Originally posted on bryancavefiduciarylitigation.com
It is uncommon to see modern trusts that require distribution of all income but preclude distribution of any principal to a beneficiary. Since the characterization of income and principal can be subject to multiple interpretations, precluding any distribution of principal often can lead to legal disputes. In Favour v. Favour (not for publication), the Arizona Court of Appeals disagreed with an Arizona superior court’s ruling that “the income beneficiary of [a] Martial Trust is entitled only to the annual ‘distributable net income (“DNI”)… reported on the federal income tax return, and no more than that.” The Will also specified that it was intended to qualify as “qualified terminable interest property” (“QTIP”) for which an election could be made under Section 2056(b)(7). (more…)
It’s that time of the year again…tax time! Like it or not, when tax season rolls around it is time for most Americans to add “do taxes” to the “to do” list. Chances are you have already started gathering the documents that you or your accountant will need to complete your income tax return. Or, if you are ahead of the game, your income tax return is already filed and your refund (if you are lucky) is in your pocket. (more…)
The term March Madness may take on new significance to New Yorkers this year. In addition to contributing to NCAA pools, New Yorkers should consider making gifts this month. Following up on prior blog post, New Yorkers may have a very small window of opportunity to take advantage of gifting significant sums of money prior to April 1, 2014. Currently New York State has no gift tax. New Yorkers can make gifts of any size to anyone without incurring any New York gift tax consequences at all. However, the gift and estate tax rules may change shortly. Governor Cuomo has proposed a change to New York’s estate and gift tax law that will require all taxable gifts made by a New York resident after March 31, 2014 to be included as part of the gross estate for purposes of calculating the New York estate tax. However, the proposal would not apply to gifts made prior to April 1, 2014. (more…)
The Internal Revenue Service has posted final instructions to Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, to its website. (more…)
Maintaining property in a family for generations to come can be tricky. As the parties in Hoefer v. Musser found out, the intention of a decedent speaks volumes and can overcome procedural deficiencies such as an improper recording of a warranty deed. In Hoefer, the Missouri Court of Appeals (Southern Division) recently held in favor of a decedent’s wishes to keep a farm in his family for “generations and generations.” See Hoefer v. Musser, No. SD 32576, 2013 WL 6800823 (Mo. App. S.D. Dec. 23, 2013).
In Hoefer, the decedent’s nephew (Hoefer) was appointed as successor trustee to decedent’s irrevocable trust—the “Vineyard Dwain Hoefer Trust,” created during Hoefer’s lifetime. Musser, the decedent’s niece, was appointed as personal representative to Hoefer’s estate. The trust’s only asset was the decedent’s farm, which he intended to keep in his family for as long as possible by granting the farm to Hoefer until his death, then to Matthew Hoefer until his death, then to Matthew Hoefer’s living children or lawful heirs.
After executing the trust documents and warranty deed transferring ownership of the farm to the trust, the decedent’s attorney gave him the original copies of the documents and instructed him to record both the trust and warranty deed. Approximately three months after execution of the trust, Musser called Hoefer to indicate that the trust had not yet been recorded. Hoefer recorded the trust shortly thereafter.
Following Hoefer’s recording of the trust, the farm house burned down–resulting in a total loss of the property. Less than a year after the farm’s destruction, Hoefer, with the decedent’s permission, built a house on the farm. Not long after Hoefer built the house on the farm, the decedent passed away. Musser, in her capacity as personal representative of the decedent’s estate, instituted a probate action and listed the farm land as an asset of the estate.
Hoefer moved to quiet title, or in the alternative, unjust enrichment for the cost of the improvements done on the farm. Hoefer argued that the decedent had let him build the home on the farm because it was Hoefer’s property. Musser argued that the decedent never recorded the warranty deed, and therefore the transfer of the farm as an asset to the trust never occurred.
After a bench trial, the trial court ruled in favor of Hoefer, finding that the intentions of the decedent pointed his desire to keep the farm in his family. Hoefer provided evidence and witness testimony regarding the decedent’s actions and intentions. For example, witnesses testified that decedent had offered the farm to other members of his family and even Musser herself, who all declined, before the decedent granted the property to Hoefer.
Although the decedent’s intentions were a substantial focus of the trial court’s ruling, the crux of the case came down to a procedural aspect: the decedent’s failure to record the warranty deed transferring the farm to the trust. Musser presented evidence that although she was present for the execution of the trust, she did not see the warranty deed in the papers given to the decedent for him to record. Furthermore, the original warranty deed had been given to the decedent with instructions on how to record, and was presumed to have been lost in the fire that destroyed the farm. The parties did not contest that the warranty deed had in fact, never been recorded.
After the trial court ruled in Hoefer’s favor, Musser appealed, arguing that the farm was never properly transferred to the trust in that the deed delivering title to the trust was not accepted by the grantee nor recorded. The Missouri Court of appeals was bound to uphold the trial court’s ruling unless there existed no substantial evidence to support judgment, the judgment was against the weight of the evidence, or the trial court erroneously declared or applied the law.
A deed must be delivered for it to operate as a transfer of ownership of land because the delivery gives the instrument force and effect. Rhodes v. Hunt, 913 S.W.2d 894, 900 (Mo. App. S.D. 1995). Here, the burden of showing that the deed was not delivered was upon Musser, as the party contesting its delivery. The Missouri Court of Appeals looked at case law precedent holding that although recording creates a presumption of delivery, it does not operate as delivery of the deed. In fact, delivery may be made even though the grantor remained in possession of the deed. O’Mohundro v. Mattingly, 353 S.W.2D 786, 792 (Mo. 1962).
The court also looked to precedent that held that the failure to record a deed conveying title to property to a trust does not affect the validity of the trust. Newtom v. Winsatt, 791 S.2.2d 823, 829 (Mo.App.S.D. 1990). Under Newton, the Court found substantial evidence for the trial court to find an effective delivery and acceptance of the warranty deed.
Finding that it was undisputed that the decedent intended to keep the farm in his family, and that he intended to convey the farm by warranty deed to the trust, the Court of Appeals upheld the trial court’s decision. In doing so, the Court deferred to the trial court’s credibility determinations, and the weight given by the trial court to witness testimony.
Although certain technical requirements were lacking in Hoefer’s case, the overwhelming evidence of decedent’s intentions to maintain the farm in his family for “generations and generations” ultimately prevailed.
The use by the founders of Facebook and Twitter of grantor retained annuity trusts (“GRATs”) to reduce estate taxes has been widely publicized. What many founders and entrepreneurs may not realize, however, is that the same techniques may be appropriate for companies with more modest growth potential and that considering the use of a GRAT at an early stage may be advantageous. GRATs have been discussed previously on the blog here.
In essence, a GRAT is a method to “freeze” the value of an asset at a particular point in time so that the future appreciation of that asset’s value escapes estate tax. A grantor contributes assets to a GRAT in exchange for the right to receive fixed annual payments from the GRAT for a number of years (not for life). The amount of each annual payment includes a return of a portion of the principal amount contributed plus an amount of interest (at a minimum rate required by the Internal Revenue Service). If the sum of the annual payments from the GRAT equal the original principal (valued at the time of the transfer to the GRAT) plus the aforementioned minimum interest, the GRAT is referred to as a “Zeroed Out” GRAT and there is no gift made when the asset is transferred to the GRAT. After the final annual payment is made to the grantor, all assets remaining in the GRAT are transferable to the beneficiaries of the GRAT (children, not grandchildren) without the payment of gift taxes and are not considered part of the grantor’s taxable estate (if he or she survives the term of the GRAT). (more…)
Many people in their 20s and 30s are more interested in checking off a bucket list than addressing important issues related to estate planning. Young professionals are already quite busy juggling all sorts of concerns – new jobs, new families, new home, adjusting to a new stage of life, but few include estate planning on this list. Despite the popular mantra from Ke$ha to “live like you’re going to die young”, few young adults actually anticipate the possibility of doing so. The following are a few simple steps to enable you to ease the burden on loved ones before life becomes even more complicated.
1. Who do you want to receive your stuff? Put it in writing.
Estate planning does not just involve mass amounts of money – we all have assets in some form, and they need to go somewhere when we die. Beyond real property, you have a lot of “stuff” – various bank accounts, furniture, life insurance policies, vehicles, hobby gear, jewelry, clothing, retirement accounts, pets… Without a valid will, all of your “stuff” will likely pass to the designated person under your state’s intestacy statute. If you don’t know who that may be, it’s worth finding out. For most unmarried individuals, their “stuff” will likely go to their parents, who probably won’t appreciate your snowboard as much as a good friend. Maybe you know someone could use your kitchen table, someone who your dog gets super excited to see when he/she comes over, or a roommate that you help accessorize every morning with your jewelry? Did you and brother draw straws over a piece of furniture you inherited? Take the opportunity to be thoughtful and generous towards others in your life by writing them into your will. (more…)
Recent news stories such as that of Marlise Muñoz in Texas and auto racing star Michael Schumacher serve as a reminder of the importance of discussing your wishes with others regarding end-of-life care. Select someone you trust to make those decisions on your behalf in case you become incapacitated, and sign the documents required to empower that person to act for you if necessary.
Most Americans say they want to die at home, surrounded by family and friends. But data from Medicare shows only about a third of elderly patients die this way. Taking a few small steps now can go a long way toward ensuring that your wishes are respected when the time comes.
You can start by talking to your family, your friends, and your doctors about your wishes in terms of death-delaying care in the event you are unable to make those decisions for yourself. Do you want “extraordinary” measures taken to prolong your life, such as major surgery or a mechanical respirator? What about artificial nutrition and hydration? Under what conditions? Is the cost of procedures to be taken into consideration? Do you wish to remain at home rather than be transferred to a hospital or nursing facility? Do you want to be an organ donor? Do you want to be buried or cremated? For help getting the conversation started, visit deathoverdinner.org. The website was launched last year for precisely this purpose. It provides invitation language, reading materials, conversation prompts, and hosting tips, among other things.
After you’ve shared your wishes with others, it’s important to select the person (or persons) you would like to have act on your behalf, if necessary. Typically referred to as an “agent,” a “health care surrogate,” or an “attorney-in-fact for health care decisions,” this person is authorized under an advance directive or a healthcare power of attorney to communicate with your physicians and make medical decisions for you if you are incapacitated. This should be someone you trust and who knows your wishes regarding medical treatment and end-of-life care and will be able to make decisions for you in accordance with those wishes. Typically you would designate only one person at a time to serve as your attorney-in-fact for health care decisions. However, you may be able to designate multiple individuals as your attorneys-in-fact for health care decisions. If more than one person is designated – my three children acting jointly, for example – consider whether any one or more of the persons designated may act alone, or if you want decisions made by majority rule. And be sure to appoint one or more successor attorney(s)-in-fact for health care decisions, to serve if your first choice is unable or unwilling to serve.
Put it in writing. According to the New York Times, only about 47% of Americans over age 40 have advance directives or living wills. State law governs what you will need in order to authorize another person to make medical decisions for you. Depending on your state, you may need what’s called an advance directive, a living will, and/or a healthcare power of attorney. A good resource for state forms and other information related to end-of-life issues is caringinfo.org. For questions regarding how to complete forms, you should consult your attorney.
Revisit and update your documents periodically. Have your wishes regarding medical treatment or end-of-life issues changed? Are the people you designated as your attorneys-in-fact and successors still aware of your wishes and able to act on your behalf? Have you moved to a new state? State requirements differ, so it’s important to sign documents that conform to your new home state’s specifications when you move.
Not surprisingly, doctors are more likely than the rest of us to have advance directives. This is one easy lesson in medicine that doesn’t require an M.D.
Under the portability rules a surviving spouse can elect to have the deceased spouse’s unused estate tax exemption (currently $5.34 Million) added to the surviving spouse’s estate tax exemption amount. But to do this, a federal estate tax return has to be filed within 9 months of the death of the first spouse, even if there is no taxable estate for estate tax purposes. The federal estate tax return is the only way to take advantage of the portability election. The nine month time limit has proved to be an issue in regards to same-sex spouses, whose marriages were not recognized by the IRS until the Windsor decision on June 26, 2013. Click here, here, and here to read about the Windsor decision. We believed the Windsor decision may have opened the door to the otherwise “late” portability elections for same-sex spouses, but were not sure how the IRS would treat an otherwise late return for this purpose.
Good News! Now, for deaths of same-sex couples that occurred in 2010, 2011, and 2012, Rev. Proc. 2014-18 provides a process for claiming portability for any spouse, same sex or not, who died between December 31, 2010 and December 31, 2013, even if otherwise a “late” election. (more…)
A program related investment (PRI) is a powerful tool for a private foundation to positively influence social enterprise while advancing its philanthropy and satisfying its 5% annual minimum distribution requirement.
Traditionally, private foundations have used grant-making activities as the primary means to satisfy their 5% annual minimum payout requirement and to accomplish their tax exempt purposes. However, modern trends reveal a new focus of private foundations on PRIs to achieve the same results.
What is a PRI?
A PRI is an investment, rather than a grant, whose primary purpose is to achieve one or more of the private foundation’s tax exempt purposes and no significant purposes of which is the production of income or the appreciation of property. However, the fact that an investment produces significant income or capital appreciation is not conclusive evidence that income or appreciation was a significant purpose of the investment, and, therefore, does not preclude the investment from being a valid PRI. As a practical matter, many PRIs produce income or capital appreciation. The test is whether the production of income or capital appreciation is a significant purpose of the investment over the tax exempt purposes of the investment. As long as the tax exempt purpose of the investment is strong, the production of income or capital appreciation should be viewed as a mere ancillary benefit.
A PRI is also a great benefit to a private foundation. PRI counts towards a foundation’s qualifying distributions just as if they were grants and are exempt from the excess business holdings tax (imposed on foundation investments that exceed 20 percent of a for-profit venture) and the jeopardizing investment tax (imposed on investments that jeopardize the tax exempt purposes of a foundation).