When Trust Services Included Immortality

 From an April 1959 issue of The New Yorker:

[An old post that seemed worth repeating.]

Did Stretch IRAs Deserve to Die?

Individual Retirement Accounts began as simple way to put aside a few bucks. With the passing years, limits on annual IRA contributions increased and top income earners started moving megabucks into rollover IRAs.  Estate planners took notice.

Assets remaining in IRAs and 401(k)s at the owner’s death could be passed to a named beneficiary, and not necessarily in a lump sum. Distributions could be stretched over the beneficiary’s lifetime. Planners saw the potential for “inheritances" that offered many years of tax-deferred investment growth. Potentially, owners of seven-figure rollover IRAs could leave the grandkids a growing income for life.

Just one problem: Bright, imaginative grandchildren weren’t going to let a stretch IRA dribble out payments decade after decade. They would empty the account and use the after-tax proceeds to buy a beach house, start a business, back a Broadway musical. or who knows what.

The challenge for estate planners: Create trust provisions that deterred or prevented such impulsiveness, while also complying with IRA regulations. They rose to the challenge. Now the SECURE act has made their ingenuity almost useless. Except for spouses and with certain other limited exceptions, the SECURE act eliminates stretch IRAs. Most beneficiaries are now required to empty their IRAs within ten years.

The Editorial Board of The Wall Street Journal was not amused by the stretch IRA's demise, accusing Congress of playing a dirty trick on “the 90-year-old banking on this strategy." But the WSJ conceded, "there’s a reasonable case that IRAs weren’t meant to outlive their owners by decades.”

Michelle Singletary in The Washington Post agrees. IRAs weren’t intended to be estate planning vehicles.

There is nothing wrong with trying to minimize your taxes or the tax bill for your heirs. That’s a smart money move. However, IRAs and 401(k)s weren’t meant to be used as a way to transfer wealth. They were designed to encourage people to save by giving plan participants and/or account holders — not their children or children’s children — a tax break. The loophole created by the law that has allowed beneficiaries to stretch out their tax burden was a bonus, not an entitlement that should never be touched.

I’m with Singletary. The death of the stretch IRA is timely.

Will Your Robo Adviser Plan Your Estate?

Illustration: Sydney Morning Herald

Fintech has brought us robo portfolios, robo rebalancing, robo tax-loss harvesting. What's next?

According to Steve Lockshin of Adviceperiod in this Barron's interview, human estate planners should start feeling nervous:

We are beginning to work on automation for estate planning—the one area that advisors love to insist cannot be automated. We are using our access to data to build out the algorithms to automate estate-planning recommendations and then create the appropriate legal documents. It’s all rules-based, and when it comes to most lawyers, it’s an antiquated industry.

Five Reasons for a Trust

Estate planning is about more than taxes. Steve Hartnett at the American Academy of Estate Planning Attorneys offers a concise summary of five planning needs that call for a trust.

Fred Trump's Tax-Averse Estate Planning

Fred Trump in 1950

Seemed like a quiet year for estate planners. With the Trump tax cuts old news, the Heckerling Institute resorted to promos on NPR to drum up business.

But now Heckerling attendees will have plenty to talk about. The New York Times has published a virtually endless study, adorned with audio-visuals, of how Fred Trump passed his real estate fortune to his children, and most especially to his celebrity son, Donald. Hidden gifts! A large GRAT valued for little! An overreaching codicil that Donald tried, unsuccessfully, to attach to Fred Trump's will!

Even in the age of fake news, you can't make this stuff up.

Inheritance Begins at 30

Beneficiaries shouldn't get their inheritances before age 30, according to a majority of respondents to a Financial Times survey of wealthy readers.  And despite the conventional wisdom offered by estate planners, some may not give the same amount to each child.

In reality, inheriting too soon probably isn't the problem. As one respondent commented, rising life expectancy is deferring many inheritances to an age when it is too late enjoy or spend the proceeds.

Sidelight: Respondents did not view their private bankers as an estate planning resource.

When asked whether they had discussed wealth transfers with their advisors, the response was mainly ‘no’, with comments such as: "They don’t have the expertise or experience to help like in the past"; "No point, they just want to sell you inappropriate and expensive “products"; and my personal favourite: "Yes. Some. But they nod out of deference. Silly people."

Should She Neutralize Her Ex's Estate Plan?

Query to The Ethicist in The New York Times magazine:

I am divorced. I recently learned from one of my children that my ex is leaving them uneven shares of his wealth. He’s leaving less to our son, the child he dislikes. His rationale is that this particular child has poor money-management skills 

My will, so far, is divided evenly. As I’ve told my children repeatedly, I love them equally, and I want this love reflected in my will.  

Should I change it to give more to the child disliked by his father, in order that the children come out more or less equal? Would the other child, our daughter, feel slighted and less loved?

Yes, use your will to equalize things, rules The Ethicist, and explain your strategy to your daughter.

As for the son's lack of money-management skills, "you can solve that problem (as your ex-husband could have) by putting the money in a trust."

Today's Trusts Explained

From a Massachusetts law firm comes Demystifying Trusts, a guide to currently popular trust arrangements. They include revocable living trusts, special needs trusts and trusts designed to maximize Medicaid eligibility for trustors in nursing homes. Also, ILITs.

The Estate Plan That Amazed Samuel Pepys

Samuel Pepys

Not long after Christmas, three and a half centuries ago, Royal Navy bureaucrat and diarist extraordinary Samuel Pepys paid a call on Lord Crew. There he heard a remarkable story of inheritance.

An old friend had left Lord Crew's brother, Mr. Nathaniel Crew, an estate paying 600-700 pounds per  annum. Surely a worthy income in those days.

But Mr. Crew's good fortune had not come by bequest or devise. The recently deceased friend had left no will.

Nathaniel Crew

Rather, the amazed Pepys reports, the friend "had, above ten years since, made over his estate to this Mr. Crew, to him and his heirs for ever, and given Mr. Crew the keeping of the deeds in his own hand all this time; by which, if he would, he might have taken present possession of the estate…."

"This is as great an act of confident friendship," writes Pepys, "as this latter age, I believe, can shew."

Oddly, in his portrait the trustworthy Nathaniel looks a bit shifty. In reality he went on to become one of the Church of England's longest serving bishops.

Who Gets the $7 million townhouse?

The Horatio Street townhouse 

Back around the time young Bob Zimmerman moved to New York and legally changed his surname to Dylan, Bill Cornwell and Tom Doyle moved into an apartment in a West Village townhouse on Horatio Street. Cornwell later bought the building, and there they stayed. Although gay marriage was unthinkable half a century ago, the two men became a well-known couple in the West Village.

In 2014 Cornwell died at age 88. His will left his personal possessions and his townhouse to Doyle. But the will is invalid, signed by only one witness – New York State requires two. So Cornwell died intestate. Nieces and nephews will inherit. Could Tom Doyle lose the only home he has known for over five decades?

Not without a fight, writes Attorney Arthur Z. Schwartz:

Tom has come to my office and we have come up with a plan. While New York never recognized common law marriage, Pennsylvania did until recently. Bill Cornwall and Tom Doyle vacationed there a number of times, and New York Courts will recognize common law marriages if they would be recognized in a state where a couple visited, even if the visit was brief. I have made Tom Doyle’s rightful claim to 69 Horatio Street. It is a claim born of love and the cruel refusal of New York to recognize gay marriage for so many years.

Could the plan succeed? In any event, the moral of the story is that Bill Cornwall should have shaped his estate plan sooner and better.

A Meltdown for Family Limited Partnerships?

The family limited partnership, Wealth Management declared back in 2000, is the ice cream sundae of estate planning strategies.

By using a partnership to pass portions of a family business, real property or even a portfolio of marketable securities to family members, wealthy donors can generate substantial valuation discounts for gift or estate tax purposes.

Could the ice cream social be nearing an end? That's the threat posed by newly proposed regulations. Some observers think the regs will be finalized before we have a new president in the White House.

Last weekend Paul Sullivan in The New York Times and Laura Saunders in The Wall Street Journal offered briefings on the potential meltdown. Both columns may prove helpful to wealth managers as they urge wealthy clients to enjoy their sundaes before the feds turn up the heat.

Gerry Beyer Goes Into "Hotchpot"

In Parade, the Wills, Trusts and Estates Prof introduces laymen like me to "going into hotchpot." That's a procedure for figuring the kids' equitable shares of an estate when they have had unequal advancements.

In non-legal usage, the dictionary explains, hotchpot evolved into hotchpotch and hodgepodge." Hodge" was an English nickname for Roger that came to refer to the "ordinary Joe."

You learn something new every day.

Another Tax Skirmish for Campbell's Soup Heirs

John T. Dorrance,  inventor of Campbell's condensed soup, died in 1930. As every student of estate planning learns, Dorrance had maintained a home in New Jersey and another in a classier Pennsylvania neighborhood. At his death, both New Jersey and Pennsylvania claimed him as a resident and levied tax. The U.S. Supreme Court declined to intervene.

Vintage Campbell's Soup ad

In 1995 a grandson, John "Ippy" Dorrance, made news by renouncing his citizenship for tax reasons and moving to Ireland before selling a large chunk of Campbell's stock.

Another grandson sought to  tame the estate-tax dragon with life insurance. In 1966 Bennett and Jacquelyn Dorrance bought policies from five companies with a face value of almost $88 million.

At that time the insurance companies were "mutuals." Policyholders had membership rights. When the insurers became stock companies, the Dorrances and other policyholders received shares.

When the Dorrances later sold their shares, how should they have calculated their capital gain? Were the entire sales proceeds  capital gain?  Or did they have a "cost basis," even though they had merely paid premiums, not purchased stock?

Reversing a District Court decision, the Ninth Circuit U.S. Court of Appeals says the Dorrances' cost basis is zero.

Video clip of Appeals Court panel here.

Brits Can't Necessarily Disinherit Their Kids

The European notion of forced heirship seems to have seeped across the English Channel. Could it eventually spread to this side of the pond?

The Guardian describes a case where an estranged daughter eventually won a share of her mother's estate, aided by a 1975 Inheritance Act designed to protect adult children.

Estranged offspring hate being cut out of their parents' wills, as the Daily Mail illustrates here.

•

Will disputes continue to increase in the UK. Here, too? 

Divorce Settlement Saves Estate Tax, But . . .

1978: Jimmy Carter was in the White House and an Illinois businessman seems to have been in love, although not with his wife. He divorced her, agreeing in a settlement agreement to leave their three daughters and one son half his estate in equal shares when he died.

He remarried the following year. By the time he made a new will and created a trust he must have forgotten the divorce agreement, for he left the children less than 34% of his estate.

The businessman, Warren Billhartz, died in 2006. The following year his widow must have staged a coup, convincing her stepchildren to waive their rights under the divorce agreement. A federal appeals court summarizes:

According to the Marital Separation Agreement, the four children were to receive 50% of Billhartz’s “estate” (an undefined term), divided evenly. In the end, though, they cumulatively ended up with less than 34% of Billhartz’s assets, divided unevenly. None theless, after receiving notice of this discrepancy, all four children executed an agreement (the “2007 Waiver Agreement”), in which they accepted the lesser shares set out for them in the trust and waived all potential claims they may have been able to assert against either the Estate or the trust. The payments to the children totaled approximately $20 million; each daughter received about $3.5 million, while Ward received $9.5 million.

 How do federal courts enter the story? Even though the divorce agreement was not honored, it was used to claim that $3.5 million per child was a deductible payment of indebtedness rather than an estate-taxable transfer. The IRS objected but ultimately agreed to allow an estate-tax deduction for slightly more than half the payments.

Moneywise, that was good news. Familywise, it was explosive. The children finally realized what they had signed away when they agreed to accept no more than their father had left them by trust.

The daughters and the son went to court seeking their full shares of the estate, and the daughters won an additional $1.45 million each. But that meant the agreement with the IRS no longer looked so good. The children wanted it revised to allow a deduction for at least part of the additional payments. The Tax Court said no, and now the Appeals Court agrees.

Trusts and Estates saves us the trouble of spelling out the details of the story here.

Question for Jim Gust: Did Billhartz hit upon a ploy other wealthy individuals could use to do some estate-tax planning when they shed a spouse?

Will Robo Advisers Have Cyborg Clients?

Within 200 years wealthy humans will have become godlike cyber-organisms. So predicts Yuval Noah Harari, a professor at the Hebrew University of Jerusalem,

Our cyborg descendants, says Harari, "will be as different from today’s humans as chimps are now from us." Presumably their lifespans will become more or less infinite.

Well, there goes the dynasty trust market.

Estate Planning Seminar in Mock Mourning

Upstairs at Chicago's Goodman Theater: Women in mourning clothes. Funereal organ music. Ushers in tasteful black, some sporting veils.

The organ music faded…."Good morning friends," [estate attorney Robert] Hamilton said in a warm, tender baritone. "I am brother Hamilton, your minister for today's service, 'In Memoriam of the Estate Tax.'"

***

This was an estate-planning seminar in mourning clothes. (Indeed the federal estate tax itself is not even actually dead, just largely irrelevant to the vast majority of tax payers.) The title was "Outfoxing Uncle Sam: How to Plan Your Estate," and the goal was donations — the kind of large, end-of-life charitable donations that a theater patron might bequest in a will.

Thus does the Chicago Tribune describe estate planning enlivened by a touch of theater. Three-fifths of FUNDS, as my bride learned in her fundraising days, is FUN. Funereal fun, in this case. 

Anyone know of other examples of estate planning seminars imaginatively staged?

Dynasty Trusts? The New Money Has Doubts

David G. Klein

Although this WSJ Wealth Adviser column points out several ways to make dynasty trusts flexible, "forever trusts"seem like a hard sell to first-generation wealth:

Financial advisers and estate-planning professionals say many of their clients feel uncertain about the kind of world their heirs will inhabit…. These concerns are making it hard to steer estate-planning conversations beyond simply the next generation to thinking many decades, or even centuries, down the line….

*** 

Add in uncertainty about what the family will look like, and what kind of tax rules and other financial issues they will face…. It can make recommending… handing assets over to a dynasty trust…very tricky.

For those who can predict the estate tax rules that will be in place in 2115, perhaps dynasty trusts make sense. But if all possible flexibility (trust protectors, decanting, powers of appointment, etc.) is built into a trust, hasn't its creator essentially relinquished control over his or her "legacy"?

Because dynasty trusts represent advanced estate planning, they tend to be paired with sophisticated investment strategies. Good idea? Maybe not. Preston McSwain explains why Yale's David Swensen believes family funds should not be invested like a tax-free university endowment.

Another estate planning novelty from Robin Williams

Coming soon to Merrill Anderson's Investment and Trust Newsletter, "The Michael Jackson Problem, and the Robin Williams Solution."

Jackson's estate gave his his publicity rights only a nominal value, and the IRS valued those rights at hundreds of millions of dollars. The two side are currently battling in the Tax Court over $500 million in additional estate taxes and $200 million in penalties.

Perhaps that was the inspiration for an unusual element of Robin Williams' trust concerning the commercial use of his likeness.  First, such use is sharply constrained for the next 25 years.  That will dramatically reduce the theoretical value of his publicity rights.  More importantly, those rights pass to a charity.  No matter what value the IRS assigns to those rights, there will be a fully offsetting charitable deduction for them.

The Hollywood Reporter has the story, and suggests that this could be the wave of the future.

Who Gets Robin Williams' Tux?

“I’ve sent three sons to very expensive Ivy League schools thanks to the dysfunctional nature of estate planning  for families with stepchildren,” says  attorney William Zabel.  

Current example: Robin Williams' Heirs Fight Over Assets With Sentimental Value.