Estate Planning Bits

A taxing situation – beware new investment advisory fees tax

Just when we think that rules will not change and we have an understanding of income taxes assessed on trusts and estates, the courts have thrown yet another curve in the calculation of deductible expenses.

In January, the United States Supreme Court, which does not normally review many tax related cases, made a unanimous decision that investment advisory fees paid by a trust may not be deducted in full for income tax purposes. Therefore, these expenses may be subject to a 2% limitation as part of the itemized miscellaneous deductions claimed on a fiduciary tax return.

In the case they reviewed, there was a trust established under the will of the founder of the Pepperidge Farm Company. This particular trust had almost $3 million in securities and paid approximately $22,000 in investment advisory fees. While the trust deducted all fees, the Internal Revenue Service felt that these fees should be subject to the 2% floor and thus disallowed a significant portion of them.

Therefore, the IRS felt that the trust owed an additional $4,448 in taxes. The trust position held that there was a fiduciary duty upon the trustee to act under the prudent investor rule in Connecticut, and therefore, was required to engage investment counsel to provide for investment advisory expense, which was deductible.

Without getting into the arguments that both parties made, the court determined that it was not uncommon for an individual to hire an investment advisor, and therefore, the prudent investment standard does not only apply to trustees.

The standard is what a prudent investor, with the same investment objectives, handling the investors own affairs, would do. Since there may not be a difference between investment advisory fees for an individual versus a trustee, the fees will be subject to the 2% floor, and therefore, not fully deductible.

In most trusts this may not be a major issue, but for a large trust with large investment advisory fees, this will cause additional taxes to be due, and thus, a trustee should in fact be filing larger estimated tax payments to avoid a penalty in the future. This is a situation that certainly involves an accountant who is skilled in fiduciary taxes to properly complete returns and ensure that all maximum deductions are obtained correctly.

By: Hyman G. Darling, Esq.

Aging at home – how to make that happen

The two most commonly asked questions my elderly clients ask are, “Will I have enough money to retire?” and, “How can I remain in my home?”

Most people prefer to stay at home rather than move to a long-term care or assisted living facility. However, they are often unable to remain at home because of stairs, too-small entrances to rooms, closets with rods that are too high to reach and bathrooms they are unable to navigate and utilize.

The good news is that it is not difficult to make a home suitable for an elderly resident. With proper planning and some nominal remodeling, a home can be converted to “senior friendly.”

Simple things, such as removing toggle switches for light fixtures and replacing them with rocker switches, are relatively easy. Changing door knobs that a person may not be able to turn to a lever door handle is also relatively easy. Removing a tub and installing a stall shower or even a bathtub with a door that removes the need to climb in and out can be installed within one or two days.

It is a good idea to create a bedroom on the first floor, or if that is not feasible, it is possible to install an electric chair that allows the elderly family member to ride up and down stairs.

Navigation on a thick pile or soft carpet with a cane or walker can be dangerous, so it might be a good idea to install a hardwood floor or laminate. This reduces the risk of tripping and also better accommodates a wheelchair if that becomes necessary.

Other relatively easy modifications can greatly assist a person with a disability or handicap, such as

• lowering cabinets and/or replacing them with drawers
• opening up doorways and entranceways to make room for a wheelchair or walker to easily pass
• purchasing furniture that adapts to user needs, such as a recliner that pushes a person up out of the chair
• adding grab bars in the bathroom and possibly in other areas of the house

Some people may find these modifications less attractive, but safety and the ability of the elder to remain at home are usually worth it. With the increasing numbers of elders and baby boomers, manufacturers and designers are creating new and improved devices and techniques to market to this population. In the event that one does not have sufficient funds to pay for the necessary remodeling, perhaps a reverse mortgage is a worthwhile consideration.

By: Hyman G. Darling, Esquire

Special Needs Trusts – protecting government benefits for your loved one and much more

Special needs trusts can fund more than their name implies. Importantly, they can be structured and managed so that trust distributions do not reduce government benefits such as Supplemental Security Income (“SSI”) or Medicaid.

Government benefits generally aim to fund basic living necessities like shelter, food, clothing, and medical expenses. Special needs trusts can supplement these government benefits thereby enhancing the quality of life of a disabled person.

The breadth of disbursements available from a special needs trust is limited by the trustee’s duty to act in the best interest of the beneficiary and by limitations on distributions that would replace governmental benefits already being received. Still, the trustee could purchase a new home, make a down payment on a new home, or fund a security deposit for an apartment.

Domestic appliances, such as televisions, stereos, computers, microwaves, refrigerators, and washers or dryers, can be purchased and maintained with funds from a special needs trust. Domestic services, such as cable television, internet access, house cleaning, and home improvements, can also be funded by a special needs trust. The special needs trust can even put new drapes in the living room, towels in the bathroom, and linens in the bedroom.

Special needs trusts are also flexible enough to support extracurricular activities. They can pay for clubs and dues, massages, tickets to sporting or concert events, and haircut or salon services. They can pay for transportation to the club or ball games, including taxi service, a rental car, a bus pass or even a new car. And, when it is time for a vacation, the trust can also fund travel and lodging.

Special needs trusts are very effective when they are designed and administered correctly. A properly designed and administered special needs trust can vastly improve the quality of life of the disabled beneficiary while still allowing the disabled individual to maintain vital government benefits.

By: Gina M. Barry, Esquire

Trustee abuse of James Brown’s estate? The moral - trust but not blindly

James Brown died Christmas Day 2006. Yet, the self-described “hardest working man in show business” is still putting on a show. This time, however, it is being played in the South Carolina State court.

A recent lawsuit filed by two court-appointed trustees of his estate accuses his longtime business managers, the initial trustees of the estate, of pillaging millions of dollars from Brown through their roles as trustees of Brown’s estate. Due to complaints from Brown’s heirs of mismanagement, the former trustees were removed in 2007.

The majority of Brown’s estate was held in a trust and in James Brown Enterprises, which was controlled by the former trustees. The new complaint alleges that the former trustees received an “exorbitant” fee of $4.9 million. The complaint also alleges that a deal to refinance bonds owned by Brown would have generated fees of at least $2.7 million for the trustees but would ultimately have cost Brown around $5 million.

With the increased sophistication of estate plans, more and more people are performing the roles of a trustee. Generally, a trustee owes a duty of loyalty to the beneficiaries of the trust. Furthermore, the trustee must exclude all selfish interest and all consideration of the interests of third persons by devoting himself or herself completely to the beneficiaries’ interests.

Perhaps the most common area of controversy in probate matters is the interaction between beneficiaries and trustees. A properly drafted trust can limit the possibility of trustee abuse by providing the necessary safeguards to ensure that the trustee(s) exercise good faith and act solely in the interests of the beneficiaries. The trust should provide appropriate trustee removal powers and detailed directives on how the trustee shall serve the beneficiaries.

By: Todd C. Ratner, Esquire