Charitable Giving

I must be on a nostalgia kick because this month's articles all seem to relate to some part of my past. One of my biggest memories from college was sitting around the living room with my roommates watching The Simpsons. I can't believe it has been around for over twenty years - attribute to its creators and writers which leads to wondering what the creators do with their wealth?

One of the co-creators and executive producers of The Simpsons, Sam Simon has used the wealth derived from the Simpsons to help out numerous groups. He has given away millions of dollars to charities over the past two decades. While Simon left the hugely popular television show in 1993, he continues to receive lucrative royalties to this day. Simon has used his fortune to support animal rights organizations, such as People for the Ethical Treatment of Animals ("PETA") and anti-whaling groups, among others. Simon has also set up his own charitable organization, The Sam Simon Foundation, which helps rescue stray dogs and provides the homeless with vegan food.

While Simon's financial position may be uncommon, the choices he faced about charitable giving are not. These choices became increasingly important at the end of last year, when Simon was diagnosed with terminal colon cancer. In the face of such a diagnosis and with only a will in place at the time, Simon set up a charitable trust to ensure that his wishes would continue to be carried out should he pass away, and that his estate would avoid being diminished by the probate process and applicable taxes.

The rules surrounding charitable giving (and its associated deductions) are highly complex. Charitable giving may take various forms, including cash gifts, contributions to a trust with a charity or other organization as the named beneficiary, the establishment of a private foundation, or donation of land for use by a charity or other organization.

In order to claim a tax deduction, thereby reducing your taxable income, you must meet certain IRS-mandated standards for charitable giving.

• You must itemize your income tax deductions.
• A related requirement is that you must be eligible to itemize, meaning that your charitable giving puts you above the applicable threshold that must be met before you can begin itemizing your gifts.
• You comply with stringent record-keeping rules concerning your contributions pursuant to the Pension Protection Act of 2006. A more thorough discussion of these rules are discussed here.

One of the most important requirements for charitable giving is that the organization to which you are donating is qualified as tax-exempt. Some charities will be required to obtain 501(c)(3) status from the IRS in order to obtain this status. Other groups, such as religious organizations, do not have this requirement. Moreover, it is important to note that gifts to certain people or entities, such as political candidates or campaign organizations, individuals, and for-profit schools and hospitals, among others, are not tax deductible under any circumstances.

The final basic prerequisite for a charitable deduction is that you have actually given property or cash (as opposed to simply planning to give) in order to deduct. It should be noted, however, that several other requirements may apply, depending on the type of giving involved. These include, for example, rules concerning writing requirements for appraisals and certain types of gifts, limits on the various kinds of charitable contributions, and limits on the charitable deduction itself. There are also the practical considerations. For example, my people are shocked to learn that many charities do not accept real estate, particularly home residences, as donations. The charities do not want the burden of upkeep of the home if the home cannot be immediately sold. Charities will generally require you to sell the home and transfer the proceeds from the sale to the charity.

While Sam Simon was able to establish a foundation with his millions, charitable giving does not have to nearly as complex and there are variety of ways to create a charitable legacy with much smaller amounts.

Basics of Estate Planning: What are the Differences between Revocable and Irrevocable Trusts?

One of the bigger issues I face when talking with clients is making them understand the mechanics of a trust and how it interplays with a client's estate plan. To further complicate the issue, some client's estates require several different trusts that could be revocable or irrevocable. I thought a basic primer on the difference between irrevocable and revocable trusts would help many readers.

Basic differences

The most basic difference between a revocable and irrevocable trust is - not surprisingly - the ability of the trustor (the creator of the trust) to change or revoke the document after it comes into effect. A revocable trust may be altered or revoked at any time by its creator during the life of the trustor, upon whose death the instrument becomes irrevocable. In contrast, an irrevocable trust generally can't be changed or terminated before the termination date or event listed in the trust document.

Advantages, disadvantages and consequences of using a revocable trust.

The most obvious advantage of a revocable trust is its flexibility. With a revocable trust, the trustor retains the right to amend the trust document at will like change distribution terms, add or remove assets or, even, terminate the trust completely. In light of this flexibility, many people opt to create a revocable trust simply to ensure that the assets in the trust pass at their death without having to go through probate while still retaining de facto control over their assets.

There are two other related benefits of a revocable trust that are true of trusts generally. The first is maintaining the privacy of the trust documents. Once admitted to probate, a person's will becomes a matter of public record. The second is the ability of the trustor to plan for the incapacity. Generally, the trust plans for the incapacity of the trustee but also can take into account beneficiaries of the trust. In the case of an incapacitated trustee, a successor trustee would be appointed to manage the trust and trust's assets held in the revocable trust. Usually, the trustor would select the successor trustee prior to incapacity and this would avoid a court-supervised conservator or guardian.

However, as one may expect, the extensive control allowed by a revocable trust has downsides as well. The law essentially treats the revocable trust as an extension of the trustor's will. The trustor is still viewed as the owner of the assets the trustor has placed in the trust. This has various consequences for the trustor.

1. The trustor cannot use the trust as a "shield" to keep the assets from trustor's creditors.
2. If the trustor is acting as trustee, the trustor is required to report the income on trustor's personal income tax return, instead of a separate income tax filing for the trust.
3. There is no protection from estate taxes. Upon the trustor's death, the trustor's estate will still owe federal and state estate taxes on the trust assets. The IRS deems the trustor to have "owned" the trust assets at the time trustor passed away.
4. There can also be transfer issues with respect to assets owned by a trust. Frequently, if a trust owns real property that needs to be sold, refinanced or the like, the title company or mortgagor will require the real property to be transferred back to the individual owner's name instead of the trust. While this is not a huge impediment to the trust owning real property it is just another hurdle that has to be crossed.

Advantages, disadvantages and consequences of using an irrevocable trust

In contrast to a revocable trust, an irrevocable trust is far less flexible - the trustor generally can't change beneficiaries, add, change, or remove terms, or revoke the trust outright. However, what the irrevocable trust loses in flexibility, it makes up for in asset protection and tax benefits. These advantages result from the trustor's relinquishment of control of the assets to a larger extent than with the revocable trust.

The primary reason people establish irrevocable trust is the asset protection trust assets acquire from creditors' claims. Furthermore, the assets in an irrevocable trust are not taken into account for purposes of Medicaid planning. The irrevocable trust functions as a "shield," keeping the assets from two of the "burdens" of ownership while enabling a trustee to manage the trust assets to support the trustor's beneficiaries. An irrevocable trust can be used to decrease a trustor's taxable estate, thus minimizing or avoiding estate taxes. One of the best examples of an irrevocable trust used to minimize a person's estate tax liability it the irrevocable life insurance trust, or ILIT. It may also be used to reduce or defer capital gains taxes and income taxes. These tax schemes are, of course, complex, and the task of navigating them should be entrusted to the expertise of an estate planning attorney.

One drawback for irrevocable trusts that tends to be overlooked is how irrevocable trusts are taxed for income tax purposes. In 2013, Trusts with more than $11,950 in income will pay at the top tax rate for income, dividends and capital gains. In contrast, individual taxpayers don’t trigger those rates until they report more than $400,000 in taxable income ($450,000 for joint filers). The top income-tax bracket is 39.6%, while the top rate for long-term capital gains and dividends is now 20%. In addition, Trusts pay the 3.8% Medicare surtax on basically the undistributed net investment income in excess of $11,950. There are ways to avoid these tax issues but the trustor needs to account for the higher tax burden with an irrevocable trust.

The fundamental revocable vs. irrevocable trust distinction is only one overarching consideration to take into account when setting up a trust. There are a multitude of specific types of trust, each intended to suit the grantor's individual situation and preferences. Some of these include charitable trusts (discussed at length in this month's newsletter), discretionary trusts, generation-skipping trusts, living trusts, special needs trusts, insurance trusts, dynasty trusts and testamentary trusts.

Update on Estate of the Month: Reclusive Heiress's Estate Settled

A few months ago, in the April 2013 Estate of the Month, I described the unfortunate estate circumstances of Huguette Clark. She was an reclusive heirs with an estate valued at approximately $330 million. She had written several wills prior to her passing and caused the equivalent of an estate litigation battle royal over the estate's assets. You might say I am over-stating the ligation but when sixteen law firms are involved that is a major legal battle.

On Friday, September 27, 2013, except for a few minor parties, it appears most of the major litigants have agreed on a global settlement ending the matter. Not surprisingly, legal fees have been estimated at at least $12 million and, not surprising, as the legal fees go up, settlement starts to make more sense.

The terms of the settlement have some interesting provisions, including:

• The biggest single cash allocation under the settlement of $34.5 million to 20 descendants of William Clark’s first marriage. Huguette had allegedly not see these relatives in decades.
• Huguette's nurse will have to pay back $5 million of the $31 million in gifts that she and her family received from Huguette over 20 years. In exchange, Huguette's will be exempted from separate legal proceedings to recover past gifts.
• The Bellosguardo Foundation, a new institution will be established. The Bellosguardo Foundation's principal asset is Clark’s $85 million seaside mansion in Santa Barbara, Calif.
• Corcoran Gallery of Art will receive $10 million in cash, recieve fifty percent (50%) of the proceeds in excess of $25 million from the sale of Claude Monet’s “Water Lilies," twenty-five percent (25%) of any money recovered from the recipients of millions of dollars in gifts given by Huguette late in her life, and a seat on the board of directors of the Bellosguardo Foundation.

All of this will come after the estate pays back taxes, administrative expenses, penalties, interest and any estate taxes owed. Then, hopefully, everyone can move on.

Estate of the Month: Not Stayin Alive

I was born in the early 1970's and unfortunately, I remember some of the not so great trends of the 70's like butterfly collars, polyester leisure suits and disco. It also means I have a vague memory of the Bee Gees on the radio. Or, was it 8-track back then? One of the founding members of the Bee Gees Robin Gibb, who died last year after a long battle with cancer, is September's Estate of the Month.

The details of his will were recently released. Not surprising, Gibb left nothing to his first wife. He left cash gifts of £500,000 each to his two children from that marriage. The majority of Gibb's estate went to his second wife, Dwina. These provisions were fairly expected and straightforward; however, other provisions in Gibb's will are more controversial. Gibb left an £800,000 house to his 38-year-old mistress, Claire Yang. He also reportedly privately arranged for the continuing financial support of the "love child" fathered by Gibb and Yang.

What is perhaps most surprising of all in Gibb's will is that he left nothing outright to his son RJ, his only child with his second wife. He did provide that RJ, along with his other two children from his first marriage, would share in Gibb's estate after Dwina passed away. The omission of any direct distribution to RJ upon Gibb's death is somewhat unexpected. It may or may not have been a surprise to RJ that Gibb left nothing to RJ - for the time being.

Gibb's will raises interesting questions about family dynamics and the different ways in which testators may choose to provide for the needs of different people in their wills. Typically, the provisions in a person's will reflect the current state of the testator's relationships at the time the will is executed. Relationships change. Relationships may improve or become strained from the time of execution of a will and the time the testator passes away. You would be surprised at how many changes occur in client's estate plans in a client's last years.

There are alternative ways to make provisions for a family member besides outright gifts in a will. Choosing such alternative methods does not always mean that the testator has a poor relationship with the person he fails to provide for "directly." (James Gandolfini's treatment of his son and daughter is a perfect example.) On the contrary, the testator may simply view one child as having less financial need than others. For example, if one child is a doctor and the other is a social worker. Instead of disinheriting the child, a testator could create a "sprinkle trust," in which a trustee periodically inquiries into the state of each child's finances and distributes money accordingly. There can be issues with this type of trust but those will be left for another day.

When viewed in this way, and in light of Gibb's complicated family dynamics, it may have made sense that Gibb seemingly "omitted" RJ from his will. For example, Gibb may have made cash gifts to RJ during his life, to address RJ's financial need. Gibb may have thought that RJ simply didn't need a cash gift at the time he passed, while perhaps his other two children from his first marriage had greater financial need.

Furthermore, it is worth noting that once Dwina passes, RJ will become the manager of Gibb's music rights, which is surely a great honor and likely lucrative role for RJ due to Gibb's success and royalties generated therein. It is likely that Gibb viewed this appointment, along with the division of Gibb's estate upon Dwina's passing, as sufficient to provide his son with the appropriate means that Gibb wished to pass on.