Celebrity Estate Planning Mistakes that Keep on Giving–to the Wrong Person

My dad was a life insurance salesman. I remember rummaging around in his sales materials and finding a service he subscribed to that reported on the estate tax problems of the rich and famous and even the not-so-famous. He used the  reports to make the point that his prospective clients needed to do some estate and insurance planning, so their families wouldn’t face similar fates.

I was reminded of this when I stumbled upon this 2013 article from Forbes, “Monumental Estate Planning Blunders of 5 Celebrities.” The piece details the woes of rocker Jim Morrison, Rat Pack icon Sammy Davis Junior, hotelier Leona Helmsley,  QB Steve McNair, and, my favorite sad story, actress Marilyn Monroe:

Some celebrities have erred by not going far enough with their estate planning. For instance, famous actress and model Marilyn Monroe left most of her estate to her acting coach, Lee Strasberg.

“She left him three-fourths of her estate, and when he died, his interest in Marilyn’s estate went to his third wife, who did not even know Marilyn. Marilyn’s mistake was not putting her assets in trusts,” says Nass.

Strasberg’s third wife, Anna, eventually hired a company to license Monroe’s products, which involved hundreds of companies including Mercedes-Benz and Coca-Cola. In 1999, many of Monroe’s belongings were auctioned off, including the gown she wore to President John F. Kennedy’s birthday party, for more than $1 million. Strasberg ended up selling the remainder of the Monroe estate to another branding company for an estimated $20 million to $30 million, according to a remembrance of the star by NPR in 2012.

It’s unlikely Monroe would have wanted someone she didn’t know to profit so handsomely from her belongings. A trust would have provided for Strasberg while he was alive and then after his death could have directed the remainder of her estate to someone of her choosing.

Yes, I imagine was very unlikely that she wantedStrasberg’s 3rd wife to laugh all the way to and from the bank. But poor planning allowed that to happen.

The Donald’s Impact on Estate Planning: Good or Bad?

Jonathan G. Blattmachr & Martin M. Shenkman, two major gurus in the estate planning field, seem to think a Trump administration will lead to the need for most of us to engage in some planning:

The election of Donald J. Trump as President, along with a Republican-controlled House and Senate, may lead to the most radical changes to the estate tax since it was first enacted.

I’ve only read a brief abstract from the article at this link. I’ll report back after I’ve read the actual piece. (I’m not a fan of the online viewing option for this story. Hard to read.)

And You Thought the IRS was out to Get You

Good news from the land of taxes. The IRS audit rate of individuals (.07%) and businesses (.05%) fell to a 10+ year low due to budget cuts.  Even high income taxpayers can feel the love:

Audits declined even for the high-income households that have been an enforcement priority for the IRS. In 2016, the agency audited 5.83% of returns with income over $1 million, down from 9.55% in 2015 and marking the lowest audit rate for that income group since 2008.

 

Just Leave It Alone?

As many will recall, then candidate Trump promised to eliminate the estate tax. That was then. This is now–he’s the President. What will he actually do? Will he also eliminate the estate tax’s two siblings: the gift tax and the generation skipping tax? No one knows, though many people care, especially those who preach tax fairness.

Given that married couples currently have to be worth almost $11 million dollars before  the estate tax kicks in–it’s more complicated than that, but still–eliminating the estate tax is going to help only the very, very wealthy. And maybe that’s a bad (or a good) thing.

I’m here to argue for the advisor. Estate planning attorneys, life insurance and investment advisors, CPAs and financial planners. I’m betting that each and every one of them agree with the following:

Because the estate tax generates a meager 0.005 percent of annual tax collections, according to I.R.S. figures, it generates far more political debate than federal revenue. And among many tax planners, the calls aren’t so much for reform as for stability, or at least a period of benign neglect.

“Just leave it alone so we can plan,” Mr. Jenney said. “But every administration seems to want to put their own twist on the estate tax.”

IRA Rollover Gotcha Down?

We all know the rule:

Sections 402(c)(3) and 408(d)(3) provide that any amount distributed from a qualified plan or IRA will be excluded from income if it is transferred to an eligible retirement plan no later than the 60th day following the day of receipt. A similar rule applies to § 403(a) annuity plans, § 403(b) tax sheltered annuities, and § 457 eligible governmental plans. See §§ 403(a)(4)(B), 403(b)(8)(B), and 457(e)(16)(B).

No, actually, we all know that rule stated this way:

You have 60 days to get your distribution from one IRA or retirement plan to another IRA or retirement plan, or you suffer the tax consequences. The “getting to one from another” is called a rollover–typically an IRA rollover.

If you fail to complete the rollover within 60 days, the penalties can be severe, including income and excise taxes, interest, and penalties.

get-out-of-jail-freePeople do rollovers for a variety of reasons. They retire. They change jobs. They become dissatisfied with their current IRA provider. In those cases and others, there’s a need to change move your retirement money from one plan to another. And typically the move goes smoothly–without a hitch.

Except when it doesn’t. What if the rollover takes more than 60 days? Then what?

Well, the IRS recently issued a new rule, Revenue Procedure 2016-47, that recognizes certain realities: Life happens.

  • Checks get misplaced
  • Houses burn down
  • The Post Office screws up
  • The fish were biting (just kidding)

Yup. If life hits you in the face, the IRS is going to wipe the tears away and tell you to go back outside and play–that is, they’re going to waive any penalties. There is a catch–of course:

  • What hit you in the face must be among the many excuses the IRS lists in the Revenue Procedure 2016-47 AND
  • You must complete the rollover “as soon as practicable” after the intervening reason no longer exists (there’s a 30 day safe harbor, though you can take longer) AND
  • You must self certify to your new plan administrator or IRA trustee that you meet the requirements of the Revenue Procedure AND
  • The IRS previously must not have denied a waiver.

The Revenue Procedure provides a  handy self-certification letter, the wording of which you must follow almost to the T.  You can find the sample letter here, in the appendix of the actual Revenue Procedure. Enjoy the read.

Gift and Estate Planning Coupons May Worth Less After This Election

When you give money or property to someone while you’re alive, you make a gift. If that gift is beyond a certain size, you will also have to pay a gift tax on it. When die, your money or property will go to those whom you name as your beneficiaries in your will or trust. But yet again, if your estate is beyond a certain size, your estate will have to pay a tax on it, this time an estate tax.

clinton-trumpNow Uncle Sam has, of late, been pretty generous**. He’s given each of us coupons* to pay that tax–up to a certain amount. Currently, each of us has a lifetime coupon worth $5,450,000; that is, each of us can give away (or devise or bequeath upon our death) $5,450,000 without having to pay any gift or estate tax. And if we’re married, we can combine these “applicable exclusion amounts” so that as a couple we can give away twice that amount, or $10,900,00 without any gift or estate tax being assessed.

It gets better. In addition to the amounts I just mentioned, each of us can make annual gifts of $14,000–an annual coupon, if you will–to as many people as we want, family, non family, friends, and enemies. Every year! And if we’re married, we can combine our gifts. That’s $28,000. Gift tax free.

And if you finally do have to pay an estate or gift tax? The top rate is 40%.

All that was to tell you this: If Hillary Clinton is elected, she’s promised to reduce the applicable exclusion amount–the large lifetime coupon–to just $3,500,00 for an individual, $7,000,000 for a married couple. That’s almost a $4 million drop from present levels. I’m unsure at this time if she had any plans to reduce the annual gift coupon.

Donald Trump wants to repeal the estate tax.

FWIW, this is not a political post, or at least I don’t intend it to be. Just the facts. And that’s that.

*In addition to the two “coupons” discussed in this post, there’s a third, the unlimited marital deduction, which allows spouses to pass property between one another without tax consequences. Ultimately, the last to die may have an estate tax bill to pay.

**Generous is being generous. We’re talking about money that is not Uncle Sam’s to begin with, but humor me here.

What is Probate Anyway?

Everybody wants to avoid probate, but far too many of those who want to avoid it, know what is. Here’s a primer:

Probate is the legal process in which a deceased person’s will is proved valid; her personal representative or executor appointed; her property collected and preserved; and her debts, including taxes, paid. Usually, the deceased’s family hires an attorney to file the appropriate papers with the probate court to begin the process. Depending on the state and the complexity or size of the state, the probate process can be complicated or streamlined. In Utah, for example, if the deceased’s estate is under $100,000, probate can be handled via a s0-called small estate affidavit, a much more simple process.

The deceased person’s personal representative (another term for executor) is the point person in the process. Essentially, a personal representative fills the shoes of the deceased. What the deceased could do if she were still alive, the personal representative does instead. Need to transfer title? The personal representative does that. Need to close a bank account. Again, the personal representative steps up. Often (but not always) named in the deceased’s will, the personal representative, once he has the court’s blessing, is the one who goes about collecting property, paying debts, and–finally–distributing what’s left to the deceased’s heirs. Often (but again, not always) this is done under court supervision, depending again on the state and the size/complexity of the estate.

Why do people say they want to avoid probate? Probably because they’ve heard it’s expensive–which it can be–or because they’ve heard it’s public–which it is; that is, it’s public in the sense that your nosey neighbor can walk down to the courthouse and ask the clerk to see your probate file. Then it really becomes public.

There are a number of ways to avoid probate the attendant publicity and some of the cost. One is to establish a revocable or living trust. For more on that, go here.

Get Your (Valuation) Discounts Now!

Two weeks ago, the Treasury Department released proposed IRS Code Section 2704 valuation regulations that, as proposed, will dramatically change the discounts currently allowed, including so-called minority and marketability discounts. Thus, gift and estate tax planning strategies that rely on such discounts to transfer property from one individual to another via the use of limited liability companies, family limited partnerships, and other such entities may not work so well in the future.

The IRS has scheduled hearings on the proposed regulations for December 1, 2016. Sometime after that hearing the regulations will become final; thus, anyone planning on taking advantage of such discounts has little time to waste.

As I learn more about the proposed changes, I’ll follow-up on this blog. If you can’t wait that long, the AICPA has a number of helpful resources.

Estate Planning? I Don’t Have Time . . .

Why doves cry. Half of Prince’s estate to go to government.

When Dave Ramsey’s Wrong, He’s Really Wrong

Zander_2016-04-15_1200I’ve listened to Dave Ramsey. My wife owns a couple of his books. I get what he does, and I think he probably does a some good–in the debt area, at least. But he’s not always right. For example, I don’t care for some of his opinions about life insurance and much of his investment advice is off the mark as well. Further, his one-size-fits-all approach and his dismissive attitude towards insurance agents and other financial advisors are a real turn off for me. Seems that everybody’s out to get you but Dave and those he recommends. (I have more to say on this point, but I won’t.)

In short, I’m basically not a fan.

So you will not be surprised that I’m posting this link to a blog post by attorney Richard Chamberlain in response to a wildly uniformed excerpt about living/revocable trusts from one of Dave’s books. Make sure to read the entire post and the links in the post.

I must add my two cents on living/revocable trusts: Though they are just one part of a well-executed estate plan, they are an important part. Among many good reasons to establish a living/revocable trust, there’s this: setting one up and funding it will help you and yours get your minds around what you own, how you own it, and how you want it distributed or handled upon your death or incapacity. Mind you, I could add more than two cents to this conversation, but I’ll stop here.

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