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Wednesday, September 23, 2015
Wednesday, September 16, 2015
Tom Clancy, renowned author, died on October 1, 2013. Tom died with an estate worth approximately $83 million. Tom was survived by his wife, Alexandra Clancy, a daughter born to Tom and Alexandra and four adult children from Tom’s prior marriage.
When Tom died, he left a Last Will and Testament (“Will”) that governed the disposition of his probate assets. The Will provided that his probate estate is to be divided into thirds – one-third to his wife in trust (the “Marital Trust”), one-third to his wife and all of his children in trust (the “Family Trust”) and one-third to his children from his prior marriage in trust (the “Children’s Trust”).
Due to the size of Tom’s estate and his estate planning elections, Tom’s estate is required to pay a significant amount in estate taxes, apparently approximately $16 million. Tom’s personal representative (aka executor) allocated a portion of the taxes owed to Alexandra’s inheritance. Alexandra objected and claimed that based on a codicil that Tom executed, which amended the terms of his Will, Tom’s intent was that no portion of her inheritance would be responsible for the estate taxes. Rather, Alexandra claims the entire burden should be borne by the portion going to Tom’s four adult children from his prior marriage.
As a result of Alexandra’s claim, a dispute ensued between her and Tom’s adult children. On August 21, 2015, a Baltimore judge ruled in favor of Alexandra, a decision that is likely to cause a protracted legal battle.
This case provides a prime example to blended families of the importance of engaging in appropriate estate planning. Relationships can be finicky, especially relationships between a child and his or her step-father or step-mother. Estate planning should not be a straw that breaks the camel’s back and ruins that relationship. Not only that, disputes between children and their step-parents can erode the hard-earned estates of the deceased parent through legal fees, which could be avoided with appropriate planning.
If you have a blended family and do not have the appropriate estate planning in place, please contact our offices to further discuss your situation.
Wednesday, September 9, 2015
Crummey Indeed; Providing Proper Crummey Notices to Beneficiaries of an ILIT is Essential to Preserve Tax Benefits.
A highly regarded estate tax-savings tool utilized in estate planning is the Irrevocable Life Insurance Trust, commonly referred to as an “ILIT”.
Establishing an ILIT allows proceeds from a life insurance policy to escape estate taxes upon the death of the insured. Under the current income tax laws, proceeds from a life insurance policy are paid to the beneficiaries of the insurance policy entirely income tax free. For estate tax purposes, however, if you are the owner of a life insurance policy, the proceeds from that policy are included in your taxable estate on your death, and therefore become subject to the estate tax. For example, if you are single with estate assets (other than life insurance) valued at $5,000,000, and if the proceeds of a life insurance policy payable on your death amount to $2 million, the estate tax due is approximately $628,000.
With an ILIT, on the other hand, the $2 million policy is removed from your taxable estate because the policy is owned by the trust. Thus, in the above example, placing the policy in a properly drafted ILIT would completely eliminate any estate tax on your death, while freeing up the entire $2 million for your heirs. In combination with the favorable income tax laws, an ILIT can ensure that the proceeds from a life insurance policy escape both income and estate taxes. Additionally, contributions to an ILIT in the form of premium payments can also be made gift-tax free.
To enjoy those tax savings, it is imperative that you send the appropriate “Crummey” notice to the beneficiaries of your ILIT if required. “Crummey” notices are required any time you make a gift to your ILIT. In order to claim the gift tax annual exclusion (the amount that you are permitted to gift each year without incurring gift taxes) for gifts made to your ILIT, you must notify the ILIT beneficiaries of their right to withdraw such gift. Only by giving appropriate notice to these beneficiaries of their immediate right of withdrawal will you be able to claim the gift tax annual exclusion under the Internal Revenue Code. Otherwise, you may incur gift tax liability.
To give appropriate notice, you can send a letter to the beneficiaries of your ILIT with the following information:
1. A statement that a gift was made to the ILIT;
2. Amount of gift that is subject to the particular beneficiary’s right of withdrawal;
3. Amount of time the beneficiary has to exercise the withdrawal right before it lapses; and
4. A request that the beneficiary notify the trustee if he or she wishes to exercise the withdrawal right.
In addition, to keep adequate records, you may also want to send a separate receipt of acknowledgment. Each beneficiary can sign and give it back to you, stating that they received the required notice of their right to withdraw. As previously mentioned, if these notices are not sent you may incur gift tax liability.
An ILIT is an excellent tool that can save you and your estate potentially hundreds of thousands of dollars in estate and gift taxes, if the proper formalities are strictly adhered to. If you have questions about whether an ILIT is right for you or if you have been properly preparing the requisite Crummey notices, contact one of our attorneys at (702) 433-4455.
-Attorney Rebecca J. Haines