Trusts, as part of your overall estate plan, exist for a multitude of purposes, varying from estate tax savings, to gifting to your favorite charities, to making sure family members or friends are secure in your plan. Trusts can also be used to tackle sensitive family issues such as divorce or remarriage. Today, with so much attention directed to opioid addiction, a trust can be utilized when a beneficiary of yours suffers from substance abuse. And of course, trusts can benefit an elderly or special needs heir who requires advanced planning.

Many of our clients prefer to use a combination of different types of trusts in order to take advantage of all the tax savings and income benefits available to them and their beneficiaries.

I didn’t even mention the use of a trust for a spendthrift beneficiary. One of this Month’s articles titled "Someone to Trust” is about Johnny Depp’s money trouble and is a timely reminder of the benefits of inheritances in trust. Talk about a spendthrift!

Where is this Summer going?

Sincerely,
 
  Ira J. Brower, Founder
SOMEONE TO TRUST

How could someone who earned $650 million over 17 years be broke? That’s the question the actor Johnny Depp recently put to a team of forensic accountants and his new business manager, according to a Vanity Fair article (“How Did Johnny Depp Find Himself in a Financial Crisis?,” August 2017). The team determined that Depp’s business managers of 17 years were guilty of mismanagement, breach of fiduciary duty, and disbursing funds without Depp’s knowledge, and the team filed a lawsuit seeking $25 million.

The business managers, who never had been sued before, fired back with a lawsuit of their own. A partial list of why Depp went broke, according to them, was that Depp owned:

  • 14 residences, including a chateau in France;
  • a 156-foot yacht, which was expensive to maintain;
  • 12 storage facilities filled with memorabilia, such as collectible guitars and art;
  • $30,000 worth of exotic wines flown to him monthly; and
  • he employed 40 full-time employees, costing $300,000 per month.

As an example of his extravagant lifestyle, Depp spent $5 million for a memorial service for his idol, journalist Hunter S. Thompson. A 153-foot cannon was built at Thompson’s home to blast his ashes into the air.

The business managers seek damages of $560,000 and a statement by a court declaring that “Depp caused his own financial waste.” The trial is expected in January.

Adding guidance to an inheritance

Although Johnny Depp may be an extreme example of financial management failure, it is stories such as these that cause some wealthy parents to wonder about the financial capacity of their own heirs. Even responsible adults have been known to have moments of weakness when faced with a large inheritance.

That’s why so many are turning to trust-based inheritances. When the trust is administered by a professional trustee, such as us, the beneficiaries get financial management according to the terms of the trust, along with investment management of the trust assets. There’s no guarantee that a trust will last for a lifetime, but it does improve the odds for lifetime financial security.

By the way, Depp paid 10% of his income to his business managers and his lawyer, some $65 million over 17 years. Our fee for trusteeship is well below that percentage. Ask us for details.

(August 2017)
© 2017 M.A. Co.  All rights reserved.
SAVING A FLAWED ESTATE PLAN
Given the unrelenting pace of change in the tax laws and in the economy, coupled with the ordinary changes in personal and family circumstances, any estate plan is bound to go out of date sooner or later. Sometimes planning failures may be remedied post mortem, sometimes not. Here’s a happy example.

Oskar Brecher died in 2016 with an estate of some $8 million.  His last will and testament had been drafted in 1989. The federal estate tax had seen many important changes since then.

Brecher’s will left his surviving spouse the minimum amount needed to reduce federal estate taxes to zero, with the balance passing to a credit shelter trust, a routine approach to estate tax minimization at the time that his will was drafted. This was long before the major estate tax reforms of 2001, after which many states decoupled their death taxes from the federal template. Brecher died a resident of New York, which in 2016 had an estate tax exemption of $4,187,500, significantly lower than the $5,450,000 federal estate exempt amount.

Application of Brecher’s formula would result in a credit shelter trust of $5,450,000. A trust that large and not protected by the marital deduction would trigger a New York estate tax of $505,455, leaving $2,044,545 for the surviving spouse. The estate’s heirs petitioned to have Brecher’s will reformed, so as to reduce both federal and state death taxes to zero. In that case the credit shelter trust would be only $4,187,500, and the surviving spouse would receive $3,812,500.
 
The trust beneficiaries did not oppose the reformation, and the Surrogate’s Court granted the petition. Said the Court:  “... reformation as a general rule is only sparingly allowed...however, the courts have been more liberal in their regard to petitions seeking reformation when that relief is needed to avert tax problems caused by a defective attempt to draft a will provision in accordance with the then tax law or instead caused by a change in law, subsequent to execution of the will, that renders a tax-driven will provision counterproductive. The central question in such a case is whether the clear wording of the subject instrument subverts rather than serves the testator’s intent.”

Moral of the story.  This estate had a sympathetic judge. The better course is to have a professional review of your estate planning documents after major tax law changes. Relying upon a 37-year-old will is expecting too much from an initial estate planning consultation.

(August 2017)
© 2017 M.A. Co.  All rights reserved.
COULD THE IDEAL ESTATE TAX RATE BE 100%?
If the Republicans agree on a tax bill, the federal estate tax may die for longer than it did in 2010. But the urge to tax inherited wealth never dies— especially, it seems, in the U.K.

Excerpts from a Guardian op-ed, “Why not fund the welfare state with a 100% inheritance tax?”

Yes, the desire to pass on property to your descendants may be natural – but why should we be slaves to our biology? Social progress has frequently depended on our ability to transcend individualistic urges and work together for the common good.
***
Cultural norms teach us that the inheritance of private property is the default and any expropriation of this wealth must be justified. It should be the other way round.
***
A 100% estate tax (perhaps with a small allowance for objects of sentimental value) isn’t a policy we can expect to see in a party manifesto any time soon. It’s well outside the current spectrum of mainstream political opinion. Questioning the status quo is always going to be a somewhat uncomfortable process, though, and all kinds of major social changes seemed impossible until suddenly they weren’t.

The crack about "slaves to our biology" is interesting. Would adopted children still get inheritances?

Confiscation of wealth at death would promote every possible method of lifetime transfer to avoid the terrible tax. Outright gifts and gifts in trust would be likely strategies. With lifespans lengthening, that might not be such a bad idea. Why should someone age 70 still be waiting for his parents to part with their worldly goods?

(August 2017)
© 2017 M.A. Co.  All rights reserved.
ARTICLES OF INTEREST

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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2017. All rights reserved.