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Dear Trust Officer:
How much can I save on my income taxes if I put my investments into a living trust?—LOOKING FOR LOOPHOLES
Dear LOOKING:
Nothing. A revocable living trust that a grantor sets up to manage his or her wealth provides no income tax advantages. The trust’s income and capital gains are taxable to the grantor.
The benefits of a living trust are elsewhere. When we are the trustees of your living trust, you get investment convenience and our professional expertise in investment supervision. You can leave the investment worries to us.
Living trusts also provide financial privacy at death. This can be very important to celebrities, and you may think that it won’t be as important to your family if you are not famous. Still, do you really want the whole world to be able to know what your beneficiaries will receive after you die? Because that is what will happen when your will is probated.
We would be most pleased to discuss living trusts with you in more detail—please make an appointment to see us at your earliest convenience.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
Brothers Michael and Thomas Connelly were the sole shareholders of a corporation. The corporation obtained life insurance on each brother so that if one died, the corporation would have ready cash to redeem his shares without impairing the company operations. A buy-sell agreement was in place, giving each brother the right to buy the other’s shares at death, and the corporation would redeem the shares if the survivor declined to purchase. Although the agreement included a mechanism for valuing the shares, it was never used.
Michael died first, and the company received $3.5 million of life insurance proceeds. The corporation redeemed the shares for $3 million in an amicable agreement, and Michael’s interest in the business was valued at the same $3 million on the federal estate tax return. A $300,000 estate tax was timely paid, likely out of the remaining $500,000 of proceeds.
Upon audit, the IRS disagreed with the valuation of the company. The $3.5 million must be added to the value of the company, as it was a company asset. That brought the total value of the company to $6.86 million. Michael had owned 77.18% of the company, so the estate tax value of his interest came to about $5.3 million. That meant another $1 million in estate taxes were due. Where that money was to come from was not a concern of the IRS.
In Court, the estate argued that the value of the company was controlled by the shareholder’s agreement, and although the insurance proceeds were a corporate asset they were offset by the obligation on the company to proceed with the redemption. The arguments were unavailing, first in the District Court, then in the Eighth Circuit Court of Appeals, and now, finally, in the U.S. Supreme Court. The Court held unanimously that life insurance proceeds must be included in valuing the company for estate tax purposes, and that a redemption agreement in this case did not reduce the value of the company, even though it drained the company of available cash.
Owners of small businesses need to schedule an early conference with their estate planning advisors to assess the impact of this decision on their planning. Cross purchase agreements, in which each shareholder owns life insurance on the other shareholders, should not be adversely affected, but that arrangement has its own drawbacks. Owners of very small businesses that are below the federal estate tax threshold have less to be concerned about, but even in that situation using life insurance to fund a redemption will raise issues regarding the value of the company and the basis of inherited interests.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
Charles Littlejohn worked as a contractor for the IRS. According to the U.S. Justice Department, between August and October 2019, Littlejohn accessed the tax return records of a high-ranking government official, presumably then-President Donald Trump. He offered the records to a news outlet. In July and August 2020 Littlejohn stole additional tax information for the nation’s wealthiest taxpayers. He evaded IRS protocols established to detect and prevent large downloads or uploads from IRS devices or systems. Littlejohn disclosed the tax information to ProPublica, which published more than 50 articles based upon the information beginning in June 2021.
There was a substantial uproar over the theft and disclosure of private taxpayer information, but for several years there was no explanation. Members of Congress repeatedly pressed the Treasury Secretary and IRS Commissioner for progress reports, to little avail.
Billionaire Ken Griffin was one of the taxpayers who found his private financial information being published by ProPublica. In December 2022, he filed a lawsuit against the IRS for its failure to adhere to the legal requirements of holding taxpayer information in strict confidence. His concern was not to collect monetary damages, but to get the IRS to live up to its legal responsibilities.
Finally, on September 23, 2023, three years after the crime spree, Littlejohn was charged for his actions. Despite the thousands of taxpayers potentially harmed, Littlejohn was charges with only a single count of unauthorized disclosure of tax information. The sentencing judge expressed surprise at the leniency, but sentenced Littlejohn to the maximum five years in federal prison.
With the criminal aspect of the case resolved, Griffin’s suit also was settled. He got an explicit apology, an acknowledgement of failure by the IRS: “The Internal Revenue Service sincerely apologizes to Mr. Kenneth Griffin and the thousands of other Americans whose personal information was leaked to the press. . . The IRS takes its responsibilities seriously and acknowledges that it failed to prevent Mr. Littlejohn’s criminal conduct and unlawful disclosure of Mr. Griffin’s confidential data. Accordingly, the IRS assures Mr. Griffin and the other victims of Mr. Littlejohn’s actions that it has made substantial investments in its data security to strengthen its safeguarding of taxpayer information.”
This IRS apology came more quickly than their apology for targeting conservative groups in 2012, as revealed by Lois Lerner. In that case, the apology was delayed until 2017.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
Jeffrey and Margaret were in their 20s when they met in a park and began dating. They moved to Sullivan County, Pennsylvania, living together while Margaret waitressed and Jeffrey got a job at Proctor and Gamble. In 1987, Jeffrey signed up for P&G’s profit sharing and savingsprogram. He listed Margaret as his beneficiary, stating that she was a “cohabitor.”
Two years later, the couple broke up. According to Margaret, it was because she wanted marriage and children, he did not. Margaret soon did marry and have children.
Jeffrey remained unmarried and childless throughout his life. He lived with a new partner, Mary Lou, for several years, until 2014. During that time he designated his mother and Mary Lou as beneficiaries of his life insurance. After his mother died, Mary Lou was the sole beneficiary.
Jeffrey died in 2015, at age 59, a few months before he planned to retire. His largest asset was the P&G retirement fund, then worth some $750,000. He had never changed his beneficiary designation. And he never made a will.
Under ERISA, beneficiary designations control who receives retirement accumulations after the owner dies. Jeffrey’s brothers, as executors of his estate, did not believe that he wanted all this money to go to an ex-girlfriend. P&G asked a federal court to decide who would get the money. The brothers alleged that P&G had violated its fiduciary duties by not getting Jeffrey to change his beneficiary designation, but the court noted that forms sent to Jeffrey over the years repeatedly admonished him to check this issue. The most recent court ruling was in favor of Margaret, but the brothers announced that they will appeal.
What if Jeffrey had made a will? A will does not normally overrule a beneficiary designation for insurance proceeds or retirement benefits, so it might not have prevented this litigation. However, it could have provided some insight into Jeffrey’s intentions for the funds—perhaps he really did want Margaret to be the beneficiary of the retirement fund, which had grown to over $1 million by 2020. Had Jeffrey consulted an estate planning lawyer, the lawyer likely would have advised him to take steps to remove all ambiguity about his wishes, including a more forceful recommendation to check the beneficiary designations.
Nine years after Jeffrey’s death, the retirement money is still being held in escrow.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
INVESTMENT PRODUCTS/SERVICES ARE:
NOT A DEPOSIT - NOT FDIC INSURED - NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED BY THE BANK - MAY LOSE VALUE
