to timely and adequately address the TCJA.  Post-2024 Election Considerations During Donald Trump’s initial term as president, the TJCA was introduced and passed. In light of the recent election results, we can expect that there will be a push to renew and extend the TCJA. If the TCJA is extended, it could allow the estate and gifting annual and lifetime exemptions to remain in place and to further increase annually by adjustment for inflation provisions. This would continue the greatest transfer of wealth in history, allowing individuals to pass larger gifts to their loved ones or establish more complex plans to take advantage of gifting techniques as part of the transfer of wealth. Clients should continue to speak with their financial advisors and estate planning attorneys to remain updated on the TCJA and the potential sunset. 

November 13, 2024

Estates and Trusts

Inheritance Rights of Domestic Partners: A Comparison Between New York and New Jersey Laws

Domestic partnerships are legal arrangements between two individuals that grant some of the same rights and benefits as marriage. While domestic partnerships are recognized in many states, inheritance rights can differ greatly depending on the jurisdiction. This article explores the critical differences in inheritance rights for domestic partners under the laws of New York and New Jersey. Qualifying for Domestic Partnerships The qualifications for entering into a domestic partnership in New York and New Jersey are largely similar. Generally, both partners must: Be residents of the county or city where they are applying. Be at least 18 years old. Be unmarried and unrelated by blood. Be in a close, committed personal relationship for at least six months. Not have been in another domestic partnership within the six months prior to applying. Inheritance Rights in New Jersey In New Jersey, domestic partners are granted specific inheritance rights if their partner dies intestate (without a valid will). The surviving partner’s share of the estate depends on several factors: If the deceased partner has no children or parents, the surviving partner inherits 100% of the estate. If the deceased partner is survived by children who are also the children of the surviving partner, the surviving partner inherits 100% of the estate. If the deceased partner has a surviving parent, the surviving partner is entitled to the first 25% of the estate (with a minimum of $50,000 and a maximum of $200,000) plus 75% of the remaining estate. If either the deceased partner or the surviving partner has a child from another relationship, the surviving partner is entitled to the first 25% of the estate (with the same minimum and maximum) plus 50% of the remaining estate. Additionally, New Jersey law grants the surviving domestic partner priority to serve as the legal representative (administrator) of the deceased partner’s estate. Inheritance Rights in New York In contrast, New York does not grant inheritance rights to surviving domestic partners if their partner dies intestate. Without a will, the deceased partner’s assets will be distributed as follows: The deceased partner’s assets will go to their children, not their partner. If there are no children, the assets go to the deceased’s partner’s surviving parents. If they are not survived by children or parents, the assets pass to the deceased partner’s siblings. In the absence of children, parents, or siblings, the deceased partner’s assets may pass to distant relatives, such as nephews or cousins, leaving the surviving partner no share of the estate. Moreover, a surviving partner in New York does not have the right to serve as the legal representative (administrator) of the deceased partner’s estate. For couples in domestic partnerships in New York, comprehensive estate planning is essential. Without a will or other legal instruments, the surviving partner has no legal claim to the deceased partner’s assets and no right to act on behalf of the estate. The Federal Landscape: Domestic Partnerships and Estate Taxes It is also important to note that the federal government does not recognize domestic partnerships. Unlike married couples, domestic partners do not benefit from the federal estate tax exemption for spouses. As a result, a surviving partner may face estate taxes on any assets they inherit from their deceased partner. Additionally, if a partner inherits a qualified retirement account (such as a 401(k) or IRA), they cannot roll over the account into their own retirement account. This limitation can result in significant additional income tax liabilities on inherited retirement funds. Conclusion The inheritance rights and legal benefits for domestic partners vary significantly from state to state. In New Jersey, domestic partners are granted certain inheritance rights and legal privileges, including the ability to serve as the estate representative. In contrast, New York provides no automatic inheritance rights or authority over a deceased partner’s estate for surviving domestic partners. Due to these significant differences, domestic partners—especially those in states like New York—should prioritize estate planning. Careful planning ensures that a domestic partner’s wishes are clearly outlined, and their surviving partner is appropriately protected. Consulting with an attorney experienced in estate planning and domestic partnerships is essential for navigating these complex legal issues.

November 13, 2024

Estates and Trusts

Defensive Estate Planning For the LGBTQ+ Community

The political landscape has shifted, and those of us in the LGBTQ+ community are worried about what the future may hold. There is a lot to lose, and the new administration promises to be decidedly anti-gay. The rights of same-sex couples, adoptive parents, transgender individuals, and queer youth could well be in jeopardy. Among these is the simple right to get married. In Dobbs v. Jackson, the Supreme Court decision that overturned Roe v. Wade, one justice suggested revisiting Obergefell v. Hodges, the landmark ruling that legalized same-sex marriage nationwide. The right to marry was a milestone victory for the LGBTQ+ community. With the arrival of a new administration and conservative majorities in both houses of Congress, an emboldened Supreme Court could strike down marriage equality. With so much at stake, it is more important than ever to harness the protections the law currently provides. The Benefits of Marriage For couples in committed relationships, the best protection may well be marriage itself. Marriage not only provides a wide range of federal and state legal benefits; it also ensures that in a crisis, your spouse has essential rights regarding inheritance, health care decisions, and other critical matters. Taking advantage of the right to marry now—while it is still secure—could be a prudent move. Before tying the knot, talk to a lawyer to ensure that you understand the state and federal benefits, as well as the tax obligations. For example, being married means having to file your annual tax returns as a married couple, and some couples will pay more in income taxes under the “marriage penalty.” But most couples pay less in taxes, and they enjoy a sense of security that simply being partners may not provide. If the Supreme Court decided to overturn Obergefell, it would mean that marriage equality would no longer be federally protected, leaving it up to individual states to determine whether to allow same-sex marriages. This could lead to a patchwork of state laws, some continuing to permit same-sex marriage and others outlawing it. Already having a marriage license will help guard against such uncertainty. The Importance of Estate Planning Marriage confers significant legal benefits, but a marriage license alone isn’t enough. No matter what the future holds for same-sex unions, an estate plan will help protect your relationship from some of life’s most significant uncertainties. 1. Will The backbone of most estate plans, a will specifies how your assets should be distributed upon your death, who will care for any minor children, and who will be responsible for settling your estate. For same-sex couples, wills are particularly important to ensure that each partner is legally recognized as an heir. Without a valid will, your partner may not inherit your property automatically, and your assets could go to family members who do not have your best interests at heart. 2. Powers of Attorney If you should ever become incapacitated, someone would need to pay your bills, file your taxes, and possibly even sell your home if the incapacity appears to be permanent. A power of attorney will authorize a partner, spouse, or other trusted individual to take on this role. If you have no power of attorney, it could be necessary for someone to become your legal guardian. This is an expensive and time-consuming process, and it involves a court hearing. At just a few pages, a power of attorney can prevent the need for a guardianship and save your loved ones a lot of stress. In Maryland, it’s helpful to have the state’s statutory power of attorney, which banks and other entities are obligated to accept. You can even include special instructions in the document, such as authorizing your attorney in fact to make gifts on your behalf. 3. Advance Medical Directives An advance directive enables you to name a “health care agent”—someone you trust who will manage your health care if you ever become incapacitated. It also says what kind of care you want to receive in an end-of-life situation, like a terminal illness. If you have a partner, naming them as your agent helps ensure that they have the legal right to make critical medical decisions on your behalf. Without such a document, hospitals or medical staff may default to family members who may not recognize or support your relationship. Being married means your spouse automatically has the legal right to make medical decisions for you. But an advance directive is an important backup. It ensures that your spouse is in charge even if your marriage is not recognized, and it names a backup agent in case your spouse is not available. For trans individuals, an advance medical directive can also help make their care as dignified as possible. For example, the document can instruct your healthcare providers to address you by your preferred name and pronouns, regardless of your legal name or the gender marker on your driver’s license. This simple provision can prevent the distress of being called by the wrong name at an especially vulnerable time. To help prevent being misgendered, you can also request that your appearance be maintained to align as much as possible with your stated gender. Including this instruction in an advance directive will alert your healthcare providers as to your wishes and also help your healthcare agent ensure that they are followed. 4. Trusts In addition to a will, many people choose to set up a trust to manage their assets during their lifetime and distribute them efficiently upon their death. A trust allows you to specify how your assets will be used for the benefit of your loved ones, and it can enable them to bypass the lengthy probate process. A trust is also more private than a will. In a hostile political environment, having a trust can protect your privacy as a member of the LGBTQ+ community. Second-Parent Adoptions Less certain than the right to marry is the future of adoptions by same-sex couples. If one parent has a legal connection to a child, such as through birth, it’s smart to have the other parent file for a “second-parent adoption” to create a clear legal relationship. (This will require the consent of the child’s other biological parent.) A court order giving the second parent full legal rights will prevent problems when enrolling the child in school or accessing their medical records. Trans Individuals The incoming administration has directed some of its harshest rhetoric at the transgender community. Because the laws may shift in ways that limit protections for trans individuals, it’s a good idea to take steps now to safeguard your rights. For someone who is transgender or in transition, these might involve legally changing their name to reflect their gender identity or choosing a gender-neutral name that aligns with their preferences. It’s also important to update the gender marker on their birth certificate. In many states, a new birth certificate will be issued—rather than an amended version—showing the updated name and gender marker. A legal name change can occur at any time, regardless of the stage of the person’s transition. Once the change is final, they should notify Social Security and the Motor Vehicles Administration of the new name. Having a driver’s license and Social Security card bearing the new name will make it easier for other agencies and businesses to update their records as well. And, of course, your will, power of attorney, and advance directive should be updated to reflect your new name as well. Conclusion These are challenging times. The good news is that the legal rights of the LGBTQ+ community are still largely intact, even with the future uncertain. By acting now, you can enjoy some peace of mind, knowing that you have taken important steps to protect yourself and those you care about. This article appeared in the May 2025 edition of Maryland OUTLoud.

November 8, 2024

Estates and Trusts

The Key to Succession Planning: A Revocable Trust

How can you ensure your legacy endures and your loved ones are spared unnecessary heartache during a challenging time? Succession planning is one of the most crucial aspects for securing financial stability and ensuring a smooth transition of wealth across generations upon the death of a business owner. Proactive planning today can save loved ones future confusion, stress, and financial strain. Among the many tools available for succession planning, a revocable trust stands out as one of the most versatile and effective methods for securing one's legacy and preserving the value of a business. What is a Revocable Trust: A revocable trust, also known as an “inter vivos” or "living” trust, is a legal document that allows an individual, known as the grantor, to transfer ownership of their assets, including a business, into a trust for their own benefit during their lifetime. Simply put, a trust can be the proverbial bucket in which you “hold” your assets. The grantor can revise the document at any time, adding or removing assets or even revoking it entirely if circumstances change. Upon the grantor’s death, the trust becomes irrevocable, and the designated successor trustee—the person named by the grantor to manage the trust after their death—distributes the trust's assets according to the terms outlined in the trust document. Unlike a Last Will and Testament, which becomes effective only after death, a revocable trust functions during the grantor’s lifetime. It provides control over assets while simplifying asset distribution after death by avoiding the probate process required with a Last Will and Testament. Key Benefits of Using a Revocable Trust in Succession Planning: Avoiding Probate: One of the primary advantages of a revocable trust for a business owner is that assets held within the trust bypass the probate process. Probate is a public, court-supervised process that can be lengthy, costly, and stressful for heirs. During probate, the deceased’s assets, including business assets, can be frozen during the pendency of a probate proceeding. When a business is one that needs daily attention, services customers, runs a payroll, and has employees, even a short delay could mean financial ruin. With a revocable trust, the appropriate party can step in immediately to manage the business, allowing for uninterrupted operations and quick, private inheritance for beneficiaries. Maintaining Privacy: Probate is a public process, meaning the estate details—including the business assets owned by the decedent and their beneficiaries— become a matter of public record (as illustrated by the widely reported Last Will and Testament of actor James Gandolfini, published on the first page of the New York Post). A revocable trust, however, remains private, ensuring a discreet transfer of assets and protecting family members from unwanted attention, potential disputes, and estate contests. Flexibility and Control: The grantor of a revocable trust retains control over the assets placed in the trust, allowing for the addition or removal of assets as needed. Business interests, investments, and real property owned in different states can all be titled in the same trust, creating an organized structure for asset management. This flexibility allows for updates as family dynamics or financial situations evolve (consider the 5D’s), ensuring the trust remains adaptable and effective throughout changing circumstances. Protection for Beneficiaries: If you have young or financially inexperienced beneficiaries, a revocable trust can also protect their inheritance by establishing “sub-trusts” specifically for them. Simply put, the grantor’s trust can contain additional trusts to benefit the beneficiaries. These sub-trusts provide guidelines and stipulations for how and when distributions to the beneficiaries are made, providing structure and oversight. When business assets are left to inexperienced beneficiaries, these guidelines and stipulations are particularly helpful, and a trustee can be appointed who has familiarity and understanding of the business to ensure that those interests are protected. Sub-trusts are particularly useful for parents or grandparents looking to ensure that minors or financially vulnerable beneficiaries are cared for responsibly, preventing unrestricted access to valuable business assets. Incapacity Planning: In the event that the grantor becomes incapacitated, even temporarily, a revocable trust allows for seamless management of their affairs by a designated successor trustee. This trustee, selected by the grantor, can be someone well-versed in both the business operations and the grantor's family dynamics. Appointing a competent successor trustee in advance can effectively manage potential financial and administrative crises, helping to avoid the need for a court-appointed guardianship, which can be a lengthy and an emotionally taxing process. Avoidance of Disputes: A revocable trust clearly defines named beneficiaries, ensuring they receive their inheritance without being involved in the probate court process. In New York and many other states, next of kin, who may not even be beneficiaries named in the Last Will and Testament, are notified of their family member’s death and provided the opportunity to appear in court and dispute the terms of the Last Will and Testament. However, with a revocable trust, there is no probate court proceeding, eliminating the notification requirement for disinherited individuals. This absence of a court process makes it significantly more challenging to dispute the terms of a revocable trust. Securing Your Legacy Succession planning with a revocable trust provides control, flexibility, and protection for both the business owner and their beneficiaries. By securing financial stability and continuity in business operations, even after the death of the owner, a revocable trust can be a valuable component of a comprehensive estate plan. Whether you are in the process of building your business or preparing for sale or succession, or planning your legacy, consider the use of a revocable trust to protect your family’s future with confidence.

November 4, 2024

Estates and Trusts

The Gift of Planning Your Estate

As 2024 draws to a close, the season of giving that rounds out the year will once again be upon us. As you fill your shopping list with festive sweaters, cool electronics, and other treasures, consider planning for the unexpected as a gift to the people you care about. Estate planning is a good place to start. Consider the consequences if something were to happen to you. Would someone you trust be allowed to take care of you and manage your health care? With an advance medical directive, you can put the right person in charge in case you ever become unable to speak for yourself. This person could then work with your doctors to help ensure that your care is appropriate and in keeping with your wishes. As part of a complete estate plan, an advance directive also enables you to make choices for serious, end-of-life situations such as a terminal illness. Would you simply want to be kept comfortable, or would you prefer to have more aggressive measures taken? These are tough questions to consider. But wresting with them in advance, before the need arises, will make life easier for the people who care about you. What about your finances? If you should ever become incapacitated, someone would need to pay your bills, file your taxes, and possibly even sell your home. A power of attorney will authorize a trusted friend or family member to take on this role. If you have no power of attorney, it could be necessary for someone to become your legal guardian. This is an expensive and time-consuming process, and it involves a court hearing. At just a few pages, a power of attorney can prevent the need for guardianship and save your loved ones a lot of stress. It is also important to plan for what happens if the worst comes to worst. Upon your death, who would settle your estate? Who would inherit your assets? If you have minor children, who would their guardians be? Should they receive their inheritance through a trust or outright? The best way to sort through these questions is to speak with an attorney who can guide you through the planning process. In addition to helping you explore your options; the attorney can draft a will and other essential documents. A complete estate plan will also address things like updating the beneficiaries on retirement accounts and life insurance policies. It will help ensure that your “digital assets,” like online accounts, frequent flyer miles, and credit card award points, are included in your estate. It will also give you an opportunity to plan a meaningful memorial service that reflects your wishes and beliefs. The effort that goes into creating an estate plan can be considered a gift. It is, first of all, a gift to yourself. With your plan complete, you can enjoy the peace of mind that comes from knowing that, as much as possible, you are ready for what lies ahead. An estate plan is also a gift to the people you love. A minimum amount of stress will enable them to care for you if you can’t care for yourself. It will also save them time, money, and worry when you are no longer in the picture. Whether you have a spouse or partner, children, or just dear friends, consider preparing an estate plan as a gift to them. As Booker T. Washington said, “Those who are happiest are those who do the most for others.” Lee Carpenter is a Principal at the law firm of Offit Kurman, P.A., and can be reached at (410) 209-6426 or lee.carpenter@offitkurman.com. This article is intended to provide general information and should not be construed as legal advice.

October 30, 2024

Estates and Trusts

Why Your Estate Plan Might Need a Tune-up

An estate plan is a set of papers that usually includes a will, durable power of attorney, and advance medical directive. These essential documents can help you manage financial and health-related matters if you ever become incapacitated, and they should provide for the efficient transfer of your assets upon your death. In other words, an estate plan is a hedge against uncertainty, a defense against the curveballs life may toss your way. An up-to-date plan can help you minimize death taxes, protect your assets from creditors, provide for your loved ones, establish trusts for your children, and appoint guardians to care for them. Although estate-planning documents don’t “expire,” they can become out of date and ineffective if your life circumstances have changed. This is when a “tune-up” may be in order. A phone call with an Estates & Trusts attorney is advisable if any of the following apply to you — You have had children or gotten married or divorced. Someone named in your documents has died. You have bought or sold real estate (in Maryland or elsewhere). Your assets have changed significantly. Even if your circumstances are largely unchanged, it is still recommended that you review your plan every three to five years. Tax laws change, new planning techniques become available, and updated documents can offer important new benefits. It’s also possible that your wishes have changed since your documents were drafted. For example, do you want to update the list of people who will inherit from you? Is it time to change the individuals who will settle your estate, act as your trustees, or serve as guardians to your children? Do your financial power of attorney and advance medical directive still name the right people to manage your affairs if you no longer can? An attorney who specializes in this area can help you think through your planning goals and suggest your best options for achieving them. Even if no changes to your documents are necessary, receiving the assurance that you are ready for the unexpected is reason enough to speak with a planning professional today. Of course, if you don’t already have a current estate plan, there is no better time than the start of a new year to put your affairs in order. Making decisions today about your will, power of attorney, and advance medical directive can bring you peace of mind and a new confidence about what lies ahead. Lee Carpenter is a Principal at the law firm of Offit Kurman, P.A., and can be reached at (410) 209-6426 or lee.carpenter@offitkurman.com. This article is intended to provide general information and should not be construed as legal advice.

October 30, 2024