New York and Connecticut Business Litigation Lawyer & Attorney : Rogers & Tartaro Law Firm : Commercial Litigation : Westchester County NY, Fairfield County CT

HartfordBusiness.com reports that the world now has ten million millionaires (“World now has 10 million millionaires, report says”). The story, by Associated Press Writer Candice Choi, is based on a report issued by Merrill Lynch & Co. and consulting firm Capgemini Group. It also reports that one third of the millionaires are located in the United States.

I will suspend my skepticism at anyone’s ability to overcome differences around the world related to, among other factors, differences in currency, property valuations and customs of confidentiality to derive an accurate number. The exact number, after all, is not that important.  We like milestones so let's consider the number to be 10 million. 

Whatever the exact number, a lot of people are millionaires and multi-millionaires without realizing it. We can credit the growth of IRA’s, 401(k)’s, 403(b)’s, and even life insurance (and allowing for the current dip) home values.

But, the HartfordBusiness.com story also reports that a million dollars isn’t what it used to be. Today, millionaires can be people of fairly modest means.   

This story drew our attention because we interpret our "business litigation" mandate broadly.  We include in our commentary issues related to estate planning, in particular, avoiding litigation among beneficiaries and the unpleasant surprises associated with unexpected estate tax liabilities and disputes with tax authorities. 

We counsel clients to think about and make plans for their entire estate. Pension assets (which include IRA’s, 401(k)’s, 403(b)’s), the proceeds of life insurance and any jointly owned assets (such as homes, bank accounts, securities) do not necessarily pass by will but by separate beneficiary designations or operation of law. In legal terminology, these are “nonprobate assets.” Writing a will without also carefully coordinating the separate beneficiary designations, for example, may lead to unpredictable distributions of assets and the potential for disputes and litigation among the beneficiaries.

On the other hand, nonprobate assets are included in considering whether an estate becomes taxable and could put a modest estate over the top to a taxable level. We counsel clients to be aware of the way asset values may have grown over time and to do the appropriate planning.

For more on this subject, we invite you to view an earlier post, with link to our video program, My Financial Journal.

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The Utah Business, Real Estate and Estate Planning Blog, in its article, “ILTSs as an Estate Planning Tool” by Matt Frankhauser, provides a clear and succinct summary of how an Irrevocable Life Insurance Trust (ILIT) may be used to keep the proceeds of life insurance policies out of the gross estate of the insured. We don’t want to try to improve on the summary and offer the entire article here. But, we offer a few comments to supplement it.

First, as a point of clarification for our readers who are not lawyers, it is widely known that the proceeds of life insurance policies, the death benefits, are not taxed as income to the recipient. It is less widely known that the death benefits are counted as part of the gross estate of the insured and subject to estate tax if the estate is large enough to be taxable. The life insurance proceeds, by increasing the size of the gross estate, can push the estate across the threshold from a nontaxable to taxable estate.

The focus of our blog is generally on litigation and, whenever possible, avoiding litigation. One type of litigation our business clients will definitely want to avoid, although it will affect their beneficiaries, not themselves (who are gone at that point), is litigation with the IRS over whether millions of dollars in life insurance death benefits ought to be taxed at a marginal rate of 45% or so. Thus, Mr. Fankhauser’s article notes that “if properly constructed and managed,” ILITs can be effective estate planning tools (emphasis added). His article does a nice job of communication elements of proper construction and management.

One aspect that is especially difficult to communicate, however, concerns the process of paying the premiums. Although covered in the Utah blog article, some elaboration may help to further understanding. The issue arises because premiums paid by the insured for policies owned by this artificial entity (the ILIT) are gifts.

Now, in addition to keeping the future proceeds of the life insurance out of the gross estate, a further goal is added, not to pay gift tax on the current gifts of the premiums to the trust. As mentioned, in the Utah blog article, this is often done by taking advantage of the annual gift tax exclusion (currently $12,000). Unfortunately, the tax code and the IRS have established two governing principles: (1) the annual gift tax exclusion may not be used for a gift of a future interest and (2) money given to the trust to pay premiums that may not result in death benefits for many years are future interests.

But, if someone can exercise the option to receive the gifts now, then the gifts are considered present (and not future) interests. The result is the procedure of the “Crummey Letters,” named after a court case that established the procedure. The beneficiaries of the trust are given the option, limited for a short period of time, to immediately demand the money intended to be used by the ILIT to pay premiums. The existence of this option establishes that the gifts to the trust (for premiums) are “present interests” and the annual gift tax exclusion does apply.

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If you have a compulsion to be involved in truly contentious litigation and are tired of matrimonial cases, try a will contest. For this reason, we include the identification of “best practices” in the area of Estate Planning as falling within the overall mission of our blog. Acquisition, preservation and, ultimately, disposition of assets are activities t, in our way of thinking, that are appropriately categorized as business activities that can be managed so as to avoid unnecessary and costly litigation.   

Because we consider Estate Planning such an integral part of our mission and practice, our firm’s two partners were excited to be invited and to actually appear last year to talk about Estate Planning on the public access television program My Financial Journal hosted by Andrew Rose. In all modesty, our audience was probably small. More important, we believe our audience, whatever its size, was treated to a fast paced, interesting and informative program.

With special thanks to Andrew Rose the program can be seen by clicking here.

If you don’t have time for the half hour program or the technical resources to download it, I offer a few bullet point highlights.

• The discussion of death is definitely uncomfortable for many people but others find a source of satisfaction and accomplishment in knowing they have taken care of their families and addressed some difficult issues.
• In particular, the care of minor children and financially dependent adult family members is a concern.
• The complexity of an estate plan can depend on the variety and nature of your assets but two other factors include the extent to which income tax qualified assets are included in your estate and whether, because of size, the estate is exposed to federal and state taxation.
• The status of estate tax laws is in flux because federal law, while temporarily increasing the size of exempt estates, is scheduled to be repealed absent another act of Congress and states have enacted their own estate tax laws “decoupling” or becoming independent from federal estate tax law.
• Revocable Trusts can be effective planning tools if real estate is owned in multiple states or to provide an added layer of disincentive to contest the plan.
• But, often revocable trusts are set up without actually transferring assets to them, nullifying some of the advantages.
• Planning for non-traditional families and families with children from prior marriages requires an added level of sensitivity and a concern for fairness.
• Similarly, gay and lesbian couples need to explicitly address their particular needs through effective planning because some useful provisions of law are inapplicable to them.
• Women, traditionally tending to be caregivers, may have difficulty putting their own needs first, but upon establishing a relationship can proceed expeditiously in facilitating the family’s estate plan.
• Single women and single men, in our experience do not tend to differ in the fundamental nature of their estate planning needs; one aspect is that often their concern is for more remote family members or even friends.

We hope you have the time to view the entire program. Whether you do or not, we hope you make the time for your own estate planning. You may not be around to experience it yourself, but for your beneficiaries the disputes, among themselves or with tax authorities, can be costly and debilitating.

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