Inter-Vivos QTIP Trusts; Almost Perfect

For many years I have been, and remain, a fan of the inter-vivos QTIP trust.  There is no perfect estate planning, but this QTIP is almost perfect.   BTW, this is a brief, technical post primarily for advisors and practitioners who might find this topic useful for their clients.

This inter-vivos QTIP trust is a marital trust for a married couple designed under the QTIP tax laws.  QTIP, in tax law jargon, is “qualified terminable interest property.”

Essentially, one spouse creates and funds this inter-vivos QTIP trust while alive. The other spouse is the beneficiary of the QTIP trust. “Inter-vivos” is an old legal term meaning essentially “between the living”.  A trust someone creates while alive.  By contrast, a trust that only becomes operative when the person dies is a “testamentary” trust. Such as a trust provision in that person’s Last Will and Testament.

As an important aside, and part of the inter-vivos QTIP design, it is possible for the funding spouse later to become a secondary beneficiary of the QTIP trust if the other beneficiary spouse dies first. Also, the written provisions of the inter-vivos QTIP trust can include provisions for the children after both spouses’ deaths, etc.

In broad terms, the above inter-vivos QTIP trust provides the following benefits:

    1. It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
       
    2. The inter-vivos QTIP trust is defective for income tax purposes from inception up to the death of the second spouse. This both-spouses duration of the defective status means no trust income tax returns, no compressed trust tax rates, and no separate 3.8% Medicare tax during the remaining lifetimes of both spouses.
       
    3. I am purposely repeating this above point. That is, defective during the lifetime of the spouse who creates the QTIP trust and during the surviving spouse’s lifetime. This effect on both spouse generally is not available for testamentary QTIP trust planning.
       
    4. The defective income tax status of this QTIP trust also allows the substitution of assets, called a substitution power. This can allow, if needed, stepped-up basis planning by later substituting into the QTIP trust high-basis assets for low-basis assets, etc.
       
    5. The inter-vivos QTIP, in my opinion, provides the optimal flexibility for portability options.
       
    6. The spouse’s funding of the inter-vivos QTIP trust starts the 5-year lookback period for Medicaid nursing home eligibility. This may be important in the event later the spouses need governmental Medicaid nursing home assistance. Medicaid planning – although generally not at the top of most family’s estate planning checklist – can greatly help prevent financial impoverishment of the other spouse (and possibly the children).
       

For readers who wish to delve into more technical aspects of this inter-vivos QTIP planning, I highly recommend the following breaking-ground 2007 article by well-known estate lawyers Mitchell Gans, Jonathan Blattmachr, and Diana Zeydel.   Click here for the link. It is a well-written article.

The late Robert Persig (4-24-17): Zen and the Art of Motorcycle Maintenance

Robert Persig, who wrote Zen and the Art of Motorcycle Maintenance, died yesterday (April 24, 2017). This book has had a continuing effect on me since my first reading during college. If I were asked to state in the briefest possible way why this book is so influential, my inarticulate attempt might be to say Persig compels us to examine, and more-fully contemplate, our lives rather than merely being swept along in a kind of half-asleep, herd-like, obsequious manner. And, that we possess an innate ability to sustain this level of self-reliance.

Immediately below, I am reposting my earlier 2013 blog post about Robert Persig and Zen and the Art of Motorcycle Maintenance as a gesture of my continuing appreciation for him and his book.

My earlier 2013 blog post:

This is not a legal or tax post, in the event you wish to stop reading at this point. Rather, it includes a couple of key thoughts in response to my recent second reading of the book Zen and the Art of Motorcycle Maintenance by Robert Persig. I first read this book during college.

For reasons I do not address more fully here due to my desire to keep this post short(er), this is one of those powerful books that affects readers permanently.

Among the many threads of thought in this book, two are the subject of this blog post: Quality. And Death.

As a trust tax lawyer, I deal constantly with both quality and death. Quality in terms of seeking to find the differences that make a difference for a successful, efficient, effective outcome for clients.

Death in terms of a great deal of planning for clients in anticipation of death and in handling numerous after-death issues and problems, both tax and non-tax. I have had a number of very likable clients die over the years. With strong nostalgia, I feel sometimes as though I am an undertaker.

As to quality, one of the aspects I enjoy most about lawyering is that many problems crossing my desk do not trigger immediate, easy, solutions or answers.

Rather, in most cases the idea, kernel, or thread of a solution or answer ends up surfacing in due course, unscheduled during day or night. It is the subconscious working of the mind that most often is the courier delivering these ideas to the forefront of consciousness.

Persig, in Zen and the Art of Motorcycle Maintenance, discusses in a very convincing way the subject of “Quality” and “stuckness”, including his reference to this subconscious aspect of the mind, as follows:

  • “But now consider the fact that no matter how hard you try to hang on to it, this stuckness is bound to disappear. Your mind will naturally and freely move toward a solution. Unless you are a real master at staying stuck you can’t prevent this. The fear of stuckness is needless because the longer you stay stuck the more you see the Quality-reality that gets you unstuck every time. What’s really getting you stuck is the running from the stuckness through the cars of your train of knowledge looking for a solution that is out in front of the train.  .    .    .
  • It’s this understanding of Quality as revealed by stuckness which so often makes self-taught mechanics so superior to institute-trained men who have learned how to handle everything except a new situation.”

Back to my own comments. What I like about Persig’s notion of stuckness is that our accepting and relaxing into these stuck moments results in the most effective and successful way to get unstuck. This is in contrast to fuming, fretting, and remaining doggedly impatient or upset that you do not yet possess an immediate solution or answer.

Back to my reference to death. Persig’s son Chris, who at age 11 rode with Persig on the motorcycle trip described in the book, was stabbed to death 10 years later in San Francisco during a street mugging.

In the book’s “Afterward” that he added in 1984, Persig describes his persistent stuckness about his son Chris’s tragic death. This stuckness appeared to have no possibility of resolution:

  • “I [Persig] tend to become taken with philosophical questions, going over them and over them and over them again in loops that go round and round and round until they either produce an answer or become so repetitively locked in they become psychiatrically dangerous, and now the question became obsessive: ‘Where did he go?’ “

In an extraordinary, moving, and comforting passage within this Afterward, Persig gives a response to the “Where did he go” question. Persig’s response similarly is what I hope can ultimately be in line with my own reaction if one of my family members were to die.

Also, for me to include here the content and substance of Persig’s response to this question would fill up a much longer portion of this blog post. You can read the Afterward for yourself and draw your own conclusion about Persig’s response [Google: Afterward Zen]. And my own praise for Persig’s response to this death question is not to suggest other readers agree or disagree with the response.

Rather, in my view, and because universally we each ponder death from time to time, I personally believe Persig’s commentary – at least for me — is one of the more satisfying responses to this hard, difficult question.

Avoiding Costly Estate Tax for a Simultaneous Death

I ran into this estate tax question a few days ago that I found interesting. But not interesting so dramatically or spectacular to warrant a long law review article or other long-winded commentary. Nonetheless, many readers might find this brief summary useful.

This question centers on maximizing estate tax savings. Specifically, dealing with portability of the estate tax exemption for a married couple, and how the unlikely event of both spouses’ simultaneous deaths can adversely affect portability.

As a backdrop, a fundamental checklist item for any married-couple estate planning is purposely to preserve the use of each spouse’s full estate exemption. As I illustrate by example below, lack of planning for a simultaneous death can cause a loss of portability and a surprise increase in estate tax.

Point One. All married couples’ Wills need to include an express provision governing how the spouses’ estates operate in the (unlikely) event of a simultaneous death. For example, both spouses die in a plane crash. This express provision must be included in simple and complex Wills. In all Wills, in my opinion.

Point Two. If the Will does not include a simultaneous death provision, then state law generally by default applies. For example, Georgia law (like many states) provides that a simultaneous death is treated as though each person survived one another. Georgia’s default statutory law is the “Uniform Simultaneous Death Act in Georgia”, at O.C.G.A. § 53-10-1 et seq.

This “survived one another” is a brain-twister and might provide some level of novel, mental gymnastics over drinks. But, its operative essence – for example with a married couple – is that neither spouse is treated as receiving any of the estate from the other spouse. Their Wills are then applied to the next level of beneficiaries. Their children in many cases.

Point Three. You can google and find various tax commentators who make the point that the federal portability tax regulations do not address simultaneous death. This is correct. And another reason a Will must include its own simultaneous death provision, so as to trump the above state law “survived one another” result and insulate against the absence of clarity under the portability tax regulations.

Also, simply put, a state law “survived one another” result will cause a married couple to lose the benefit of portability. You can play around with the math and this concept, etc. And, below is an example:

Assume a married couple H and W die in a common disaster. W has $7.1 million of assets. H has $1.8 million. Combined total $8.9 million. H and W are both under the combined $10.98 million estate exemption amount. Ideally no estate tax.

But, in this example H and W have no provision in their Wills otherwise spelling-out that one spouse is deemed to have predeceased the other spouse in the event of a simultaneous death. Absent this Will provision, state law applies to H and W in this example so that H and W by default are treated as each surviving one another.

H and W in this example have disastrous estate tax planning. They will pay $644,000 estate tax in W’s estate even though their estate values are below their combined $10.98 million estate exemption amount. [I do not compute any potential state death tax in this example.]

This estate tax exposure is because W’s $7.1 million estate value exceeds her $5.49 million exemption. Triggering W’s estate tax of $644,000 [40% of $7.1 million less W’s $5.49 million exemption = $644,000 tax].

Why this costly result?

H and W lose portability in this example. Under default state law they are treated as each surviving one another. No property from one spouse passes to the other spouse. Also, in this example H’s unused estate exemption does not pass to W. Here there is a complete loss of H’s portability for his unused exemption. [H has a $1.8 million estate less than his available $5.49 million exemption.]

Point Four. Each Will for a married couple must include a presumption of death provision in the unlikely event of a simultaneous death. In some cases, practitioners opt for designating the spouse with the greater estate value as being the spouse presumed to die first.

But, as to the specifics of this simultaneous-death provision, I frankly see no need in every case for portability purposes to worry which spouse has (or might have) the greater assets.  Rather, just make sure – likely in most all cases – you designate one of the spouses (whether H or W) as being the spouse expressly deemed to predecease the other spouse in the event of a simultaneous death.

“It’s Tough to Be Better.” Here is a Great Podcast.

I am a big fan of podcasts. They offer the best of new, cutting edge ideas that I might otherwise not stumble across. Among my favorites: The TED Radio Hour.  Click here. The Tim Ferris Show. Click here. RadioLab. Click here.

This past weekend I listened to a Tim Ferris Show podcast with 62-year old trainer / weightlifter Jerzy Gregorek.  Without boring you in this blog post with details of my own observations, I will say Jerzy’s commentary was compelling. I plan to listen again to the entire podcast.  I am also motivated (somewhat officiously?) to suggest that every person I know listen to this podcast.

Jerzy’s comments go well beyond weightlifting. He more broadly touches on the universal notion of what it takes to get better at something, whether weightlifting, exercise, diet, work, or music, and so forth. Jerzy uses the phrase:  Easy Choices-Hard Life;  and Hard Choices-Easy Life.  He also uses the phrase I added to the title of this blog: “It’s tough to be better.”

Here is the link to this podcast:  Click here. It is:  “The Lion of Olympic Weightlifting, 62-Year-Old Jerzy Gregorek (Also Featuring: Naval Ravikant)”.

We all have a tendency in areas of life to get no further than imagining our goals or improvement. In essence, we simply daydream away our present opportunity and never face taking actual steps forward toward goals we truly desire.

Spend some time with this podcast.  I hope you find it also compelling.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You are Not Your Brother’s Keeper. Tax Liens and Joint Ownership of Real Property.

I cringe (figuratively speaking) when I hear of individuals who include friends and ancillary family members as joint owners of real property. Such as joint tenants in common for owning grandmother’s old house, etc.

This is joint ownership of real property with the co-owners each named on the real estate deed.  Such as “John Smith and Jane Doe, as tenants in common.” Or, “John Smith and Jane Doe, jointly with right of survivorship.”

[There are exceptions to my concern in certain cases (i) for married couples as joint owners and (ii) in states with joint “tenancy by the entirety” ownership (Georgia does not recognize tenancy by the entirety).]

Because real estate ownership is governed by publicly-recorded deed and lien records, jointly-owned property is a lightning rod for the other co-owners’ debts, judgments, unpaid income taxes, estate tax liens, etc.

Let’s assume Bill owns Atlanta undeveloped land with his distant nephew Pete. Pete owns 10% with Bill as the other 90% joint owner (joint tenants in common, to be exact). This is undeveloped land that belonged to Bill’s grandparents (Pete’s great-grandparents). Bill and Pete rarely visit the property.  It is merely a long-term, passive asset.

Bill typically remains unfamiliar with nephew Pete’s ongoing financial and tax affairs and has no idea Pete has not been paying his (Pete’s) income tax. Unknown to Bill is that the Georgia Department of Revenue has been racking up recorded unpaid tax liens against Pete (called a recorded Fi-Fa), with Pete’s unpaid tax debt continuing to increase with interest and penalties.

Bill’s 90% share is now on the hook. Although technically Bill is not liable for Pete’s tax liens. Nor is the value of Bill’s 90% portion of the land technically available to satisfy Pete’s liens. The reality for Bill is that the entire land is burdened by Pete’s tax liens.

On the other hand, Pete essentially has no concerns about his unpaid taxes or these liens. Pete, 27 years old, works part-time, has no money, etc.

Bill’s unfortunate reality is that no buyer will touch this land until Bill clears these tax liens. The Georgia Department of Revenue also has been  consistent with extending the duration of its recorded tax liens (called an “entry of nulla bona”).

Bill’s land over the years has increased in value. This results in Pete’s 10% share also increasing in value to the extent Georgia will likely demand its full claim for the unpaid taxes, penalties and interest in order to release the liens. These surmounting Georgia penalties and interest have transformed what started as nominal unpaid tax amounts into substantial issues. Bill has a costly problem.

The moral of this blog post.

Don’t — without thoughtful deliberation — become your brother’s keeper. Talk to your lawyer first about co-ownership of property. Possibly use an LLC. Or, a recorded written joint property agreement that allows a co-owner to charge the other owner’s portion of the property for these kinds of liens. Good legal advice is also an investment in tranquility.

Preventive Planning and Jazz Guitar

Bear with me. There is a connection in this blog post between my reference to preventive planning and jazz guitar. I use the term “preventive planning” in reference generally to estate and asset-protection planning.

The top 1-percent. A roster of high net-worth clients is a badge of honor among estate and asset-protection planning lawyers. A plume signifying success, financial reward, larger law firm profits, etc. The work is high-end, interesting, technically challenging, and typically underpins the ever-increasing hourly lawyer rates for this market segment. I am fortunate to have a small share of these top 1-percent clients. But, I also have many clients in my own group.  That is, the other 99-percent of us.

A focus narrowly only on the top 1-percent fails to address how important it is for our remaining 99% group to address preventive planning. Most current marketing efforts (and the bulk of related articles, commentaries) for estate planning and asset-protection continue to address options for the top 1-percent group. I find few discussions of what we (and our families) — in the bottom 99-percent — ideally need for excellent, cost-effective preventive planning.

The probable absence of estate tax liability for most of us in this 99-percent group also helps push this preventive planning to an even lower place on our “to-do” list. No pressure. No rush. Do it later.

This next point is for our 99-percent group.

One of my high-priority, personal goals is to prevent me and my family from wasting valuable time due to problems caused by lack of planning, outdated, flawed or missing documents, failure of estate planning, absence of asset-protection, etc. Coupled with this threat of lost time, I prefer my family not expend their financial resources on lawyer fees to clean up an oversight or mess I might leave for my wife and kids.

Now, why jazz guitar? I have played guitar since college and presently take improvisational jazz guitar lessons. I am committed to squeezing in 45 minutes of evening practice each day, as though it also is a job. I guard this 45-minute time-slot zealously.

I would be extremely perturbed if issues were to arise from a lack of planning, etc., that steal away my (and my family’s) valuable time. But, I have my preventive planning in place. And it gives me great comfort knowing my family and I will not lose time in dealing with problems, etc. We also will likely not incur substantial lawyer fees to fend off and resolve future problems.

But, bottom line for this post, I am far more concerned about wasted time than money (for fees, etc.). One can always make more money. But, can never get back lost time.

 

This Just Hit Me. Re Estate Planning

I grapple with how much information a client needs to read and consider when putting into place core estate planning.  The complex tax and non-tax laws — and how these laws affect a family and estate planning — have made this entire area almost unbearable for busy clients.  Most simply cannot easily take the time to deal with this right now.

I don’t want to overwhelm a client, but do strive constantly to have my clients end up with a good grasp of the fundamental design of their planning, and their key options.

This points to there being  no simple, easy approach to good estate planning. Choices and options are a necessary evil.  And, require time and thought.

Here is what hit me.  For clients who never take the time to deal with their estate planning, the choices and options do not simply disappear.  Instead, often the continuing need to address these items becomes centered under court-oversight, including potentially contentious litigation.

With the clients failing to deal with these choices and options, you now have opposing family members (fueled by in-laws) fighting to elbow in their own personal choice and options.  The court becomes essentially the forum.   A costly forum.

The potentially expensive court-option is why, as I stated in my last post, lawyers will still benefit financially at the expense of the client’s family in the absence of planning.

Do your family a favor, seriously.   Don’t make your family help line lawyers’ pockets.